Mr. Cooper Group Inc. - Quarter Report: 2008 June (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

Commission File Number 1-14667

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


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)

(206) 461-2000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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):


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

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:


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

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

See Notes to Consolidated Financial Statements.

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

See Notes to Consolidated Financial Statements.

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

⁽¹⁾: Represents accumulated dividends on shares returned from escrow.
See Notes to Consolidated Financial Statements.

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

(The Consolidated Statements of Cash Flows are continued on the next page.)

See Notes to Consolidated Financial Statements.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

(Continued from the previous page.)

			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

See Notes to Consolidated Financial Statements.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1: Summary of Significant Accounting Policies

Basis of Presentation

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.

Cumulative Effect from the Adoption of Accounting Pronouncements

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.

Recently Issued Accounting Standards Not Yet Adopted

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

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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.

Note 2: Restructuring Activities

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.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Note 3: Mortgage Banking Activities

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

⁽¹⁾: Originated mortgage-backed securities represent available-for-sale securities retained on the balance sheet subsequent to the securitization of mortgage loans that were originated by the Company.
⁽²⁾: Includes contractually specified servicing fees (net of guarantee fees paid to housing government-sponsored enterprises, where applicable), late charges and loan pool expenses (the shortfall of the scheduled interest required to be remitted to investors and that which is collected from borrowers upon payoff).

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

Changes in the balance of mortgage servicing rights ("MSR") were as follows:

			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

⁽¹⁾: Changes in commercial real estate MSR fair value are included in other income on the Consolidated Statements of Income.
⁽²⁾: Pursuant to the disclosure requirements of Statement No. 157 that was adopted by the Company on January 1, 2008, this represents the amount of gains for the period included in earnings attributable to the change in unrealized gains relating to MSR still held at June 30, 2008.

Changes in the portfolio of mortgage loans serviced for others were as follows:

			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

Note 4: Guarantees

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

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.

Note 5: Covered Bond Program

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

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.

Note 6: Equity Issuance

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.

Preferred Stock

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.

Common Stock

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

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

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.

Issuance Costs

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

Note 7: Earnings Per Common Share

Information used to calculate earnings per common share was as follows:

		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.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

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.

Note 8: Employee Benefits Programs

Pension Plan

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.

Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans

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

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

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:

		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	$	–

		Six 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		$	51		$	4	$	1	$	42		$	4	$	1
Service cost			39			2		–		47			1		–
Expected return on plan assets			(86	)		–		–		(71	)		–		–
Amortization of prior service cost			7			–		–		–			–		–
Recognized net actuarial loss			–			–		–		5			1		–

	Net periodic benefit cost	$	11		$	6	$	1	$	23		$	6	$	1

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

Note 9: Fair Value

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.

Fair Value Hierarchy

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:

•: Level 1 – Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
•: Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.

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(UNAUDITED)

•: Level 3 – Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect the Company's own estimates of assumptions that market participants would use in pricing the asset or liability.

Estimation of Fair Value

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

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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

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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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

⁽¹⁾: Loans achieving hedge accounting treatment as prescribed by Statement No. 133.
⁽²⁾: Represents deferred compensation balances in which the value is based on exchange-traded securities.

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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."

⁽¹⁾: Assets and liabilities transferred into or out of Level 3 during the period are reported at their fair values on the last day of the same period.
⁽²⁾: Represents the amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held at June 30, 2008.
⁽³⁾: Level 3 derivative assets and liabilities have been netted on these tables for presentation purposes only.

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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."

⁽¹⁾: Gains and losses on Level 3 derivative exposures have been netted on these tables for presentation purposes only.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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.

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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:

		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	)

⁽¹⁾: Loans were adjusted to the lower of cost or fair value using Level 2 inputs with losses included within other noninterest income.
⁽²⁾: Loans were adjusted to the lower of cost or fair value using Level 3 inputs with losses included within revenue from sales and servicing of home mortgage loans.

Fair Value Option

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.

Note 10: Operating Segments

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

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(UNAUDITED)

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 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

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(UNAUDITED)

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:

•: management of the Company's interest rate risk, liquidity position and capital. These responsibilities involve managing a majority of the Company's portfolio of investment securities and providing oversight and direction across the enterprise over matters that impact the profile of the Company's balance sheet. Such matters include determining the optimal product composition of loans that the Company holds in portfolio, the appropriate mix of wholesale and capital markets borrowings at any given point in time and the allocation of capital resources to the business segments;
•: enterprise-wide management of the identification, measurement, monitoring, control and reporting of credit, market and operational risk;
•: community lending and investment activities, which help fund the development of affordable housing units in traditionally underserved communities;
•: general corporate overhead costs associated with the Company's facilities, legal, accounting and finance functions, human resources and technology services;
•: costs that the Company's chief operating decision maker did not consider when evaluating the performance of the Company's four operating segments, including costs associated with the Company's restructuring activities;
•: the impact of changes in the unallocated allowance for loan losses;
•: the net impact of funds transfer pricing for loan and deposit balances; and
•: items associated with transfers of loans from the Retail Banking Group to the Home Loans Group when home loans previously designated as held for investment are transferred to held for sale, such as lower of cost or fair value adjustments and the write-off of the inter-segment profit factor.

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Financial highlights by operating segment were as follows:

		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

⁽¹⁾: Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment.
⁽²⁾: The managed basis presentation of the Card Services Group 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. Such adjustments to arrive at the reported GAAP results are eliminated within Securitization Adjustments.
⁽³⁾: Represents the difference between mortgage loan premium amortization recorded by the Retail Banking Group and the amount recognized in the Company's Consolidated Statements of Income. For management reporting purposes, certain mortgage loans that are held in portfolio by the Retail Banking Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking Group reflects this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
⁽⁴⁾: Represents the difference between gain from mortgage loans recorded by the Home Loans Group and gain from mortgage loans recognized in the Company's Consolidated Statements of Income.
⁽⁵⁾: Represents the difference between the tax amounts recorded by the segments and the amount recognized in the Company's Consolidated Statements of Income.
⁽⁶⁾: Represents the inter-segment offset for inter-segment loan premiums that the Retail Banking Group recognized upon transfer of portfolio loans from the Home Loans Group.

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(UNAUDITED)

		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

⁽¹⁾: Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment.
⁽²⁾: The managed basis presentation of the Card Services Group 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. Such adjustments to arrive at the reported GAAP results are eliminated within Securitization Adjustments.
⁽³⁾: Represents the difference between mortgage loan premium amortization recorded by the Retail Banking Group and the amount recognized in the Company's Consolidated Statements of Income. For management reporting purposes, certain mortgage loans that are held in portfolio by the Retail Banking Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking Group reflects this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
⁽⁴⁾: Represents the difference between gain from mortgage loans recorded by the Home Loans Group and gain from mortgage loans recognized in the Company's Consolidated Statements of Income.
⁽⁵⁾: Represents the difference between the tax amounts recorded by the segments and the amount recognized in the Company's Consolidated Statements of Income.
⁽⁶⁾: Represents the inter-segment offset for inter-segment loan premiums that the Retail Banking Group recognized upon transfer of portfolio loans from the Home Loans Group.

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(UNAUDITED)

		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

⁽¹⁾: Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment.
⁽²⁾: The managed basis presentation of the Card Services Group 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. Such adjustments to arrive at the reported GAAP results are eliminated within Securitization Adjustments.
⁽³⁾: Represents the difference between mortgage loan premium amortization recorded by the Retail Banking Group and the amount recognized in the Company's Consolidated Statements of Income. For management reporting purposes, certain mortgage loans that are held in portfolio by the Retail Banking Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking Group reflects this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
⁽⁴⁾: Represents the difference between gain from mortgage loans recorded by the Home Loans Group and gain from mortgage loans recognized in the Company's Consolidated Statements of Income.
⁽⁵⁾: Represents the difference between the tax amounts recorded by the segments and the amount recognized in the Company's Consolidated Statements of Income.
⁽⁶⁾: Represents the inter-segment offset for inter-segment loan premiums that the Retail Banking Group recognized upon transfer of portfolio loans from the Home Loans Group.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(UNAUDITED)

		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

⁽¹⁾: Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment.
⁽²⁾: The managed basis presentation of the Card Services Group 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. Such adjustments to arrive at the reported GAAP results are eliminated within Securitization Adjustments.
⁽³⁾: Represents the difference between mortgage loan premium amortization recorded by the Retail Banking Group and the amount recognized in the Company's Consolidated Statements of Income. For management reporting purposes, certain mortgage loans that are held in portfolio by the Retail Banking Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking Group reflects this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
⁽⁴⁾: Represents the difference between gain from mortgage loans recorded by the Home Loans Group and gain from mortgage loans recognized in the Company's Consolidated Statements of Income.
⁽⁵⁾: Represents the difference between the tax amounts recorded by the segments and the amount recognized in the Company's Consolidated Statements of Income.
⁽⁶⁾: Represents the inter-segment offset for inter-segment loan premiums that the Retail Banking Group recognized upon transfer of portfolio loans from the Home Loans Group.

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

Risk Factors

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:

•: Economic conditions that negatively affect housing prices and the job market have resulted, and may continue to result, in a deterioration in credit quality of the Company's loan portfolios, and such deterioration in credit quality has had, and could continue to have, a negative impact on the Company's business;
•: The Company's access to market-based liquidity sources may be negatively impacted if market conditions persist or if further ratings downgrades occur. Funding costs may increase from current levels, and gain on sale may be reduced, leading to reduced earnings;
•: If the Company has significant additional losses, it may need to raise additional capital, which could have a dilutive effect on existing shareholders, and it may affect its ability to pay dividends on its common and preferred stock;
•: Changes in interest rates may adversely affect the Company's business, including net interest income and earnings;
•: Certain of the Company's loan products have features that may result in increased credit risk;
•: The Company uses estimates in determining the fair value of certain of our assets, which estimates may prove to be imprecise and result in significant changes in valuation;
•: The Company is subject to risks related to credit card operations, and this may adversely affect its credit card portfolio and its ability to continue growing the credit card business;

•: The Company is subject to operational risk, which may result in incurring financial losses and reputational issues;
•: The Company's failure to comply with laws and regulations could have adverse effects on the Company's operations and profitability;
•: Changes in the regulation of financial services companies, housing government-sponsored enterprises, mortgage originators and servicers, and credit card lenders could adversely affect the Company;
•: The Company's business and earnings are highly sensitive to general business, economic and market conditions, and continued deterioration in these conditions may adversely affect its business and earnings;
•: The Company may face damage to its professional reputation and business as a result of allegations and negative public opinion as well as pending and threatened litigation; and
•: The Company is subject to significant competition from banking and nonbanking companies.

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.

Controls and Procedures

Disclosure Controls and Procedures

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.

Changes in Internal Control Over Financial Reporting

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."

Critical Accounting Estimates

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."

Fair Value of Certain Financial Instruments and Other Assets

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.

Adoption of FASB Statement No. 157, Fair Value Measurement

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:

•: Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities.
•: Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.
•: Level 3 – Valuation is modeled using significant inputs that are unobservable in the market.

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.

Fair Value of Reporting Units and Goodwill Impairment

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.

Overview

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.

Recently Issued Accounting Standards Not Yet Adopted

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

Summary Financial Data

				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

⁽¹⁾: Includes taxable-equivalent adjustments primarily related to tax-exempt income on U.S. states and political subdivisions securities and loans related to the Company's community lending and investment activities. The federal statutory tax rate was 35% for the periods presented.
⁽²⁾: This one-time earnings per share reduction represents a beneficial conversion feature that was recorded upon the June 2008 conversion of the preferred shares issued in connection with the April 2008 capital transaction. This non-cash adjustment, which had no effect on the Company's capital ratios or the net loss recorded in the second quarter, was provided to facilitate the comparison of earnings per share to the prior reporting periods presented on this schedule.
⁽³⁾: The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
⁽⁴⁾: Excludes nonaccrual loans held for sale.
⁽⁵⁾: Excludes unrealized net gain/loss on available-for-sale securities and cash flow hedging instruments, goodwill and intangible assets (except MSR) and the impact from the adoption and application of FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. Minority interests of $3.91 billion and $2.94 billion for June 30, 2008 and June 30, 2007 are included in the numerator.
⁽⁶⁾: The capital ratios are estimated as if Washington Mutual, Inc. were a bank holding company subject to Federal Reserve Board capital requirements.
⁽⁷⁾: Excludes six million shares held in escrow.
⁽⁸⁾: Excludes goodwill and intangible assets (except MSR).

Earnings Performance

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.)

⁽¹⁾: Includes taxable-equivalent adjustments primarily related to tax-exempt income on U.S. states and political subdivisions securities and loans related to the Company's community lending and investment activities. The federal statutory tax rate was 35% for the periods presented.
⁽²⁾: Nonaccrual assets and related income, if any, are included in their respective categories.
⁽³⁾: The average balance and yield are based on average amortized cost balances.
⁽⁴⁾: Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $77 million and $157 million for the three months ended June 30, 2008 and 2007.
⁽⁵⁾: Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $255 million and $344 million for the three months ended June 30, 2008 and 2007.
⁽⁶⁾: Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.
⁽⁷⁾: Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.
⁽⁸⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

(Continued from the previous 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.)

⁽¹⁾: Includes taxable-equivalent adjustments primarily related to tax-exempt income on U.S. states and political subdivisions securities and loans related to the Company's community lending and investment activities. The federal statutory tax rate was 35% for the periods presented.
⁽²⁾: Nonaccrual assets and related income, if any, are included in their respective categories.
⁽³⁾: The average balance and yield are based on average amortized cost balances.
⁽⁴⁾: Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $139 million and $315 million for the six months ended June 30, 2008 and 2007.
⁽⁵⁾: Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $591 million and $706 million for the six months ended June 30, 2008 and 2007.
⁽⁶⁾: Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.
⁽⁷⁾: Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.
⁽⁸⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

(Continued from the previous 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

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.

Noninterest Income

Noninterest income 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		$	(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

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	)

(1): Originated mortgage-backed securities represent available-for-sale securities retained on the balance sheet subsequent to the securitization of mortgage loans that were originated by the Company.
(2): Includes contractually specified servicing fees (net of guarantee fees paid to housing government-sponsored enterprises, where applicable), late charges and loan pool expenses (the shortfall of the scheduled interest required to be remitted to investors and that which is collected from borrowers upon payoff).

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:

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

				2008			2007			2008			2007
				(in millions)
MSR Valuation and Risk Management:
	Change in MSR fair value due to valuation inputs or assumptions			$	542		$	530		$	42		$	434
Loss on MSR risk management instruments:
	Revaluation loss from derivatives economically hedging MSR				(637	)		(547	)		(89	)		(579	)
	Revaluation loss from certain trading securities				(2	)		(4	)		(2	)		–

		Total loss on MSR risk management instruments			(639	)		(551	)		(91	)		(579	)

			Total changes in MSR valuation and risk management	$	(97	)	$	(21	)	$	(49	)	$	(145	)

The following table reconciles the loss on investment securities that are designated as MSR risk management instruments to loss on trading assets that are reported within noninterest income during the three and six months ended June 30, 2008 and 2007:

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

			2008			2007			2008			2007
			(in millions)
Loss on trading assets resulting from:
	MSR risk management instruments		$	(2	)	$	(4	)	$	(2	)	$	–
	Other			(303	)		(141	)		(519	)		(253	)

		Total loss on trading assets	$	(305	)	$	(145	)	$	(521	)	$	(253	)

The fair value changes in home mortgage loans held for sale and the offsetting changes in the derivative instruments used as fair value hedges are recorded within gain from home mortgage loans when hedge accounting treatment is achieved. Home mortgage loans held for sale where hedge accounting treatment is not achieved are recorded at the lower of cost or fair value. This accounting method requires declines in the fair value of these loans, to the extent such value is below their cost basis, to be immediately recognized within gain from home mortgage loans, but any increases in the value of these loans that exceed their original cost basis may not be recorded until the loans are sold. However, all changes in the value of derivative instruments that are used to manage the interest rate risk of these loans must be recognized in earnings as those changes occur.

Loss from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments, was $151 million in the second quarter of 2008 compared with a gain of $192 million in the same period of 2007, and a loss of $28 million for the six months ended June 30, 2008, compared with a gain of $286 million for the same period in 2007. The decreases for the three and six months ended June 30, 2008 reflected significantly lower sales and production volume as the Company discontinued all lending through the subprime mortgage channel in the fourth quarter of 2007 and the wholesale mortgage channel in April 2008 and retained more loans in its portfolio in response to the severe contraction in the secondary mortgage markets for substantially all loans not eligible for purchase by the housing government-sponsored enterprises. Also contributing to the decline in performance was an increase in the provision for loan repurchases to $171 million and $227 million for the three and six months ended June 30, 2008 compared with $11 million and $34 million for the

same periods in 2007, due primarily to an increase in repurchase demands for prime home mortgage loans previously sold.

The value of the MSR asset, which is estimated using an OAS valuation methodology classified as Level 3 in the fair value hierarchy, is subject to prepayment risk. Future expected net cash flows from servicing a loan in the servicing portfolio will not be realized if the loan pays off earlier than expected. Moreover, since most loans within the servicing portfolio do not impose prepayment fees for early payoff, a corresponding economic benefit will not be received if the loan pays off earlier than expected. The fair value of the MSR is estimated from the present value of the future net cash flows the Company expects to receive from the servicing portfolio. Accordingly, prepayment risk subjects the MSR to potential declines in fair value. Due to this risk, the realization of future expected net cash flows may differ significantly from period end fair value of the MSR asset.

Home mortgage loan servicing revenue, net of loan payments, increased by $12 million and $93 million for the three and six months ended June 30, 2008, compared with the same periods in 2007. The increase in net servicing revenue between the comparative six month periods was attributable to a slowdown in mortgage prepayments, reflecting diminished opportunities for borrowers to refinance during a period when the housing market is weakening, underwriting standards across the mortgage banking industry have tightened and rates for nonconforming loan products have increased above levels experienced prior to the illiquid secondary market conditions.

MSR valuation and risk management resulted in a loss of $97 million in the second quarter of 2008, compared with a loss of $21 million in the second quarter of 2007 as the decline in the value of MSR risk management instruments more than offset the increase in MSR valuation. Loss from MSR valuation and risk management was $49 million for the six months ended June 30, 2008, compared with $145 million for the same period in 2007. The performance of the MSR risk management instruments was adversely affected by the flat-to-inverted slope of the yield curve during the first quarter of 2007, which had the effect of increasing hedging costs during that period.

All Other Noninterest Income Analysis

Revenue from sales and servicing of consumer loans decreased $244 million for the three months ended June 30, 2008, compared with the same period in 2007, predominantly due to a decline in the performance of the securitized credit card loan portfolio primarily resulting from higher credit costs and a $104 million decrease in gain from securitizations as the Company did not enter into credit card securitization sales during the second quarter of 2008. For the six months ended June 30, 2008, revenue from sales and servicing of consumer loans decreased $439 million compared with the same period in 2007, primarily due to the absence of new credit card securitization sales in the first half of 2008 due to the challenging capital markets environment. This led to a decrease of $259 million in gain from securitizations for the six months ended June 30, 2008, compared with the same period in 2007.

The increase in depositor and other retail banking fees was largely due to higher transaction fees and an increase in the number of noninterest-bearing checking accounts. The number of noninterest-bearing retail checking accounts at June 30, 2008 totaled approximately 11.6 million compared with approximately 10.4 million at June 30, 2007.

Loss on trading assets increased $160 million for the three months ended June 30, 2008, compared with the same period in 2007, primarily due to a decline in the value of retained interests from credit card securitizations reflecting unfavorable market conditions. The increase in loss on trading assets for the first half of 2008, compared with the same period in 2007, was a result of downward adjustments to the fair value of trading assets backed by Alt-A loans and the decrease in the value of retained interests from credit card securitizations.

The Company recognized impairment losses of $407 million and $474 million for the three and six months ended June 30, 2008 on certain mortgage-backed securities where the Company determined that the decline in the fair value of the securities below their amortized cost represented an other-than-temporary condition. Partially offsetting the impairment losses for the six months ended June 30, 2008 was a realized net gain on sale of available-for-sale securities of $90 million driven by higher sales volume.

During the second quarter of 2008, the Company retired approximately $1.11 billion of Washington Mutual's senior and subordinated debt reflecting the reduction in the Company's funding requirements resulting from the reduction of the balance sheet in the first half of 2008. These senior and subordinated debts were retired at a discounted value resulting in a gain on extinguishment of borrowings of $99 million in the second quarter of 2008.

The decrease in other income of $127 million and $119 million for the three and six months ended June 30, 2008, compared with the same periods in 2007, primarily resulted from revaluation losses on derivatives held for interest-rate risk management purposes, and a $55 million downward adjustment on the price protection feature related to the capital issuance in April 2008. See Note 6 to the Consolidated Financial Statements – "Equity Issuance" for the details of the price protection feature.

Noninterest Expense

Noninterest expense 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)
Compensation and benefits		$	939	$	977		(4	)%	$	1,853	$	1,979		(6	)%
Occupancy and equipment			460		354		30			818		731		12
Telecommunications and outsourced information services			123		132		(7	)		253		261		(3	)
Depositor and other retail banking losses			61		58		6			124		119		4
Advertising and promotion			103		113		(10	)		208		211		(2	)
Professional fees			57		55		4			96		93		4
Postage			101		106		(4	)		205		214		(4	)
Foreclosed asset expense			217		56		289			372		95		293
Other expense			342		287		19			626		541		16

	Total noninterest expense	$	2,403	$	2,138		12		$	4,555	$	4,244		7

In the second quarter of 2008, the Company implemented a series of initiatives designed to significantly reduce operating expenses. These initiatives included further consolidation of the home loans business and other savings across corporate support and other business functions. In connection with these activities, the Company recorded restructuring charges of $204 million and resizing charges of $3 million in the second quarter. Restructuring charges 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. The restructuring charges are described further in Note 2 to the Consolidated Financial Statements – "Restructuring Activities."

Compensation and benefits expense decreased during the three and six months ended June 30, 2008, compared with the same periods in 2007, primarily due to lower home loan mortgage banking incentive compensation that resulted from the significant decline in home loan volume. The decreases were partially offset by lower levels of deferred compensation costs resulting from a decline in loan

originations during the first half of 2008. Reflecting the Company's initiatives to resize the home loans business and corporate and other support functions, the number of employees decreased from 49,989 at June 30, 2007 to 43,198 at June 30, 2008.

Occupancy and equipment expense increased during the three and six months ended June 30, 2008, compared with the same periods in 2007, predominantly due to charges of $138 million and $150 million recognized in the three and six months ended June 30, 2008 related to the Company's restructuring of its home loans business. The increases were significantly offset by reduced expense levels resulting from the previous expense reduction actions taken by the Company to streamline the home loans business and corporate and other support functions.

The increase in foreclosed asset expense for the three and six months ended June 30, 2008, compared with the same periods in 2007, was due to the deterioration in the credit environment and further weakening in the housing market. The total number of foreclosed properties has increased while the values of those properties have generally declined. The Company expects that foreclosed asset expense will remain elevated until home prices begin to stabilize.

A significant portion of the increase in other noninterest expense for the three and six months ended June 30, 2008, compared with the same periods in 2007, was due to an increase in FDIC deposit insurance premiums of the Company's banking subsidiaries. Other noninterest expense during the six months ended June 30, 2008 included a $38 million partial recovery of the Visa litigation expense recorded during the second half of 2007.

Review of Financial Condition

Trading Assets

Trading assets consisted of the following:

		June 30, 2008		December 31, 2007

		(in millions)
Credit card retained interests		$	1,559	$	1,838
Mortgage-backed securities			720		854
U.S. Government and other debt securities			29		76

	Total trading assets	$	2,308	$	2,768

The Company's trading assets are primarily comprised of financial instruments that are retained from securitization transactions. Credit card retained interests are mostly comprised of subordinated interests that consist of noninterest-bearing beneficial interests. These retained interests are repaid after the related senior classes of securities, which are usually held by third party investors. Substantially all of the trading assets are classified as Level 3 in the fair value hierarchy.

Trading assets at June 30, 2008 decreased $460 million from December 31, 2007, primarily due to downward adjustments to the fair value of credit card retained interests reflecting unfavorable market conditions.

The following table presents trading assets, including mortgage-backed securities by asset type, by rating at June 30, 2008:

				AAA			AA		A		BBB		Below Investment Grade		Total

				(in millions)
Credit card retained interests				$	–		$	34	$	107	$	280	$	1,138	$	1,559
Mortgage-backed securities:
	Agency				292	⁽¹⁾		–		–		–		–		292
	Prime				236			1		3		5		24		269
	Alt-A				81			2		–		–		42		125
	Subprime				–			–		–		–		2		2
	Commercial				–			–		–		–		32		32

		Total mortgage-backed securities			609			3		3		5		100		720
U.S. Government and other debt securities					29			–		–		–		–		29

			Total trading assets	$	638		$	37	$	110	$	285	$	1,238	$	2,308

(1): Includes U.S. Government-sponsored agencies securities, which are not rated.

Available-for-Sale Securities

The Company holds available-for-sale securities primarily for interest rate risk management and liquidity enhancement purposes. Accordingly, the portfolio is comprised primarily of highly-rated debt securities. The following table presents the amortized cost, unrealized gains, unrealized losses and fair value of available-for-sale securities as of the dates indicated. At June 30, 2008 and December 31, 2007 there were no securities classified as held to maturity.

				June 30, 2008

				Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
				(in millions)
Available-for-sale securities
Mortgage-backed securities:
	U.S. Government			$	176	$	–	$	(4	)	$	172
	Agency				8,733		64		(53	)		8,744
	Private label				10,513		9		(1,197	)		9,325

		Total mortgage-backed securities			19,422		73		(1,254	)		18,241
Investment securities:
	U.S. Government				175		–		–			175
	Agency				1,379		2		(3	)		1,378
	U.S. states and political subdivisions				1,707		11		(22	)		1,696
	Other debt securities				2,597		7		(118	)		2,486
	Equity securities				476		–		(77	)		399

		Total investment securities			6,334		20		(220	)		6,134

			Total available-for-sale securities	$	25,756	$	93	$	(1,474	)	$	24,375

				December 31, 2007

				Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
				(in millions)
Available-for-sale securities
Mortgage-backed securities:
	U.S. Government			$	177	$	2	$	(1	)	$	178
	Agency				6,968		69		(23	)		7,014
	Private label				12,356		45		(344	)		12,057

		Total mortgage-backed securities			19,501		116		(368	)		19,249
Investment securities:
	U.S. Government				591		3		(1	)		593
	Agency				3,614		40		(2	)		3,652
	U.S. states and political subdivisions				1,598		17		(8	)		1,607
	Other debt securities				2,030		15		(35	)		2,010
	Equity securities				455		2		(28	)		429

		Total investment securities			8,288		77		(74	)		8,291

			Total available-for-sale securities	$	27,789	$	193	$	(442	)	$	27,540

The fair value of available-for-sale mortgage-backed securities by asset type and rating and the book value as a percentage of par value at June 30, 2008 is presented in the following table:

			AAA⁽¹⁾			AA			A			BBB			Below Investment Grade			Total

			(in millions)
Mortgage-backed securities:
	Agency and U.S. Government		$	7,501		$	–		$	–		$	–		$	–		$	7,501
	Prime			2,863			324			52			33			29			3,301
	Alt-A			408			44			1			7			63			523
	Subprime			155			40			55			36			40			326
	Commercial			6,563			8			–			8			11			6,590

		Total mortgage-backed securities	$	17,490		$	416		$	108		$	84		$	143		$	18,241

Book value as a percentage of par value⁽²⁾				95	%		56	%		41	%		32	%		18	%		89	%

⁽¹⁾: Includes securities guaranteed by the U.S. Government or U.S. Government-sponsored agencies, which are not rated.
⁽²⁾: Book value includes declines in fair value, recognized as other-than-temporary impairment losses recognized in noninterest income and unrealized net gain/loss recorded in other comprehensive income.

At June 30, 2008, available-for-sale investment securities were comprised primarily of U.S. Government-sponsored agency securities and securities issued by U.S. states and political subdivisions. Substantially all investment securities are investment grade.

The Company monitors securities in its available-for-sale investment portfolio for other-than-temporary impairment. Impairment may result from credit deterioration of the issuer or underlying collateral, changes in market rates relative to the interest rate of the instrument, adverse changes in prepayment speeds or other influences on the fair value of securities. The Company performs a security-by-security analysis to determine whether impairment is other than temporary and considers many factors in determining whether the impairment is other than temporary, including but not limited to adverse changes in expected cash flows, the length of time the security has had a fair value less than the cost basis, the severity of the unrealized loss, the Company's intent and ability to hold the security for a period of time sufficient for a recovery in value, issuer-specific factors such as the issuer's financial condition, external credit ratings and general market conditions.

The Company recognized other-than-temporary impairment losses of $407 million and $474 million on certain mortgage securities backed by Alt-A, prime and subprime collateral during the three and six months ended June 30, 2008. Specifically, other-than-temporary impairment losses were recognized on mortgage-backed securities which have experienced adverse changes in their estimated cash flows or where management judgmentally considered it probable that the Company will be unable to collect all amounts due, in both cases taking into account available evidence related to the nature and credit risk characteristics of the specific securities, including downgrades on securities and projections considering expected default rates, loss severity and loss timing. Approximately 70% of the other-than-temporary impairment losses recognized in the second quarter of 2008 were on mortgage-backed securities rated BBB or below investment grade. The securities for which other-than-temporary impairment losses were recognized were classified as Level 3 in the fair value hierarchy.

Unrealized losses increased $1.03 billion during the six months ended June 30, 2008, predominantly due to market credit spreads widening. The Company does not believe it is probable that it will be unable to collect all amounts due on these securities and it has the intent and ability to retain these securities for a sufficient period of time to allow for their recovery. Accordingly, the Company does not consider their decline in fair value to represent an other-than-temporary impairment condition.

During the three and six months ended June 30, 2008, the Company transferred $479 million and $852 million of available-for-sale securities from Level 2 to Level 3 in the fair value hierarchy. The market inputs used to estimate the fair value of these securities could no longer be corroborated and therefore were considered to be unobservable inputs. For the three and six months ended June 30, 2008, the Company recognized gross unrealized losses on the securities transferred into Level 3 of $39 million and $162 million that were recorded to other comprehensive income, net of income taxes. Also during the same periods, the Company transferred $175 million and $1.02 billion of available-for-sale securities from Level 3 to Level 2 as the Company was able to use observable market inputs to corroborate the fair value estimates.

The gross gains and losses realized through earnings on available-for-sale securities for the periods indicated were as follows:

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

		2008			2007			2008			2007
		(in millions)
Available-for-sale securities
Realized gross gains		$	28		$	20		$	130		$	59
Realized gross losses			(430	)		(13	)		(514	)		(18	)

	Realized net gain (loss)	$	(402	)	$	7		$	(384	)	$	41

Loans

Total loans consisted of the following:

				June 30, 2008		December 31, 2007

				(in millions)
Loans held for sale				$	1,877	$	5,403

Loans held in portfolio:
	Loans secured by real estate:
		Home loans⁽¹⁾		$	105,027	$	110,387
		Home equity loans and lines of credit⁽¹⁾			60,386		60,963
		Subprime mortgage channel⁽²⁾:
			Home loans		13,951		16,092
			Home equity loans and lines of credit		2,101		2,525
		Home construction⁽³⁾			1,902		2,226
		Multi-family			33,144		31,754
		Other real estate			10,478		9,524

			Total loans secured by real estate		226,989		233,471
	Consumer:
		Credit card			10,589		8,831
		Other			177		205
	Commercial				1,872		1,879

		Total loans held in portfolio⁽⁴⁾		$	239,627	$	244,386

⁽¹⁾: Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.
⁽²⁾: Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.
⁽³⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
⁽⁴⁾: Includes net unamortized deferred loan costs of $1.31 billion and $1.45 billion at June 30, 2008 and December 31, 2007.

Loans held for sale decreased $3.53 billion from December 31, 2007 as sales of residential mortgage loans exceeded originations of loans designated as held for sale. Due to the illiquid market, residential mortgage loans designated as held for sale at June 30, 2008 and December 31, 2007 were largely limited to conforming loans eligible for purchase by the housing government-sponsored enterprises. Subprime mortgage channel home loans and home equity loans and lines of credit decreased $2.57 billion as loan charge-offs and payoffs in the subprime portfolio were not replaced with loan originations in the first half of 2008.

Credit card loans held in portfolio increased $1.76 billion, or 20%, from December 31, 2007. In response to tightening secondary markets, the Company has substantially ceased credit card securitizations, resulting in on-balance sheet funding of new originations.

Total home loans held in portfolio consisted of the following:

				June 30, 2008		December 31, 2007

				(in millions)
Home loans:
	Short-term adjustable-rate loans⁽¹⁾:
		Option ARMs⁽²⁾		$	52,886	$	58,870
		Other ARMs			9,128		9,551

			Total short-term adjustable-rate loans		62,014		68,421
	Medium-term adjustable-rate loans⁽³⁾				37,546		36,507
	Fixed-rate loans				5,467		5,459

			Home loans held in portfolio⁽⁴⁾		105,027		110,387
	Subprime mortgage channel				13,951		16,092

			Total home loans held in portfolio	$	118,978	$	126,479

⁽¹⁾: Short-term adjustable-rate loans reprice within one year.
⁽²⁾: The total amount by which the unpaid principal balance of Option ARM loans exceeded their original principal amount was $2.05 billion and $1.73 billion at June 30, 2008 and December 31, 2007.
⁽³⁾: Medium-term adjustable-rate loans reprice after one year.
⁽⁴⁾: Excludes home loans in the subprime mortgage channel.

The Option ARM home loan portfolio decreased $5.98 billion during the first half of 2008 as loan payments sharply exceeded originations. Additionally, the Company continued to work with selected customers to convert their Option ARMs into other products which do not have negative amortization features. The Company ceased originating Option ARM loans in the second quarter of 2008.

Other Assets

Other assets consisted of the following:

		June 30, 2008		December 31, 2007

		(in millions)
Accounts receivable		$	5,490	$	4,837
Investment in bank-owned life insurance			5,165		5,072
Premises and equipment			2,544		2,779
Accrued interest receivable			1,626		2,039
Derivatives			1,809		2,093
Identifiable intangible assets			320		388
Foreclosed assets			1,512		979
Other			4,592		3,847

	Total other assets	$	23,058	$	22,034

Deposits

Deposits consisted of the following:

				June 30, 2008		December 31, 2007

				(in millions)
Retail deposits:
	Checking deposits:
		Noninterest bearing		$	25,435	$	23,476
		Interest bearing			21,715		25,713

			Total checking deposits		47,150		49,189
	Savings and money market deposits				58,016		44,987
	Time deposits				43,086		49,410

			Total retail deposits		148,252		143,586
Commercial business and other deposits					8,892		11,267
Brokered deposits:
	Consumer				19,248		18,089
	Institutional				100		2,515
Custodial and escrow deposits					5,431		6,469

		Total deposits		$	181,923	$	181,926

The increase in noninterest-bearing retail checking deposits was mostly due to the continuing customer account growth in the Company's free checking product. Savings and money market accounts increased as competitive pricing on money market deposits attracted new deposits and customers shifted from maturing time deposits and interest-bearing retail checking deposits. As a result, overall retail deposits increased by $4.67 billion.

Institutional brokered deposits decreased $2.42 billion or 96% from December 31, 2007 as the Company shifted to lower cost funding sources.

Transaction accounts (checking, savings and money market deposits) comprised 71% and 66% of retail deposits at June 30, 2008 and December 31, 2007. These products generally have the benefit of lower interest costs, compared with time deposits, and represent the core customer relationship that is maintained within the retail banking franchise. Average total deposits funded 65% of average total interest-earning assets in the second quarter of 2008, compared with 64% in the fourth quarter of 2007.

Borrowings

Borrowings totaled $89.24 billion at June 30, 2008, compared with $108.96 billion at December 31, 2007. The decrease primarily reflects the Company's reduced funding requirements resulting from the reduction in the size of the balance sheet during the six months ended June 30, 2008.

Operating Segments

services; and the Enterprise Risk Management function, which oversees the identification, measurement, monitoring, control and reporting of credit, market and operational risk. Refer to Note 10 to the Consolidated Financial Statements – "Operating Segments" for information regarding the key elements of management reporting methodologies used to measure segment performance.

The Company serves the needs of 19.8 million consumer households through its 2,239 retail banking stores, 42 lending stores and centers, 4,962 owned and branded ATMs, telephone call centers and online banking.

Financial highlights by operating segment were as follows:

Retail Banking Group

			Three Months Ended June 30,

												Six Months Ended June 30,
									Percentage Change			Six Months Ended June 30,						Percentage Change
			2008			2007			Percentage Change			2008			2007			Percentage Change
			(dollars in millions)
Condensed income statement:
	Net interest income		$	1,210		$	1,291			(6	)%	$	2,413		$	2,575			(6	)%
	Provision for loan losses			3,823			91			–			6,122			153			–
	Noninterest income			842			820			3			1,617			1,571			3
	Inter-segment revenue			7			16			(58	)		15			34			(55	)
	Noninterest expense			1,232			1,131			9			2,453			2,201			11

	Income (loss) before income taxes			(2,996	)		905			–			(4,530	)		1,826			–
	Income taxes			(959	)		340			–			(1,450	)		685			–

		Net income (loss)	$	(2,037	)	$	565			–		$	(3,080	)	$	1,141			–

Performance and other data:
	Efficiency ratio			59.82	%		53.19	%		12			60.63	%		52.65	%		15
	Average loans		$	138,671		$	149,716			(7	)	$	140,695		$	152,445			(8	)
	Average assets			145,800			159,515			(9	)		148,704			162,264			(8	)
	Average deposits			149,509			145,252			3			148,122			144,644			2
	Loan volume			655			5,760			(89	)		1,893			10,338			(82	)
	Employees at end of period			27,857			28,523			(2	)		27,857			28,523			(2	)

The decrease in net interest income was substantially due to a decline in the spread on home mortgage and home equity loans and declining average balances of home mortgage loans. Home mortgage loan average balances declined $17.23 billion and $18.84 billion compared with the three and six months ended June 30, 2007, as the Home Loans Group began retaining all originated home mortgage loans in July 2007. Also partially contributing to the decrease in net interest income were declining funds transfer credits on deposits driven by declining short-term interest rates. Average deposit balances increased $4.26 billion and $3.48 billion compared with the three and six months ended June 30, 2007.

The substantial increase in the provision for loan losses resulted from an increase in delinquencies in the home equity and home mortgage loan portfolios. Also contributing to the increase was declining housing prices from the deteriorating housing market, which increased expected loss severities.

The increase in noninterest income was substantially due to a 7% and 6% increase in depositor and other retail banking fees for the three and six months ended June 30, 2008, compared with the same periods in 2007, driven by higher transaction fees and the increase in the number of accounts. The number of noninterest-bearing retail checking accounts at June 30, 2008 totaled approximately

11.6 million, compared with approximately 10.4 million at June 30, 2007. The increase was primarily offset by a decrease in fees received on official check balances in process.

The increase in noninterest expense for the second quarter of 2008, compared with the second quarter of 2007, was significantly attributable to increased foreclosed asset expense as a result of the downturn in the housing market and increased defaults. Foreclosed asset expense totaled $67 million for the second quarter of 2008, compared with $7 million in the second quarter of 2007. Partially contributing to the increase was higher FDIC deposit insurance premiums. These increases were partly offset by lower technology costs.

For the six months ended June 30, 2008, compared with the same period in 2007, noninterest expense increased partially due to higher foreclosed assets expense, which increased to $102 million from $13 million during the same period in 2007. Also contributing to the increase were higher fraud losses and higher compensation and benefits. Partially offsetting these increases were lower technology costs.

Card Services Group (Managed basis)

			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)
Condensed income statement:
	Net interest income		$	769		$	649			18	%	$	1,534		$	1,290			19	%
	Provision for loan losses			911			523			74			1,537			912			69
	Noninterest income			187			393			(52	)		604			867			(30	)
	Inter-segment expense			5			–			–			9			–			–
	Noninterest expense			297			306			(3	)		557			635			(12	)

	Income (loss) before income taxes			(257	)		213			–			35			610			(94	)
	Income taxes			(82	)		80			–			11			229			(95	)

		Net income (loss)	$	(175	)	$	133			–		$	24		$	381			(94	)

Performance and other data:
	Efficiency ratio			31.25	%		29.33	%		7			26.16	%		29.42	%		(11	)
	Average loans		$	26,314		$	24,234			9		$	26,601		$	23,921			11
	Average assets			28,844			26,762			8			29,044			26,403			10
	Employees at end of period			2,940			2,827			4			2,940			2,827			4

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. Securitization adjustments within the Credit Card managed view have no impact to net income as these adjustments net to zero.

The increase in net interest income for the three and six months ended June 30, 2008 was substantially due to improved spreads and growth in the average balance of managed credit card loans. The spread improvement reflects lower funds transfer charges which were partially offset by lower managed loan yields. The average loan balances for the three and six months ended June 30, 2008 increased by $2.08 billion and $2.68 billion, compared with the same periods in 2007.

The increase in the provision for loan losses was driven by higher net credit losses and the growth in managed credit card receivables. Managed net credit losses increased to 10.84% of average managed receivables in the three months ended June 30, 2008, up from 6.49% for the same period in 2007.

Contractual and bankruptcy losses, as well as delinquencies, have increased due to a weakening economy and rising unemployment rates.

Noninterest income declined for the three months ended June 30, 2008, compared with the same period in 2007, primarily due to higher market valuation losses on retained interests reflecting lower residual cash flow assumptions and higher discount rates. Also contributing to the decrease was reduced gain on sale due to the absence of securitization sale activity during the current quarter given the challenging capital markets environment, and lower excess servicing impacted by higher net credit losses on securitized loans.

For the six months ended June 30, 2008, the decrease in noninterest income, compared with the six months ended June 30, 2007, was primarily due to reduced gain on sale resulting from the absence of securitization sale activity in 2008 and higher market valuation losses on retained interests. Also contributing to the decrease was lower excess servicing, which was partially offset by the recognition of an $85 million pretax gain from the redemption of a portion of the Company's shares associated with the Visa initial public offering in March 2008 and an increase in fee income.

The decrease in noninterest expense during the six months ended June 30, 2008, compared with the same period in 2007, was significantly due to a $38 million partial recovery of the Visa-related litigation expense recorded during the second half of 2007 and lower marketing expenses. These were partially offset by higher compensation costs related to an increase in the number of employees.

Commercial Group

			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)
Condensed income statement:
	Net interest income		$	203		$	208			(3	)%	$	400		$	420			(5	)%
	Provision for loan losses			17			2			607			47			(7	)		–
	Noninterest income			5			63			(93	)		(3	)		78			–
	Noninterest expense			63			74			(15	)		131			148			(12	)

	Income before income taxes			128			195			(35	)		219			357			(39	)
	Income taxes			41			73			(44	)		70			134			(48	)

		Net income	$	87		$	122			(29	)	$	149		$	223			(33	)

Performance and other data:
	Efficiency ratio			30.34	%		27.42	%		11			33.07	%		29.89	%		11
	Average loans		$	41,891		$	38,789			8		$	41,413		$	38,715			7
	Average assets			43,875			41,184			7			43,439			41,094			6
	Average deposits			6,632			15,294			(57	)		7,053			13,671			(48	)
	Loan volume			3,768			4,348			(13	)		6,603			8,018			(18	)
	Employees at end of period			1,342			1,508			(11	)		1,342			1,508			(11	)

The decrease in net interest income for the three and six months ended June 30, 2008, compared with the same periods in 2007, was substantially due to lower funds transfer credits on lower average balances of deposits attributable to the winding-down of the mortgage banker finance warehouse lending operations in the fourth quarter of 2007. Largely offsetting this decrease was higher net interest income from $3.10 billion growth in the average balance of loans in the second quarter of 2008 compared with the same period in 2007, predominantly in multi-family and non-residential loans.

The increase in the provision for loan losses was due to higher reserve requirements reflecting higher unemployment rates in portfolio concentration areas, increased delinquencies and higher loan balances. Net charge-offs have remained relatively low at $7 million in the first half of 2008.

The decrease in noninterest income was predominantly due to lower gain on sale resulting from reduced sales volume of multi-family and commercial loans in 2008.

Noninterest expense declined during the three and six months ended June 30, 2008, compared with the same periods in 2007, substantially due to the decision to scale back presence in non-core markets resulting in a decrease in employee compensation and benefits expense due to the reduction in the number of employees and a decrease in occupancy expense.

Home Loans Group

			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)
Condensed income statement:
	Net interest income		$	240		$	211			13	%	$	490		$	455			8	%
	Provision for loan losses			1,637			101			–			2,544			150			–
	Noninterest income			(97	)		389			–			221			550			(60	)
	Inter-segment expense			2			16			(86	)		6			34			(83	)
	Noninterest expense			484			547			(12	)		983			1,069			(8	)

	Loss before income taxes			(1,980	)		(64	)		–			(2,822	)		(248	)		–
	Income taxes			(635	)		(24	)		–			(904	)		(93	)		871

		Net loss	$	(1,345	)	$	(40	)		–		$	(1,918	)	$	(155	)		–

Performance and other data:
	Efficiency ratio			344.70	%		93.71	%		268			139.26	%		110.07	%		27
	Average loans		$	54,880		$	43,312			27		$	55,275		$	48,255			15
	Average assets			65,074			60,342			8			65,958			65,831			–
	Average deposits			5,202			8,372			(38	)		5,335			8,436			(37	)
	Loan volume			8,462			35,938			(76	)		22,236			69,718			(68	)
	Employees at end of period			7,338			13,150			(44	)		7,338			13,150			(44	)

The increase in net interest income during the second quarter of 2008, compared with the second quarter of 2007, was primarily due to the increase of $14.28 billion in average balances of prime home mortgage loans. Beginning in July 2007, the Home Loans Group began retaining these home mortgage loans within its portfolio. Also contributing to the increase were lower funds transfer pricing charges on the MSR asset. These increases were substantially offset by lower net interest income resulting from a decline in average balances of custodial and escrow deposits.

The provision for loan losses increased in response to higher levels of delinquencies and loss severity rates as a result of deteriorating housing market conditions. Due to declining home values and reduced availability of credit throughout the mortgage market, borrowers who become delinquent are less likely to be able to cure their loans through sale or refinancing, resulting in increased foreclosures and charge-offs.

The decrease in noninterest income for the second quarter of 2008, compared with the same period in 2007, was largely due to reduced gain on sale resulting from higher provision for loan repurchases and lower volumes in the mortgage origination pipeline, as well as lower inter-segment sales. Higher delinquencies drove increased repurchase requests from investors resulting in an increase in the provision for repurchase reserves.

The decrease in noninterest income for the six months ended June 30, 2008, compared with the same period in 2007, was significantly driven by reduced gain on sale due to higher repurchase reserves and lower volumes. Also contributing to the decrease were increased losses from trading securities stemming from credit downgrades and widening spreads. These decreases were partially offset by the write-down of trading assets retained from subprime mortgage securitizations that occurred in the first half of 2007.

The decrease in noninterest expense for the three and six months ended June 30, 2008, compared with the same periods in 2007, was primarily due to a reduction in the number of employees and locations, resulting from the initiatives to resize the home loans business. This decrease was largely offset by higher foreclosed asset expense as a result of the downturn in the housing market and increased number of foreclosures. Foreclosed asset expense totaled $149 million and $267 million for the three and six months ended June 30, 2008, compared with $47 million and $80 million for the same periods in 2007.

Corporate Support/Treasury and Other

			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)
Condensed income statement:
	Net interest income (expense)		$	254		$	(4	)		–	%	$	386		$	(26	)		–	%
	Provision for loan losses			55			(51	)		–			173			(25	)		–
	Noninterest income			(327	)		60			–			(241	)		154			–
	Noninterest expense			327			80			312			431			191			126
	Minority interest expense			75			42			78			151			85			77

	Loss before income taxes			(530	)		(15	)		–			(610	)		(123	)		396
	Income taxes			(247	)		(37	)		573			(316	)		(106	)		199

		Net income (loss)	$	(283	)	$	22			–		$	(294	)	$	(17	)		–

Performance and other data:
	Average loans		$	1,648		$	1,367			21		$	1,602		$	1,356			18
	Average assets			47,151			41,789			13			46,338			41,335			12
	Average deposits			23,267			37,847			(39	)		23,947			42,002			(43	)
	Loan volume			84			72			17			226			179			26
	Employees at end of period			3,721			3,981			(7	)		3,721			3,981			(7	)

The increase in net interest income was primarily due to improved spreads on lower cost borrowings. Also contributing to the increase was higher yields and lower funds transfer charges on available-for-sale securities.

The decline in noninterest income was primarily due to a $407 million other-than-temporary impairment in the Company's available-for-sale securities portfolio during the three months ended June 30, 2008. Also contributing to the decline was a $55 million downward adjustment on the price protection feature derivative related to the capital issuance in April 2008. Partially offsetting the decrease were gains resulting from the early retirement of $1.11 billion of Washington Mutual's senior and subordinated debts.

The increase in noninterest expense was primarily due to $204 million in charges related to the Company's second quarter 2008 restructuring efforts.

Off-Balance Sheet Activities

The Company transforms loans into securities through a process known as securitization. When the Company securitizes loans, the loans are usually sold to a qualifying special-purpose entity ("QSPE"), typically a trust. The QSPE, in turn, issues securities, commonly referred to as asset-backed securities, which are secured by future cash flows on the sold loans. The QSPE sells the securities to investors, which entitle the investors to receive specified cash flows during the term of the security. The QSPE uses the proceeds from the sale of these securities to pay the Company for the loans sold to the QSPE. These QSPEs are not consolidated within the financial statements since they satisfy the criteria established by Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In general, these criteria require the QSPE to be legally isolated from the transferor (the Company), be limited to permitted activities, and have defined limits on the types of assets it can hold and the permitted sales, exchanges or distributions of its assets.

When the Company sells or securitizes loans that it originated, it generally retains the right to service the loans and may retain senior, subordinated, residual, and other interests, all of which are considered retained interests in the sold or securitized assets. Retained interests in mortgage loan securitizations, excluding the rights to service such loans, were $1.23 billion at June 30, 2008, of which $1.13 billion are of investment-grade quality. Retained interests in credit card securitizations were $1.56 billion at June 30, 2008, of which $421 million are of investment-grade quality. Additional information concerning the pretax gains, cash flows, servicing fees, principal and interest received on and valuation of retained interests and loan repurchases, in each case, arising from the Company's securitization activities is included in Note 7 to the Consolidated Financial Statements – "Securitizations" in the Company's 2007 Annual Report on Form 10-K/A. Additional information concerning the revenue and expenses from the sales and servicing of home mortgage loans, including the effects of derivative risk management instruments is included in Note 8 to the Consolidated Financial Statements – "Mortgage Banking Activities" in the Company's 2007 Annual Report on Form 10-K/A.

American Securitization Forum Framework

In December 2007, the American Securitization Forum ("ASF"), working with various constituency groups as well as representatives of U.S. Federal government agencies, issued the Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans (the "ASF Framework"). On January 8, 2008, the Securities and Exchange Commission's (the "SEC") Office of the Chief Accountant (the "OCA") issued a letter (the "OCA Letter") addressing accounting issues that may be raised by the ASF Framework. The OCA Letter expressed the view that if a subprime ARM loan made to a Segment 2 borrower, as described below, is modified in accordance with the ASF Framework and that loan could be legally modified, the OCA would not object to continued status of the transferee as a QSPE under Statement No. 140.

The parameters of the ASF Framework were designed by the ASF to improve administrative efficiency while still maximizing cash flows to the QSPEs in which residential mortgage loans were transferred upon securitization by stratifying subprime borrowers into the following segments: borrowers that can refinance into readily available mortgage industry products ("Segment 1"); borrowers that have demonstrated the ability to pay their introductory rates, are unable to refinance and are unable to afford their reset rates ("Segment 2"); and borrowers that require in-depth, case-by-case analysis due to loan histories that demonstrate difficulties in making timely introductory rate payments ("Segment 3"). Consistent with its objectives, the ASF Framework was designed to fast-track loan modifications for Segment 2 borrowers, for which default is considered to be reasonably foreseeable.

The Company elected to apply the fast-track loan modification provisions of the ASF Framework beginning in March 2008 and its application did not impact the off-balance sheet accounting treatment of QSPEs that hold Segment 2 loans that were selected for modification.

At June 30, 2008, the total amount of assets owned by Company-sponsored QSPEs that hold subprime ARM loans was $22.74 billion. The table below provides details of the assets comprising the balance of these QSPEs at June 30, 2008:

			QSPEs Balance

			(in millions)
Subprime ARM loans:
	Segment 1		$	3,867
	Segment 2			469
	Segment 3			3,042

		Total subprime ARM loans		7,378
Other loans⁽¹⁾				12,283
Foreclosed assets				3,076

		Total assets of Company-sponsored QSPEs that hold subprime ARM loans	$	22,737

⁽¹⁾: Substantially comprised of subprime mortgage loans that are not within the parameters established by the ASF Framework.

The tables below provide details of activities related to fast-track modifications, loan payoffs and other activities for the three and six months ended June 30, 2008:

			For the three months ended June 30, 2008

			Fast-track Modifications⁽¹⁾		Loan Payoffs		Foreclosure Activities		Other Activities⁽²⁾
			(in millions)
Subprime ARM loans:
	Segment 1		$	–	$	213	$	297	$	115
	Segment 2			336		12		72		18
	Segment 3			–		10		781		135

		Total subprime ARM loans	$	336	$	235	$	1,150	$	268

⁽¹⁾: Fast-track modifications began in March 2008 and are only applicable to Segment 2 subprime ARM loans.
⁽²⁾: Other activities include loss mitigation modification and workout plan activities.

			For the six months ended June 30, 2008

			Fast-track Modifications⁽¹⁾		Loan Payoffs		Foreclosure Activities		Other Activities⁽²⁾
			(in millions)
Subprime ARM loans:
	Segment 1		$	–	$	428	$	517	$	155
	Segment 2			404		42		232		38
	Segment 3			–		21		3,508		293

		Total subprime ARM loans	$	404	$	491	$	4,257	$	486

⁽¹⁾: Fast-track modifications began in March 2008 and are only applicable to Segment 2 subprime ARM loans.
⁽²⁾: Other activities include loss mitigation modification and workout plan activities.

Other loans and foreclosed assets totaled approximately $15 billion at June 30, 2008, a decrease of approximately $400 million from March 31, 2008 and an increase of approximately $700 million from December 31, 2007. The decrease from March 31, 2008 was due to the exclusion of trusts that no longer have loans which meet the ASF criteria, loan payoffs, and the liquidation of foreclosed assets. The increase from December 31, 2007 was primarily due to an increase in foreclosed assets.

The total principal amount of beneficial interests issued by Company-sponsored securitizations that hold subprime ARM loans at June 30, 2008 was approximately $23 billion, substantially all of which were sold to third parties with a de minimis amount held by the Company.

Contractual Agreements

The Company may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of these contractual arrangements under which the Company may be held liable is included in Note 4 to the Consolidated Financial Statements – "Guarantees."

Risk Management

The Company is exposed to four major categories of risk: credit, liquidity, market and operational.

The Company's Chief Enterprise Risk Officer is responsible for enterprise-wide risk management. The Company's Enterprise Risk Management function oversees the identification, measurement, monitoring, control and reporting of credit, market, and operational risk. The Company's Treasury function is responsible for the measurement, management and control of liquidity risk. The General Auditor reports directly to the Audit Committee of the Board of Directors, and independently assesses the Company's compliance with risk management controls, policies and procedures.

The Board of Directors, assisted by the Audit and Finance Committees on certain delegated matters, oversees the monitoring and controlling of significant risk exposures, including the policies governing risk management. Governance and oversight of credit, liquidity and market risks are provided by the Finance Committee of the Board of Directors. Governance and oversight of operational risk is provided by the Audit Committee of the Board of Directors. The Corporate Relations Committee of the Board of Directors oversees the Company's reputation and those elements of operational risk that impact the Company's reputation.

Management's governing risk committee is the Enterprise Risk Management Committee. This committee and its subcommittees include representation from the Company's lines of business and the Enterprise Risk Management function. Subcommittees of the Enterprise Risk Management Committee provide specialized risk governance and include the Credit Risk Management Committee, the Market Risk Committee and the Operational Risk Committee.

Members of the Enterprise Risk Management function work with the lines of business to establish appropriate policies, standards and limits designed to maintain risk exposures within the Company's risk tolerance. Significant risk management policies approved by the relevant management committees are also reviewed and approved by the Audit and Finance Committees. Enterprise Risk Management also provides objective oversight of risk elements inherent in the Company's business activities and practices, and reports periodically to the Board of Directors.

Management is responsible for balancing risk and reward in determining and executing business strategies. Business lines, Enterprise Risk Management and Treasury divide the responsibilities of conducting measurement and monitoring of the Company's risk exposures. Risk exceptions, depending on their type and significance, are elevated to management or Board committees responsible for oversight.

Credit Risk Management

Credit risk is the risk of loss arising from adverse changes in a borrower's or counterparty's actual or perceived ability to meet its financial obligations under agreed-upon terms and exists primarily in lending, securities and derivative portfolios. The degree of credit risk will vary based on many factors including the size of the asset or transaction, the contractual terms of the related documents, the credit characteristics of the borrower, the channel through which assets are acquired, the features of loan products or derivatives, the existence and strength of guarantor support and the availability, quality and adequacy of any underlying collateral. The degree of credit risk and level of credit losses is highly dependent on the economic environment that unfolds subsequent to originating or acquiring assets. The extent of asset diversification and concentrations also affect total credit risk. Credit risk is assessed through analyzing these and other factors.

The Company recorded a provision for loan losses of $5.91 billion in the second quarter of 2008 compared with a provision of $372 million in the second quarter of last year and a significant increase in net charge-offs to $2.17 billion for the quarter ended June 30, 2008. The increase in the provision for loan losses reflected the further decline in housing prices which increased expected loss severities, increased delinquencies, reduced availability of credit and the weakening economy. Cure rates on early stage delinquencies, representing loans that are up to three payments past due, deteriorated significantly as declining home prices and the reduced availability of credit prevented many borrowers from refinancing their mortgage or selling their home at a price sufficient to repay their mortgage. On a national basis, the supply of unsold homes in June 2008 increased 22% from June 2007 to approximately 11.1 months. In turn, this has contributed to a 6% decline in the national median sales price for existing homes between those same 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% if weighted to reflect the geographic distribution of the Company's single-family residential portfolio. California and Florida have seen some of the sharpest declines in home prices, where 51% and 8% of the Company's total single-family residential loans at June 30, 2008 were located. Housing market weakness was also evident in the change in the national volume of foreclosure filings which increased by 121% from the second quarter of 2007 to the second quarter of 2008. Average loss severities on late-stage delinquent loans and foreclosed assets have increased as lower collateral values have been insufficient to cover the recorded investment in the loan. Approximately one-third of net single-family residential charge-offs recorded in both the second quarter of 2008 and for the six months ended June 30, 2008 were recorded on loans that were more than 180 days past due. As housing prices continued to decline, additional charge-offs were recorded on late-stage delinquent loans. These loans experienced prior charge-offs when they became 180 days past due, to the extent their carrying amounts exceeded net realizable values. The ratio of nonperforming assets to total assets increased from 2.17% at the end of 2007 to 3.62% at June 30, 2008. Increasing early stage credit card delinquencies and a more seasoned credit card portfolio partially contributed to the increase in the allowance for loan losses.

Reflecting higher incurred losses inherent in the portfolio resulting primarily from these economic factors, the Company increased its allowance for loan losses, both in absolute terms and as a percentage of loans held in portfolio from $2.57 billion or 1.05% of loans held in portfolio at December 31, 2007 to $8.46 billion or 3.53% of total loans held in portfolio at June 30, 2008. Credit costs are expected to remain elevated throughout the remainder of 2008 and 2009 while the Company expects 2008 to be the peak year for provisioning.

In light of these deteriorating conditions in the U.S. housing market, the Company has taken actions to reduce its potential future exposure to credit risk, including tightening underwriting standards across all loan products, shifting the product strategy toward originating conforming mortgage loans that can be sold to housing government-sponsored enterprises, elimination of negatively amortizing products including Option ARMs, discontinuation of all lending conducted through the wholesale channel, and the reduction or suspension of undrawn home equity lines of credit. During 2008, single-

family residential loans decreased $8.50 billion or 4% with most of the decrease coming from the Option ARM portfolio. The Company reduced or suspended $8.23 billion of available credit under home equity lines of credit in the quarter ended June 30, 2008 and $6.06 billion in the quarter ended March 31, 2008, as permitted by the Company's contractual agreements with its customers. At June 30, 2008, the Company had unfunded commitments to extend credit on home equity lines of credit of $41.0 billion. The Company also actively manages credit lines available to qualified credit card customers based on an evaluation of predictive risk indicators, such as account performance and risk scores.

The Company has also decided to focus its residential mortgage loan origination business on the retail channel and as a result, the Company expects to be better positioned to manage the credit risk of loans being added to the portfolio as home loans and home equity loans and lines of credit originated through the retail channel performed better at June 30, 2008 than loans with comparable risk characteristics originated through the Company's wholesale channel.

Origination Channel

		Portfolio at June 30, 2008		Nonaccrual Loans

		(in millions)
Retail⁽¹⁾		$	96,913	$	2,715
Wholesale			55,567		2,750
Purchased/Correspondent			10,692		813
Subprime mortgage channel			15,983		3,008

	Total home and home equity loans and lines of credit held in portfolio	$	179,155	$	9,286

⁽¹⁾: 94% or $55.39 billion of the Company's prime home equity portfolio was originated in the retail channel.

Nonaccrual Loans, Foreclosed Assets and Restructured Loans

Loans, excluding credit card loans, are generally placed on nonaccrual status upon reaching 90 days past due. Additionally, individual loans in non-homogeneous portfolios are placed on nonaccrual status prior to becoming 90 days past due when payment in full of principal or interest by the borrower is not expected. Restructured loans are reported as nonaccrual loans and interest received on such loans is accounted for using the cash method until such time as the Company determines that collectability of principal and interest is reasonably assured, at which point the loan is returned to accrual status and reported as an accruing restructured loan. At June 30, 2008, restructured loans of $1.43 billion were reported as nonaccrual loans in accordance with the Company's policy, accounting for 46 basis points of the 362 basis points of the nonperforming assets to total assets ratio.

Nonaccrual loans and foreclosed assets ("nonperforming assets") consisted of the following:

					June 30, 2008					March 31, 2008					December 31, 2007

					(dollars in millions)
Nonperforming assets:
	Nonaccrual loans^(1)(2)(3):
		Loans secured by real estate:
			Home loans⁽⁴⁾⁽⁵⁾		$	4,757		4.53	%	$	3,504		3.23	%	$	2,302		2.09	%
			Home equity loans and lines of credit⁽⁴⁾			1,521		2.52			1,102		1.80			835		1.37
			Subprime mortgage channel⁽⁶⁾			3,008		18.74			2,882		16.62			2,721		14.61
			Home construction⁽⁷⁾			79		4.14			77		3.68			56		2.51
			Multi-family			181		0.55			142		0.44			131		0.41
			Other real estate			87		0.83			87		0.87			53		0.55

				Total nonaccrual loans secured by real estate		9,633		4.24			7,794		3.36			6,098		2.61
		Consumer				1		0.02			2		0.02			1		0.02
		Commercial				57		3.03			28		1.43			24		1.26

				Total nonaccrual loans held in portfolio		9,691		4.04			7,824		3.22			6,123		2.51
	Foreclosed assets⁽⁸⁾					1,512					1,357					979

				Total nonperforming assets	$	11,203				$	9,181				$	7,102

	Total nonperforming assets as a percentage of total assets					3.62	%				2.87	%				2.17	%

⁽¹⁾: Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $2 million, zero and $4 million at June 30, 2008, March 31, 2008 and December 31, 2007. Loans held for sale are accounted for at the lower of cost or fair value, with valuation changes included as adjustments to noninterest income.
⁽²⁾: Credit card loans are exempt under regulatory rules from being classified as nonaccrual because they are charged off when they are determined to be uncollectible, or by the end of the month in which the account becomes 180 days past due.
⁽³⁾: Includes nonaccrual restructured loans of $1.43 billion, $669 million and $633 million at June 30, 2008, March 31, 2008 and December 31, 2007. Excludes accruing restructured loans of $465 million, $372 million and $251 million at June 30, 2008, March 31, 2008 and December 31, 2007.
⁽⁴⁾: Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.
⁽⁵⁾: Includes nonaccrual Option ARM loans of $3.23 billion, $2.51 billion and $1.63 billion at June 30, 2008, March 31, 2008 and December 31, 2007.
⁽⁶⁾: Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.
⁽⁷⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
⁽⁸⁾: Foreclosed real estate securing Government National Mortgage Association ("GNMA") loans of $21 million, $25 million and $37 million at June 30, 2008, March 31, 2008 and December 31, 2007 have been excluded. These assets are fully collectible as the corresponding GNMA loans are insured by the Federal Housing Administration ("FHA") or guaranteed by the Department of Veterans Affairs ("VA").

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of incurred credit losses inherent in the Company's loan portfolio as of the balance sheet date. The estimate of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of borrowers, adverse situations that have occurred that may affect a borrower's ability to meet his financial obligations, the estimated value of underlying collateral, general economic conditions, changes in unemployment levels and the impact that changes in interest rates have on a borrower's ability to repay adjustable-rate loans.

Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. The Company maintains a comprehensive governance structure and a certification and validation process that is designed to support, among other things, the appropriateness of the estimate of the allowance for loan losses. Subsequent evaluations of the loan portfolio, in light of factors then prevailing, may result in significant changes in the allowance for loan losses in future periods.

The dynamics involved in determining incurred credit losses can vary considerably based on the existence, type and quality of the security underpinning the loan and the credit characteristics of the borrower. Hence, real estate secured loans are generally accorded a proportionately lower allowance for loan losses than unsecured credit card loans held in portfolio. Similarly, loans to higher risk borrowers, in the absence of mitigating factors, are generally accorded a proportionately higher allowance for loan losses. Certain real estate secured loans that have features which may result in increased credit risk when compared with real estate secured loans without those features are discussed in the Company's 2007 Annual Report on Form 10-K/A – "Credit Risk Management."

In estimating the allowance for loan losses, the Company allocates a portion of the allowance to its various loan product categories based on the credit risk profile of the underlying loans. The tools used for this determination include statistical estimation techniques that assess default and loss outcomes based on an evaluation of past performance of similar pools of loans in the Company's portfolio, other factors affecting default and loss, as well as industry historical loan loss data (primarily for homogeneous loan portfolios). Non-homogeneous loans are individually reviewed and assigned loss factors commensurate with the applicable level of estimated risk.

The allocated allowance is supplemented by the unallocated allowance. The unallocated component of the allowance reflects management's assessment of various risk factors that are not fully captured by the statistical estimation techniques used to determine the allocated component of the allowance. Conditions not directly attributable to credit risks inherent in specific loan products (due to the imprecision that is inherent in credit loss estimation techniques) that are evaluated in connection with the unallocated allowance include national and local economic trends and conditions, industry and borrower concentrations within portfolio segments, recent loan portfolio performance, trends in loan growth, changes in underwriting criteria, and the regulatory and public policy environment. Both the allocated and the unallocated allowance are available to absorb credit losses inherent in the homogeneous loan portfolio as of the balance sheet date.

In response to increasingly adverse credit trends and consistent with its practice of routinely and regularly evaluating the accuracy of statistical estimation techniques, the Company made significant changes to key assumptions used to estimate incurred losses in its loan portfolio. For example, in the second quarter of 2008, the Company shortened the historical time period used to evaluate default frequencies for its prime mortgage portfolio from a three-year period to a one-year period to reflect the evolving risk profile of the loan portfolio and adjusted its severity assumptions for all single-family mortgages to reflect the continuing decline in home prices. These updated assumptions accounted for approximately one-third of the provision recorded in the second quarter of 2008. In the first quarter of 2008, the Company shortened the time period used to evaluate default frequencies in its home equity loans and lines of credit and subprime mortgage channel portfolios from a three-year historical period

to a one-year historical period. These updated assumptions accounted for approximately $1.2 billion of the provision recorded in the first quarter of 2008. By providing greater emphasis to more recent default data, the allowance for loan losses better reflects the evolving risk profile of the loan portfolio.

Additionally, in response to increasingly adverse credit trends, including declining home prices, the Company updated its assumptions used to estimate the net realizable value of loans to determine the amount of related charge-offs. These updated assumptions resulted in additional charge-offs of approximately $130 million in the second quarter of 2008.

Refer to Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies" in the Company's 2007 Annual Report on Form 10-K/A for further discussion of the Allowance for Loan Losses.

Changes in the allowance for loan losses were as follows:

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

				2008			2007			2008			2007
				(dollars in millions)
Balance, beginning of period				$	4,714		$	1,540		$	2,571		$	1,630
Allowance transferred to loans held for sale					–			(81	)		–			(229	)
Other					–			–			–			7
Provision for loan losses					5,913			372			9,423			606

					10,627			1,831			11,994			2,014
Loans charged off:
	Loans secured by real estate:
		Home loans⁽¹⁾			(687	)		(21	)		(1,017	)		(57	)
		Home equity loans and lines of credit⁽¹⁾			(726	)		(55	)		(1,212	)		(84	)
		Subprime mortgage channel⁽²⁾			(572	)		(103	)		(960	)		(143	)
		Home construction⁽³⁾			(3	)		(1	)		(12	)		(1	)
		Multi-family			(3	)		–			(7	)		–
		Other real estate			(1	)		(1	)		(3	)		(1	)

			Total loans secured by real estate		(1,992	)		(181	)		(3,211	)		(286	)
	Consumer:
		Credit card			(169	)		(106	)		(303	)		(202	)
		Other			(2	)		(2	)		(4	)		(5	)
	Commercial				(51	)		(15	)		(90	)		(23	)

			Total loans charged off		(2,214	)		(304	)		(3,608	)		(516	)
Recoveries of loans previously charged off:
	Loans secured by real estate:
		Home loans⁽¹⁾			–			1			1			2
		Home equity loans and lines of credit⁽¹⁾			17			3			26			6
		Subprime mortgage channel⁽²⁾			3			11			4			12
		Other real estate			1			–			1			1

			Total loans secured by real estate		21			15			32			21
	Consumer:
		Credit card			16			15			28			31
		Other			–			–			1			6
	Commercial				6			3			9			4

		Total recoveries of loans previously charged off			43			33			70			62

			Net charge-offs		(2,171	)		(271	)		(3,538	)		(454	)

Balance, end of period				$	8,456		$	1,560		$	8,456		$	1,560

Net charge-offs (annualized) as a percentage of average loans held in portfolio					3.59	%		0.50	%		2.91	%		0.41	%
Allowance as a percentage of loans held in portfolio					3.53			0.73			3.53			0.73

⁽¹⁾: Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.
⁽²⁾: Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio. Charge-offs in the second quarter of 2007 include $26 million of amounts primarily related to uncollected borrower expenses incurred in prior periods by and owed to a third party loan servicer.
⁽³⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

Key Factors Affecting Credit Costs: Lien Position, Loan-to-Value Ratios and Loan Vintages

In a stressed housing market with increasing delinquencies and declining housing prices, such as currently exists, the adequacy of collateral securing a loan becomes an important factor in determining future loan performance as borrowers with more equity in their properties generally have a greater vested interest in keeping their loans current than borrowers with little to no equity in their properties. Generally, homes purchased prior to the end of 2004 have benefited from more home price appreciation than homes purchased more recently. The credit performance of earlier vintage loans in the Company's residential loan portfolio is generally more favorable than loans originated or purchased more recently, although lately there has been some pressure on earlier vintages, such as the 2005 vintages.

In the event that the Company forecloses on a property, the extent to which the outstanding balance on a loan exceeds its collateral value (less cost to sell) will determine the severity of loss. Generally, properties with higher current loan-to-value ratios would be expected to result in higher severity of loss on foreclosure than properties with lower current loan-to-value ratios. Both loan-to-value ratios at origination and estimated current loan-to-value ratios are key inputs in estimating the allowance for loan losses.

Statistical estimation techniques used to estimate the allowance for loan losses in single-family residential portfolios incorporate estimates of changes in housing prices using Office of Federal Housing Enterprise Oversight ("OFHEO") cumulative growth rates available at the time the assessments are conducted. The estimate of the allowance at June 30, 2008 incorporated OFHEO data as of March 31, 2008 as well as more current data evidencing conditions in the housing market, such as provided by the National Association of Realtors, and internal estimates of future loss severity reflecting recent actual experience and forecasted home prices. As indicated in the footnotes to the loan-to-value/vintage tables that follow, estimated current loan-to-value ratios reflected in the tables are estimated using OFHEO home price index data as of March 31, 2008.

In foreclosure proceedings, lien position is also a critical determinant of severity of loss because when the Company holds a lien on a property that is subordinate to a first lien mortgage held by another lender, both the probability of loss and severity of loss risk are generally higher than when the Company holds both the first lien home loan and second lien home equity loan or line of credit. In the event of foreclosure, the probability of loss is generally higher because the first lien holder does not have to take into consideration any losses the second lien holder may sustain when deciding whether to foreclose on a property. The severity of loss risk is higher principally because a second lien holder who exercises its right to foreclose on a property must ensure the first lien holder's investment is repaid in full.

The table below analyzes the composition of home loans held in portfolio at June 30, 2008:

		Year of Origination

Loan-to-Value Ratio at Origination		Pre-2005			2005			2006			2007			2008			Total			% of Total
		(dollars in millions)
Home loans:
	£ 50%	$	3,381		$	1,162		$	752		$	2,722		$	517		$	8,534			8	%
	>50-60%		3,710			1,662			1,370			3,696			534			10,972			11
	>60-70%		8,515			4,867			3,652			7,402			848			25,284			24
	>70-80%		14,622			10,460			9,629			17,012			1,271			52,994			51
	>80-90%		1,659			633			559			1,543			214			4,608			4
	>90%		963			186			184			394			10			1,737			2

	Total home loans held in portfolio^{(1)(2)(3)(4)(5)}	$	32,850		$	18,970		$	16,146		$	32,769		$	3,394		$	104,129			100	%

	As a percentage of total		32	%		18	%		16	%		31	%		3	%		100	%
	Nonaccrual loans as a percentage of total		3.01			5.21			7.38			4.78			0.29			4.56
Average loan-to-value ratio at origination			69			71			72			70			66			70
Average estimated current loan-to-value ratio⁽⁶⁾			48			71			81			74			66			66

⁽¹⁾: Excludes home loans in the subprime mortgage channel. Includes Option ARM home loans.
⁽²⁾: Excluded from the balances of home loans held in portfolio are $233 million of home loans that are insured by the Federal Housing Administration ("FHA") or guaranteed by the Department of Veterans Affairs ("VA"), of which $13 million have loan-to-value ratios of £ 80% and $220 million have loan-to-value ratios of >80%.
⁽³⁾: Originations and purchases of home loans with loan-to-value ratios at origination of >80% amounted to $1.96 billion in the first half of 2008.
⁽⁴⁾: Included in the balance of home loans held in portfolio are the following interest-only home loans and their related loan-to-value ratios at origination: $31.24 billion (£80%), $859 million (>80-90%) and $178 million (>90%). Originations and purchases of interest-only loans amounted to $3.94 billion in the first half of 2008.
⁽⁵⁾: Excludes $646 million for which LTV or vintage data was unavailable.
⁽⁶⁾: The average estimated current loan-to-value ratio reflects the outstanding balance at the balance sheet date, divided by the estimated current property value. Current property values are estimated using data from the March 31, 2008 OFHEO home price index.

The table below analyzes the composition of Option ARM home loans held in portfolio at June 30, 2008:

		Year of Origination

Loan-to-Value Ratio at Origination		Pre-2005			2005			2006			2007			2008			Total			% of Total
		(dollars in millions)
Home loan Option ARMs:
	£50%	$	1,037		$	628		$	387		$	698		$	15		$	2,765			6	%
	>50-60%		1,238			906			773			1,261			29			4,207			8
	>60-70%		3,870			3,085			2,527			3,161			74			12,717			24
	>70-80%		7,491			6,479			7,308			8,063			92			29,433			56
	>80-90%		898			450			442			890			21			2,701			5
	>90%		259			92			125			121			2			599			1

	Total home loan Option ARMs held in portfolio⁽¹⁾⁽²⁾	$	14,793		$	11,640		$	11,562		$	14,194		$	233		$	52,422			100	%

	As a percentage of total		28	%		22	%		22	%		27	%		1	%		100	%
	Nonaccrual loans as a percentage of total		4.02			6.62			8.49			6.14			0.43			6.14
Average loan-to-value ratio at origination			71			72			73			72			70			72
Average estimated current loan-to-value ratio⁽³⁾			50			74			83			78			71			70

⁽¹⁾: Originations and purchases of Option ARMs amounted to $241 million in the first half of 2008.
⁽²⁾: Excludes $267 million for which LTV or vintage data was unavailable.
⁽³⁾: The average estimated current loan-to-value ratio reflects the outstanding balance at the balance sheet date, divided by the estimated current property value. Current property values are estimated using data from the March 31, 2008 OFHEO home price index.

Option ARM Home Loans

During the second quarter of 2008, the Company eliminated the production of negatively amortizing products, including Option ARMs, and continued its modification practices of working with selected customers to convert their Option ARMs into other products which do not have negative amortization features. The Option ARM home loan portfolio decreased $5.98 billion during the first half of 2008.

The Option ARM home loan product is an adjustable-rate mortgage loan that provides the borrower with the option each month to make a fully-amortizing, interest-only, or minimum payment. The minimum payment is typically insufficient to cover interest accrued in the prior month and any unpaid interest is deferred and added to the principal balance of the loan.

If the borrower continues to make the minimum monthly payment after the introductory period ends, the payment may not be sufficient to cover interest accrued in the previous month. In this case, the loan will "negatively amortize" as unpaid interest is deferred and added to the principal balance of the loan. The minimum payment on an Option ARM loan is adjusted on each anniversary date of the loan but each increase or decrease is limited to a maximum of 7.5% of the minimum payment amount on such date until a "recasting event" occurs.

A recasting event occurs every 60 months or sooner upon reaching a negative amortization cap. When a recasting event occurs, a new minimum monthly payment is calculated without regard to any limits on the increase or decrease in amount that would otherwise apply under the annual 7.5% payment cap. This new minimum monthly payment is calculated to be sufficient to fully repay the principal balance of the loan, including any theretofore deferred interest, over the remainder of the loan term using the fully-indexed rate then in effect. A recasting event occurs immediately whenever

the unpaid principal balance reaches the negative amortization cap, which is expressed as a percent of the original loan balance. Prior to 2006, the negative amortization cap was 125% of the original loan balance (or 110% of the original loan balance for loans secured by property located in New York and loans purchased through the correspondent channel). For all Option ARM loans originated in 2006, the negative amortization cap was 110% of the original loan balance. For Option ARM loans originated in 2007, the negative amortization cap was raised to 115%, with the exception of loans secured by property located in New York and loans purchased through the correspondent channel where the negative amortization cap remains at 110%. Declines in mortgage rates to which Option ARM loans are indexed will generally delay the time frame within which negatively amortizing Option ARM loans reach their negative amortization caps. Conversely, increases in mortgage rates to which Option ARM loans are indexed will generally accelerate the timeframe within which negatively amortizing Option ARM loans reach their negative amortization caps.

Assuming all Option ARM loans recast no earlier than five years after origination, as of June 30, 2008, $2.2 billion or 4% of the Company's Option ARM portfolio is scheduled to recast in the latter half of 2008 and $7.1 billion or 13% is scheduled to recast in 2009. This $9.3 billion of Option ARM loans that are contractually scheduled to recast through 2009 are not expected to have a material effect on the future cash flows and liquidity of the Company. The primary risks of the Option ARM portfolio on cash flows and liquidity are related to (a) the deficiency of cash flows that could be experienced if a portion of the loans ceases paying principal and interest, and (b) the decline in liquidity resources that could be experienced if a portion of the Option ARM portfolio becomes unavailable for collateralized borrowing (i.e., in the event the loans become non-performing). Given the most extreme hypothetical scenario in which all of these $9.3 billion of loans reach the 5-year recasting event on the same day, none of these loans prepay on or prior to that date and no future interest or principal payments are received, the effect on daily cash flows would be de minimis to the Company's normal and routine changes in deposit balances and normal and routine variances in principal and interest payments received on all loans in the Company's held for investment portfolios. Additionally, the Option ARM loans that are scheduled to recast in 2008 and 2009 are predominantly loans that were originated in 2003 and 2004. The relatively low estimated current loan-to-value ratio and other favorable characteristics of the pre-2005 vintages represent a substantial risk mitigant relative to the recast of such loans in 2008 and 2009 such that the actual impact of nonperforming assets on the Company's borrowing capacity would not be expected to be material.

The Company identifies and measures risks associated with Option ARM loans in a number of ways. These include monthly monitoring of borrower actual payment performance on the mortgage loans as well as quarterly updates of information on borrowers' broader credit standing as measured by updated FICO scores. Post-origination, property value estimates are generally updated through reference to local area indices of home price appreciation. For seriously delinquent loans being reviewed for loss mitigation or write-down activities, these are supplemented by updated estimates of value on individual properties. Trends in the incidence and depth of negative amortization are monitored, including their correlations with the overall trends in Treasury yields and the 12-Month Treasury Average ("MTA") index. The relationship of these attributes to actual historical delinquency performance are studied, and subsequent loan origination and loss mitigation practices are modified to reflect new information and manage risks. The Company's loss mitigation practices include modifying Option ARMs into other products which do not have negative amortization features.

The table below provides an analysis of the geographic distribution of the Company's home loan Option ARM portfolio and nonaccrual loan balances at June 30, 2008:

			Portfolio				Nonaccrual

			(dollars in millions)
California:
	Northern coastal		$	7,704	15	%	$	298	9	%	70	%
	Southern coastal			14,337	27			667	21		71
	Other			4,300	8			294	9		79

		Total California		26,341	50			1,259	39		72
Florida				6,921	13			831	26		72
New York/New Jersey				4,674	9			251	8		62
Washington/Oregon				1,970	4			58	2		63
Illinois				1,380	2			114	3		68
Massachusetts				1,194	2			90	3		70
Other⁽¹⁾				10,406	20			625	19		70

	Total Option ARMs held in portfolio		$	52,886	100	%	$	3,228	100	%	70	%

⁽¹⁾: Of this category, Arizona had the largest portfolio and nonaccrual balances of approximately $1.06 billion and $66 million.

The table below analyzes the composition of prime home equity loans and lines of credit held in portfolio at June 30, 2008:

		Year of Origination

Combined Loan-to-Value Ratio at Origination⁽¹⁾		Pre-2005			2005			2006			2007			2008			Total			% of Total
		(dollars in millions)
Prime home equity loans and lines of credit:
	£50%	$	2,834		$	1,308		$	1,385		$	1,490		$	239		$	7,256			12	%
	>50-60%		1,848			932			909			1,042			116			4,847			8
	>60-70%		2,749			1,528			1,443			1,724			187			7,631			13
	>70-80%		6,334			4,310			3,707			4,948			327			19,626			33
	>80-90%		2,718			3,904			5,223			6,354			101			18,300			31
	>90%		541			189			200			450			3			1,383			3

	Total prime home equity loans and lines of credit held in portfolio^{(2)(3)(4)(5)(6)}	$	17,024		$	12,171		$	12,867		$	16,008		$	973		$	59,043			100	%

	As a percentage of total		29	%		20	%		22	%		27	%		2	%		100	%
	Nonaccrual loans as a percentage of total		1.12			2.47			3.64			3.39			0.41			2.55
Average combined loan-to-value ratio at origination⁽¹⁾			69			74			75			76			63			73
Average estimated current combined loan-to-value ratio⁽¹⁾⁽⁷⁾			51			69			78			80			64			69

⁽¹⁾: The combined loan-to-value ratio at origination measures the ratio of the original loan amount of the first lien product (typically a first lien mortgage loan) and the original loan amount of the second lien product (typically a second lien home equity loan or line of credit) to the appraised value of the underlying collateral at origination. Where the second lien product is a line of credit, the total commitment amount is used in calculating the combined loan-to-value ratio.
⁽²⁾: Excludes home equity loans in the subprime mortgage channel.
⁽³⁾: 26% of prime home equity loans and lines of credit were in first lien position at June 30, 2008.

⁽⁴⁾: The Company has pool mortgage insurance that partially offsets it from the risk of default on certain prime home equity loans and lines of credit originated after March 2004 where the combined loan-to-value ratio at origination is greater than 90 percent. Contractual stop loss provisions limit the insurer's exposure to 10% of the outstanding loan balance for loans originated prior to December 31, 2006, and 8% for loans originated thereafter.
⁽⁵⁾: Extensions of credit under prime home equity loans and lines of credit with combined loan-to-value ratios at origination of >80% amounted to $91 million in the first half of 2008.
⁽⁶⁾: Excludes $735 million for which LTV or vintage data was unavailable.
⁽⁷⁾: The average estimated current combined loan-to-value ratio reflects the outstanding balance or commitment amount (in the case of lines of credit) at the balance sheet date, divided by the estimated current property value. Current property values are estimated using data from the March 31, 2008 OFHEO home price index.

The prime home equity loans and lines of credit held in portfolio at June 30, 2008, as shown in the immediately preceding table, included the following home equity loans and lines of credit in junior lien position:

		Year of Origination

Combined Loan-to-Value Ratio at Origination⁽¹⁾		Pre-2005			2005			2006			2007			2008			Total			% of Total
		(dollars in millions)
Prime junior lien home equity loans and lines of credit:
	£ 50%	$	1,032		$	644		$	856		$	740		$	106		$	3,378			8	%
	>50-60%		955			646			773			711			79			3,164			7
	>60-70%		1,632			1,170			1,284			1,201			126			5,413			12
	>70-80%		4,117			3,469			3,353			3,527			217			14,683			34
	>80-90%		2,270			3,549			5,026			5,014			42			15,901			37
	>90%		262			77			165			418			3			925			2

	Total prime junior lien home equity loans and lines of credit held in portfolio^(2)(3)(4)	$	10,268		$	9,555		$	11,457		$	11,611		$	573		$	43,464			100	%

	As a percentage of total		24	%		22	%		26	%		27	%		1	%		100	%
	Nonaccrual loans as a percentage of total		1.12			2.54			3.68			3.28			0.17			2.67
Average combined loan-to-value ratio at origination⁽¹⁾			72			76			77			78			65			76
Average estimated current combined loan-to-value ratio⁽¹⁾⁽⁵⁾			55			73			80			82			65			73

⁽¹⁾: The combined loan-to-value ratio at origination measures the ratio of the original loan amount of the first lien product (typically a first lien mortgage loan) and the original loan amount of the second lien product (typically a second lien home equity loan or line of credit) to the appraised value of the underlying collateral at origination. Where the second lien product is a line of credit, the total commitment amount is used in calculating the combined loan-to-value ratio.
⁽²⁾: Excludes home equity loans in the subprime mortgage channel.
⁽³⁾: The Company has pool mortgage insurance that partially offsets it from the risk of default on certain prime home equity loans and lines of credit originated after March 2004 where the combined loan-to-value ratio at origination is greater than 90 percent. Contractual stop loss provisions limit the insurer's exposure to 10% of the outstanding loan balance for loans originated prior to December 31, 2006, and 8% for loans originated thereafter.
⁽⁴⁾: Excludes $603 million for which LTV or vintage data was unavailable.
⁽⁵⁾: The average estimated current combined loan-to-value ratio reflects the outstanding balance or commitment amount (in the case of lines of credit) at the balance sheet date, divided by the estimated current property value. Current property values are estimated using data from the March 31, 2008 OFHEO home price index.

The subprime mortgage channel loans held in portfolio at June 30, 2008 were as follows:

		Year of Origination

Loan-to-Value Ratio at Origination		Pre-2005			2005			2006			2007			2008			Total			% of Total
		(dollars in millions)
Subprime mortgage channel:
	£ 50%	$	195		$	98		$	218		$	57		$	–		$	568			4	%
	>50-60%		231			135			208			82			–			656			4
	>60-70%		485			301			462			196			–			1,444			9
	>70-80%		1,502			2,058			2,052			752			–			6,364			40
	>80-90%		1,604			1,063			1,784			582			–			5,033			31
	>90%		28			108			1,579			203			–			1,918			12

	Total subprime mortgage channel loans held in portfolio⁽¹⁾	$	4,045		$	3,763		$	6,303		$	1,872		$	–		$	15,983			100	%

	As a percentage of total		25	%		24	%		39	%		12	%		–	%		100	%
	Nonaccrual loans as a percentage of total		14.51			26.20			17.37			17.74			–			18.77
Average loan-to-value ratio at origination⁽²⁾			77			79			83			80			n/a			80
Average estimated current loan-to-value ratio⁽³⁾			58			73			84			83			n/a			75

⁽¹⁾: Excludes $92 million for which LTV or vintage data was unavailable.
⁽²⁾: Origination loan-to-value used for first liens and combined loan-to-value used for second liens.
⁽³⁾: The average estimated current loan-to-value ratio reflects the outstanding balance at the balance sheet date, divided by the estimated current property value. Current property values are estimated using data from the March 31, 2008 OFHEO home price index.

The Company monitors delinquency rates for all loans held in portfolio. Increasing early stage delinquency rates (i.e. loans 30-89 days) are indicative of possible future credit problems when the Company has serious doubts as to the ability of such borrowers to cure the delinquency condition. Such loans have a greater propensity to migrate into nonaccrual status as cure rates on early stage delinquencies have deteriorated with the continued decline in the U.S. housing market. Delinquency rates for home loans, home equity loans and lines of credit and subprime mortgage channel loans that were more than 30 days past due but less than 90 days past due were 2.89%, 1.47% and 6.45% at June 30, 2008 as compared with 2.02%, 1.43% and 6.67% at December 31, 2007. The balance of potential problem non-homogeneous loans, which consists of accruing loans that were reviewed for potential impairment and were subsequently determined not to be impaired, amounted to $112 million and $170 million at June 30, 2008 and December 31, 2007.

90 Days or More Past Due and Still Accruing

The total amount of loans held in portfolio, excluding credit card loans, that were 90 days or more contractually past due and still accruing interest was $75 million and $98 million at June 30, 2008 and December 31, 2007. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest. Managed credit card loans that were 90 days or more contractually past due and still accruing interest were $924 million and $836 million at June 30, 2008 and December 31, 2007, including $280 million and $174 million related to loans held in portfolio. The delinquency rate on managed credit card loans that were 30 days or more delinquent at June 30, 2008 and December 31, 2007 was 7.05% and 6.47%.

Derivative Counterparty Credit Risk

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of

agreements where the Company is in a favorable position. Credit risk related to derivative financial instruments is considered within the fair value measurement of the instrument. The Company manages the credit risk associated with its various derivative counterparties through counterparty credit review, counterparty exposure limits, diversifying transactions across a number of counterparties and monitoring procedures. The Company's agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions "net." The Company obtains collateral from certain counterparties and monitors all exposure and collateral requirements daily to manage risk. The fair value of collateral received from a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company's risk management practices assist to mitigate the change in expected effects on the Company's cash flow and liquidity in the event of non-performance or failure by derivative counterparties.

At June 30, 2008 and December 31, 2007, the gross positive fair value of the Company's derivative financial instruments was $1.79 billion and $2.04 billion. The Company's master netting agreements at June 30, 2008 and December 31, 2007 reduced the exposure to this gross positive fair value by $749 million and $331 million. The Company's collateral against derivative financial instruments was $637 million and $1.28 billion at June 30, 2008 and December 31, 2007. Accordingly, the Company's net exposure to derivative counterparty credit risk at June 30, 2008 and December 31, 2007 was $405 million and $435 million.

Liquidity Risk and Capital Management

Liquidity Risk

The objective of liquidity risk management is to ensure that the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet its other obligations on a timely and cost-effective basis in various market conditions. Changes in market conditions, the composition of its balance sheet and risk tolerance levels are among the factors that influence the Company's liquidity profile. The Company establishes liquidity guidelines for the Parent as well as for its banking subsidiaries.

The Parent and its banking subsidiaries have separate liquidity risk management policies and contingent funding plans as each has different funding needs and requirements and sources of liquidity. The Company's banking subsidiaries also have regulatory capital requirements. The Company has policies that require current and forecasted liquidity positions to be monitored against pre-established limits and requires that contingency liquidity plans be maintained.

For the Company's banking subsidiaries, liquidity is forecasted over short-term (operational) and long-term (strategic) horizons. Both approaches require that the Company's banking subsidiaries maintain minimum amounts of liquidity that exceed forecasted needs (excess liquidity). Whereas the focus for operational liquidity is to maintain sufficient excess liquidity to satisfy unanticipated funding requirements, strategic liquidity focuses on stress-testing liquidity risks and ensuring that sufficient excess liquidity is maintained under various scenarios to meet policy standards.

While current market conditions have limited the liquidity sources of the Parent and its banking subsidiaries, the Company's current sources of liquidity provide it the ability to fund its operations and meet all preferred stock and debt service obligations. The principal sources of liquidity available to the Company in the current environment are collateralized borrowings with the most significant source being advances made available through the banking subsidiaries' memberships in the Federal Home Loan Bank system, and FDIC-insured deposits originated through the retail banking network or from retail deposit brokers. Other sources of funding, primarily those accessed directly through capital market transactions, covered bonds and uninsured institutional deposits are dependent on maintaining certain credit ratings assigned by various nationally recognized statistical rating organizations

("NRSROs"). Because of downgrades made to those ratings by the NRSROs, many of these sources of liquidity are not currently available to the Company.

Parent

In April 2008, the Parent completed a significant recapitalization which resulted in the receipt of approximately $7.2 billion, $5.0 billion of which has been contributed to its principal banking subsidiary, Washington Mutual Bank. With the remaining proceeds from the April 2008 recapitalization, the Parent expects to continue to have sufficient cash and cash equivalents to fund its operations for the foreseeable future without relying on the payment of bank subsidiary dividends. In the future, and as market conditions permit, the Parent may look to dividends paid by its banking subsidiaries for additional liquidity. For more information on dividend limitations applicable to the Parent's banking subsidiaries, refer to "Business – Regulation and Supervision" and Note 20 to the Consolidated Financial Statements – "Regulatory Capital Requirements and Dividend Restrictions" in the Company's 2007 Annual Report on Form 10-K/A.

In January 2006, the Parent filed an automatically effective registration statement under which an unlimited amount of debt securities, preferred stock and depositary shares were registered. The Parent's long-term obligations are rated BBB by Fitch, BBB- by Standard & Poor's, Baa3 by Moody's, and BBB by DBRS. Short-term obligations are rated F2 by Fitch, A3 by Standard & Poor's and R-2M by DBRS.

Banking Subsidiaries

The principal sources of liquidity for the Parent's banking subsidiaries are retail deposits, FHLB advances, repurchase agreements, federal funds purchased, the maturity and repayment of portfolio loans, securities held in the available-for-sale portfolio, loans designated as held for sale and the Federal Reserve Bank's discount window. Retail deposits, most of which are comprised of accounts with balances less than $100,000, continue to provide the Company with a significant source of stable funding. The Company's continuing ability to retain its retail deposit base and to attract new deposits depends on various factors such as customer service satisfaction levels, the competitiveness of interest rates offered on deposit products, the Company's reputation and depositor perception of the Company's stability and future prospects, which perceptions can be influenced at times by external events, such as instability in the banking industry generally, and rumor and speculation.

The Federal Home Loan Bank system continues to provide the Parent's banking subsidiaries with a reliable and significant source of liquidity. The Parent's banking subsidiaries continue to have qualifying assets that are available to pledge as collateral for additional FHLB Advances, repurchase agreements and other collateral-dependent liquidity sources.

With the disruptions in the credit markets, credit card securitizations cannot be transacted on terms that are attractive to the Company, and mortgage loan sales are currently limited primarily to conforming loans eligible for purchase by Freddie Mac and Fannie Mae. Accordingly, the Company's liquidity planning assumes that the government-sponsored enterprises will be the only reliable sources of liquidity in the secondary market for the foreseeable future.

In connection with credit card securitizations, the Company will be required to fund spread accounts to make payments to securitization investors and credit enhancers in the event their share of cash flows is insufficient to cover the required amounts due. This generally occurs when the performance of securitized loans deteriorates causing excess servicing amounts to decrease below contractually specified levels. As of June 30, 2008, there are no spread account funding requirements.

As part of its funding diversification strategy, Washington Mutual Bank launched a €20 billion covered bond program in September 2006. While €14 billion remains unissued under this program, no further issuances may occur until the Company's credit ratings assigned by the NRSROs are upgraded

or the ratings-based restrictions applicable to the program are eliminated. Existing floating-rate U.S. dollar-denominated mortgage bonds were issued by Washington Mutual Bank and collateralize the outstanding Euro-denominated covered bonds. The covered bonds were issued by a statutory trust that is not consolidated by the Company. The mortgage bonds are secured principally by residential mortgage loans in Washington Mutual Bank's portfolio. For more information on the covered bonds program, see Note 5 to the Consolidated Financial Statements – "Covered Bond Program."

Under the Global Bank Note Program, which was established in August 2003 and renewed in December 2005, Washington Mutual Bank may issue notes in the United States and in international capital markets in a variety of currencies and structures. Washington Mutual Bank had $12.38 billion available under this program as of June 30, 2008.

Senior unsecured long-term obligations of Washington Mutual Bank are rated BBB by Fitch, BBB by Standard & Poor's, Baa2 by Moody's and BBBH by DBRS. Short-term obligations are rated F2 by Fitch, A2 by Standard & Poor's, P2 by Moody's and R-2H by DBRS.

Capital Management

Management monitors capital adequacy for both the Company (on a consolidated basis) and its banking subsidiaries. Sufficient capital is maintained at both levels to provide for losses based on the risks inherent in the combination of businesses. The views of investors, credit rating agencies, lenders and regulators are considered in determining capital ratio targets.

Capital is typically generated through the issuance of equity securities such as common stock and perpetual preferred stock and from the retention of earnings. The Company is not currently generating capital through earnings due to the high levels of loan loss provisioning that has resulted from the severe downturn in the credit environment. On a consolidated basis, capital may also be raised through issuance of capital securities by various subsidiaries of the Company, in particular Washington Mutual Preferred Funding LLC ("WMPF LLC"). Target capital levels are estimated so as to meet both expected and unexpected future losses.

In April 2008, the Company issued $7.2 billion of capital through a private sale of common stock, Series S and Series T Contingently Convertible Perpetual Non-cumulative Preferred Stock (the "Series S and Series T Preferred Stock") and warrants to acquire common stock. Of the total amount, $3.0 billion was contributed in the form of Tier 1 regulatory capital to Washington Mutual Bank during the second quarter. On June 30, 2008, the Series S and Series T Preferred Stock were automatically converted into the Company's common stock upon receipt of certain approvals, including the approval of the Company's shareholders. Following the end of the second quarter, the Parent contributed an additional $2 billion of Tier 1 regulatory capital to Washington Mutual Bank.

The April 2008 equity issuance provided, for a limited period of time, a price protection feature to some of the investors who participated in this transaction. In certain circumstances, were the Company to engage in a future capital raising transaction, or if a fundamental change in the ownership of the Company occurs, the Company would be required to compensate those investors in the form of cash or shares of the Company's common stock. For further information, see Note 6 to the Consolidated Financial Statements – "Equity Issuance" for details of the capital issuance and the related price protection feature.

In the fourth quarter of 2007, the Company issued $3.0 billion of Series R Non-Cumulative Perpetual Convertible Preferred Stock for net proceeds of approximately $2.9 billion. Of the total net proceeds received from the sale of Series R Preferred Stock, $1.0 billion was contributed to Washington Mutual Bank. The remaining proceeds were retained at the Parent to enhance its liquidity profile.

In 2006 and 2007, the Company issued a total of $3.9 billion of perpetual, non-cumulative preferred securities through its indirect subsidiary, WMPF LLC. The high equity content characteristics of these securities are acknowledged by the Office of Thrift Supervision ("OTS"), the Company's primary regulator, and the rating agencies as qualifying elements in the composition of financial institutions' core capital structures. Accordingly, such securities are included as equity components within the Company's capital ratios.

To mitigate the capital impact of elevated credit costs, management has recommended that the Company's Board of Directors maintain the reduced quarterly common dividend payment rate of one cent per share. Refer to Item 1A – "Risk Factors" for additional information regarding risks related to capital sufficiency.

On July 15, 2008, the Company's Board of Directors declared a cash dividend of one cent per share on the Company's common stock, payable on August 15, 2008 to shareholders of record as of July 31, 2008. The Company's Board of Directors considers a variety of factors when determining the dividend on the Company's common stock, including overall capital levels, liquidity position and the Company's earnings. In addition, the Company will pay a dividend of $0.2528 per depositary share of Series K Preferred Stock, and a dividend of $19.8056 per share of Series R Preferred Stock on September 15, 2008 to shareholders of record on September 1, 2008.

With certain limited exceptions, if the Company does not pay full quarterly dividends on any issued and outstanding class or series of its preferred stock for a particular dividend period, then the Company may not pay dividends on, or repurchase, redeem or make a liquidation payment with respect to its common stock or other junior securities during the next succeeding dividend period. Refer to Note 17 to the Consolidated Financial Statements – "Preferred Stock and Minority Interest" in the Company's 2007 Annual Report on Form 10-K/A for additional information.

Capital Composition and Capital Ratios

Capital is comprised of tangible common equity, perpetual preferred stock and, to a lesser degree, trust preferred securities. When measuring the Company's capital, tangible common equity is composed of common stock and retained earnings, and excludes the effects of intangible assets (except mortgage servicing rights). The following table presents the composition of the Company's capital components:

	June 30, 2008		December 31, 2007

	(in millions)
Tangible Common Equity	$	16,361	$	14,083
Series K Preferred Stock		492		492
Series R Preferred Stock		2,900		2,900
WMPF LLC Preferred Stock		3,912		3,912
Trust Preferred Securities		814		813

OTS capital guidelines require that the dominant form of a savings association's equity (referred to as "core" or "Tier 1" capital under OTS guidelines) should be common voting shares and that savings associations should avoid undue reliance on preferred securities. Preferred securities issued by WMPF LLC (an indirect subsidiary of Washington Mutual Bank ("WMB")) qualify as part of WMB's Tier 1 capital. As a prudential safeguard, the OTS limits the portion of a savings association's Tier 1 core capital that may be comprised of preferred securities to an amount that cannot exceed 25% of Tier 1 capital. At June 30, 2008, the aggregate amount of preferred securities issued by WMPF LLC represented 18.45% of WMB's total Tier 1 capital. The capital structure of Washington Mutual Bank fsb ("WMBfsb") does not contain any preferred securities.

The Parent is not required by the OTS to report its capital ratios, and the Parent is not a bank holding company subject to capital adequacy requirements administered by the Federal Reserve Board. Nevertheless, capital ratios are integral to the Company's capital management process and the provision of such metrics facilitates peer comparisons with Federal Reserve Board-regulated bank holding companies. The Company's primary metric for measuring capital adequacy is its tangible equity to total tangible assets. Tangible equity includes tangible common equity, as described above, and perpetual preferred stock. Tier 1 capital, which is used to calculate the Tier 1 leverage ratio, consists of tangible equity and includes certain non-perpetual trust preferred securities. Tier 1 risk-based capital consists of Tier 1 capital, adjusted for the effects of residual interests. Total capital consists of Tier 1 risk-based capital, and includes certain qualifying subordinated debt issued by the Company and its banking subsidiaries, and the allowance for loan losses, subject in each case to certain limits.

	June 30, 2008			December 31, 2007

	(dollars in millions)
Tangible equity	$	23,665		$	21,387
Total tangible assets		303,731			320,749
Tangible equity to total tangible assets		7.79	%		6.67	%
Tier 1 capital	$	23,912		$	21,610
Average total assets		308,157			315,832
Tier 1 leverage		7.76	%		6.84	%
Tier 1 risk-based capital	$	22,644		$	20,013
Total risk-based capital		33,458			31,128
Total risk-weighted assets		240,193			252,330
Tier 1 risk-based capital to total risk-weighted assets		9.43	%		7.93	%
Total risk-based capital to total risk-weighted assets		13.93	%		12.34	%

Subsidiary capital requirements

The regulatory capital ratios of WMB and WMBfsb and the minimum regulatory capital ratios required to be classified as "well-capitalized" institutions under the OTS's capital adequacy framework were as follows:

	June 30, 2008

	June 30, 2008						Well-Capitalized Minimum
	WMB			WMBfsb			Well-Capitalized Minimum
Tier 1 leverage		7.07	%		63.45	%		5.00	%
Tier 1 risk-based capital to total risk-weighted assets		8.40			165.24			6.00
Total risk-based capital to total risk-weighted assets		12.44			165.60			10.00

The Company's federal savings bank subsidiaries are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMB and WMBfsb continue to satisfy this requirement.

The Company's broker-dealer subsidiaries are also subject to capital requirements. At June 30, 2008 and December 31, 2007, all of its broker-dealer subsidiaries were in compliance with their applicable capital requirements.

Market Risk Management

Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which the Company is exposed is interest rate risk. Substantially all of its interest rate risk arises from instruments, positions and transactions entered into for purposes

other than trading. These include loans, MSR, securities, deposits, borrowings, long-term debt and derivative financial instruments.

The Company's trading assets are primarily comprised of financial instruments that are retained from securitization transactions, or are purchased for MSR risk management purposes. The Company does not take significant short-term trading positions for the purpose of benefiting from price differences between financial instruments and markets.

From time to time the Company issues debt denominated in foreign currencies. When such transactions occur, the Company uses derivatives to offset the associated foreign currency exchange risk.

Interest rate risk is managed within a consolidated enterprise risk management framework that includes asset/liability management and the management of specific portfolios (MSR and Other Mortgage Banking) discussed below. The principal objective of asset/liability management is to manage the sensitivity of net income to changing interest rates. Asset/liability management is governed by a policy reviewed and approved annually by the Board. The Board has delegated the oversight of the administration of this policy to the Finance Committee of the Board.

MSR Risk Management

The Company manages potential changes in the fair value of MSR through a comprehensive risk management program. The intent is to utilize risk management instruments to mitigate the effects of changes in MSR fair value within the context of the Company's overall mortgage portfolio. Risk management instruments may include interest rate contracts, forward rate agreements, forward purchase commitments and available-for-sale and trading securities. The securities generally consist of fixed-rate debt securities, such as U.S. Government and agency obligations and mortgage-backed securities, including principal-only strips. The interest rate contracts may consist of interest rate swaps, interest rate swaptions, interest rate futures and interest rate caps and floors. The Company may purchase or sell option contracts, depending on the portfolio risks it seeks to manage. The Company also enters into forward commitments to purchase and sell mortgage-backed securities, which generally are comprised of fixed-rate mortgage-backed securities with 15 or 30 year maturities.

The fair value of MSR is primarily affected by changes in expected prepayments that result from changes in spot and future primary mortgage rates and in changes in other applicable market interest rates. Changes in the value of MSR risk management instruments vary based on the specific instrument. For example, changes in the fair value of interest rate swaps are driven by shifts in interest rate swap rates and the fair value of U.S. Treasury securities is based on changes in U.S. Treasury rates. Primary mortgage rates may move more or less than the rates on Treasury bonds or interest rate swaps or the yields on mortgage-backed securities. Potential differences in the change in value between MSR and MSR risk management instruments are what is referred to as basis risk. The Company generally constructs its hedge portfolio to minimize basis risk.

The Company continuously manages the MSR, adjusting the mix of instruments used to offset MSR fair value changes as interest rates and market conditions warrant. The objective is to maintain the portfolio of risk management instruments that will be effective in managing changes in MSR fair value within the context of the overall portfolio management strategy, while maintaining sufficient liquidity to adapt to changes in market conditions. In this context, the Company also manages the size of the MSR asset through the structuring of servicing agreements when loans are sold and by periodically selling or purchasing servicing assets.

The Company uses an Option Adjusted Spread ("OAS") valuation methodology to estimate the fair value of MSR. The OAS methodology projects MSR cash flows over multiple interest rate scenarios and discounts these cash flows using risk-adjusted discount rates. The significant assumptions

used in the valuation of MSR include market interest rates, projected prepayment speeds, cost to service, ancillary income and option adjusted spreads. Additionally, an independent broker estimate of the fair value of the mortgage servicing rights is obtained quarterly along with other market-based evidence. Management uses this information together with its OAS valuation methodology to estimate the fair value of MSR.

The Company believes this overall risk management strategy is the most efficient approach to managing MSR fair value risk within the portfolio context. The success of this strategy is dependent on management's decisions regarding the amount, type and mix of MSR risk management instruments that are selected to manage the changes in fair value of the mortgage servicing asset. If this strategy is not successful, net income could be adversely affected.

Other Mortgage Banking Risk Management

The Company also manages the risks associated with its home loan mortgage warehouse and pipeline. The mortgage warehouse consists of funded loans intended for sale in the secondary market. The pipeline consists of commitments to originate mortgages to be sold in the secondary market. The interest rate risk associated with the mortgage pipeline and warehouse is the potential for changes in interest rates between the time the customer locks in the rate on the loan and the time the loan is sold.

The Company measures the risk profile of the mortgage warehouse and pipeline daily. To manage the warehouse and pipeline risk, management executes forward sales commitments, interest rate contracts and mortgage option contracts. A forward sales commitment protects against a rising interest rate environment, since the sales price and delivery date are already established. A forward sales commitment is different, however, from an option contract in that the Company is obligated to deliver the loan to the third party on the agreed-upon future date. Management also estimates the fallout factor, which represents the percentage of loans that are not expected to be funded, when determining the appropriate amount of pipeline risk management instruments.

Asset/Liability Risk Management

The purpose of asset/liability risk management is to assess the aggregate interest rate risk profile of the Company. Asset/liability risk analysis combines the MSR and Other Mortgage Banking activities with substantially all of the other remaining interest rate risk positions inherent in the Company's operations.

To analyze interest rate risk sensitivity, management projects net interest income under a variety of interest rate scenarios, assuming both parallel and non-parallel shifts in the yield curve. These scenarios illustrate net interest income sensitivity due to changes in the level of interest rates, the slope of the yield curve and the spread between Treasury and LIBOR/swap ("LIBOR") rates. Management also periodically projects the interest rate sensitivity of net income due to changes in the level of interest rates. Additionally, management projects the discounted value of assets and liabilities under different interest rate scenarios to assess their risk exposure over longer periods of time.

The projection of the sensitivity of net income, net interest income and discounted cash flow analyses requires numerous assumptions. Prepayment speeds, decay rates (the estimated runoff of deposit accounts that do not have a stated maturity), future deposits and loan rates and loan and deposit volume and mix projections are among the most significant assumptions. Prepayments affect the size of the loan and mortgage-backed securities portfolios, which impacts net interest income. All deposit and loan portfolio assumptions, including loan prepayment speeds and deposit decay rates, require management's judgments of anticipated customer behavior in various interest rate environments. These assumptions are derived from internal and external analyses. The rates on new investment securities and borrowings are estimated based on market rates while the rates on deposits and loans are estimated based on the rates offered by the Company to customers.

The slope of the yield curve, current interest rate conditions and the speed of changes in interest rates all affect sensitivity to changes in interest rates. Short-term borrowings and, to a lesser extent, interest-bearing deposits typically reprice faster than the Company's adjustable-rate assets. This lag effect is inherent in adjustable-rate loans and mortgage-backed securities indexed to the 12-month average of the annual yields on actively traded U.S. Treasury securities adjusted to a constant maturity of one year and those indexed to the 11^th District FHLB monthly weighted-average cost of funds index.

The sensitivity of new loan volume and mix to changes in market interest rate levels is also projected. Management generally assumes a reduction in total loan production in rising interest rate scenarios accompanied by a shift toward a greater proportion of adjustable-rate production. Conversely, the Company generally assumes an increase in total loan production in falling interest rate scenarios accompanied by a shift towards a greater proportion of fixed-rate loans. The gain from mortgage loans also varies under different interest rate scenarios. Normally, the gain from mortgage loans increases in falling interest rate environments primarily from an increase in mortgage refinancing activity. Conversely, the gain from mortgage loans may decline when interest rates increase if management chooses to retain more loans in the portfolio.

In periods of rising interest rates, the net interest margin normally contracts since the repricing period of the Company's liabilities is shorter than the repricing period of its assets. The net interest margin generally expands in periods of falling interest rates as borrowing costs reprice downward faster than asset yields.

To manage interest rate sensitivity, management utilizes the interest rate risk characteristics of the balance sheet assets and liabilities to offset each other as much as possible. Balance sheet products have a variety of risk profiles and sensitivities. Some of the components of interest rate risk are countercyclical. Management may adjust the amount or mix of risk management instruments based on the countercyclical behavior of the balance sheet products.

When the countercyclical behavior inherent in portions of the Company's balance sheet does not result in an acceptable risk profile, management utilizes investment securities and interest rate contracts to mitigate this situation. The interest rate contracts used for this purpose are classified as asset/liability risk management instruments. These contracts are often used to modify the repricing period of interest-bearing funding sources with the intention of reducing the volatility of net interest income. The types of contracts used for this purpose may consist of interest rate swaps, interest rate corridors, interest rate swaptions and certain derivatives that are embedded in borrowings. Management also uses receive-fixed swaps as part of the asset/liability risk management strategy to help modify the repricing characteristics of certain long-term liabilities to match those of the assets. Typically, these are swaps of long-term fixed-rate debt to a short-term adjustable-rate, which more closely resembles asset repricing characteristics.

July 1, 2008 and January 1, 2008 Net Interest Income Sensitivity Comparison

The table below indicates the sensitivity of net interest income as a result of hypothetical interest rate movements on market risk sensitive instruments. The base case assumptions used for this sensitivity analysis are similar to the Company's most recent net interest income projection for the respective twelve month periods as of the date the analysis was performed. The comparative results assume parallel shifts in the forward yield curve with interest rates rising 100 basis points and decreasing 100 basis points in even quarterly increments over the twelve month periods ending June 30, 2009 and December 31, 2008. The base scenario for the implied forward rate analysis represents market expectations for interest rates for the next twelve months.

These analyses also incorporate assumptions about balance sheet dynamics such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics. The projected interest rate sensitivities of net interest income shown below may differ significantly from actual results, particularly with respect to non-parallel shifts in the yield curve or changes in the spreads between mortgage, Treasury and LIBOR rates, changes in loan volumes or loan and deposit pricing.

Comparative Net Interest Income Sensitivity

		Gradual Change in Rates

		-100 basis points			+100 basis points
Implied forward rates:
Net interest income change for the one year period beginning:
	July 1, 2008		0.71	%		(0.72	)%
	January 1, 2008		2.78			(2.74	)

The short-term Treasury and LIBOR implied forward rates in the July 1, 2008 net interest income sensitivity analyses were lower than the rates at January 1, 2008 while long-term rates were relatively stable. The more upward sloping implied forward curves in the July 1, 2008 analysis contributed to a more favorable interest rate environment that generally tended to enhance the net interest margin in all scenarios.

Net interest income sensitivity declined in the ±100 basis point environments in the July 1, 2008 analysis compared to the January 1, 2008 analysis. The primary reason for the reduction in sensitivity was the continued execution of fixed-rate term FHLB advances and pay fixed-rate interest rate swaps, as well as the termination of receive fixed-rate swaps. The intent of the activity was to reduce the duration mismatch of assets and liabilities and net interest income sensitivity. Other factors contributing to the reduction in net interest income sensitivity were the projected shrinkage of the balance sheet (mainly due to the $10 billion in balance sheet shrinkage that occurred from December 31, 2007 through June 30, 2008) and the reduction of loan volume production and sensitivity.

July 1, 2008 and January 1, 2008 Net Income Sensitivity Comparison

Similar to the net interest income sensitivity analysis, management also periodically projects net income in a variety of interest rate scenarios assuming parallel shifts in the implied forward yield curve. The net income simulations project changes in MSR and related hedges, all of which are carried at fair value and whose values are sensitive to changes in interest rates. The analysis assumes no changes in credit provisions, gain on sale, noninterest income or noninterest expense except for the fair value changes in MSR and related hedges.

In performing net income simulations, parallel shifts in the implied forward yield curve are assumed, with interest rates rising 100 basis points and decreasing 100 basis points in even quarterly increments over the twelve month periods ending June 30, 2009 and December 31, 2008. The interest rate scenarios are identical to the scenarios used for the net interest income comparison. The assumptions used in the base scenario are similar to the assumptions used in the Company's most current earnings forecast.

For the twelve month period ending June 30, 2009 using implied forward rates, net income is projected to increase approximately $20 million in the -100 basis point simulation while it is projected to decrease approximately $45 million in the +100 basis point simulation. In comparison, net income was projected to increase approximately $160 million in the -100 basis point scenario and decrease approximately $120 million in the +100 basis point scenario for the twelve month period ended December 31, 2008. The projected decrease in net income sensitivity in the +100 basis point scenario

for the twelve month period ending June 30, 2009 as compared with the period ended December 31, 2008 was primarily due to decreases in net interest income sensitivity partially offset by changes in other income (fair value changes in the MSR and related hedges).

These net income and net interest income sensitivity analyses are limited in that they were performed at a particular point in time and do not reflect certain factors that would impact the Company's financial performance in a changing interest rate environment. Most significantly, the impact of changes in gain on sale from mortgage loans that result from changes in interest rates is not modeled in the simulation. The net income and net interest income analyses also assume no changes in credit spreads. In addition, the net income sensitivity analysis assumes no changes in credit provisions, noninterest income or noninterest expense in the different scenarios other than changes in the fair value of MSR and related hedges. Additional or fewer provisions may be required in the rising or falling interest rate scenarios changing the projected net income sensitivity if the provisions were assumed to be sensitive to interest rate movements. The analyses assume management does not initiate additional strategic actions, such as increasing or decreasing term funding or selling assets, to offset the impact of projected changes in net interest income or net income in these scenarios.

The analyses are also dependent on the reliability of various assumptions used, including prepayment forecasts and discount rates, and do not incorporate other factors that would impact the Company's overall financial performance in such scenarios. These analyses also assume that the projected MSR risk management strategy is effectively implemented and that mortgage and interest rate swap spreads are constant in all interest rate environments. These assumptions may not be realized. For example, changes in spreads between interest rate indices could result in significant changes in projected net income sensitivity. Projected net income may increase if market rates on interest rate swaps decrease by more than the decrease in mortgage rates, while the projected net income may decline if the rates on swaps increase by more than mortgage rates. Accordingly, the preceding sensitivity estimates should not be viewed as an earnings forecast.

Operational Risk Management

Operational risk is the risk of loss resulting from human fallibility, inadequate or failed internal processes or systems, or from external events, including loss related to legal risk. Operational risk can occur in any activity, function or unit of the Company.

Primary responsibility for managing operational risk rests with the lines of business. Each line of business is responsible for identifying its operational risks and establishing and maintaining appropriate business-specific policies, internal control procedures and tools to quantify and monitor these risks. To help identify, assess and manage corporate-wide risks, the Company uses corporate support groups such as Legal, Compliance, Information Security, Continuity Assurance, Enterprise Spend Management and Finance. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of each business.

The Operational Risk Management Policy, approved by the Audit Committee of the Board of Directors, establishes the Company's operational risk framework and defines the roles and responsibilities for the management of operational risk. The operational risk framework consists of a methodology for identifying, measuring, monitoring and controlling operational risk combined with a governance process that complements the Company's organizational structure and risk management philosophy. The Operational Risk Committee ensures consistent communication and oversight of significant operational risk issues across the Company and ensures sufficient resources are allocated to maintain business-specific operational risk controls, policies and practices consistent with and in support of the operational risk framework and corporate standards.

The Operational Risk Management function, part of Enterprise Risk Management, is responsible for maintaining the framework and works with the lines of business and corporate support functions to

ensure consistent and effective policies, practices, controls and monitoring tools for assessing and managing operational risk across the Company. The objective of the framework is to provide an integrated risk management approach that emphasizes proactive management of operational risk using measures, tools and techniques that are risk-focused and consistently applied company-wide. Such tools include the collection of internal operational loss event data, relevant external operational loss event data, results from scenario analysis and assessments of the Company's business environment and internal control factors. These elements are used to determine the Company's operational risk profile and are included in the measurement of operational risk capital.

Goodwill Litigation

On August 9, 1989, the Financial Institutions Reform, Recovery and Enforcement Act was enacted. Among other things, the Act raised the minimum capital requirements for savings institutions and required a phase-out of the amount of supervisory goodwill that could be included in satisfying certain regulatory capital requirements. The exclusion of supervisory goodwill from the regulatory capital of many savings institutions led them to take actions to replace the lost capital either by issuing new qualifying debt or equity securities or to reduce assets. A number of these institutions and their investors subsequently sued the United States Government seeking damages based on breach of contract and other theories (collectively "Goodwill Lawsuits").

To date, trials have been concluded and opinions have been issued in a number of Goodwill Lawsuits in the United States Court of Federal Claims. Generally, in Goodwill Lawsuits in which opinions have been issued by the Court of Federal Claims, either the plaintiffs, the defendant (U.S. Government), or both the plaintiffs and the defendant, have opted to appeal the decision to the United States Court of Appeals for the Federal Circuit. Typically, following completion of these appeals, one or more parties has petitioned the United States Supreme Court for a writ of certiorari, but all such petitions have been denied. Generally, the appeals have resulted in the cases being remanded to the Court of Federal Claims for further trial proceedings.

American Savings Bank, F.A.

In December 1992, American Savings Bank, Keystone Holdings, Inc. and certain related parties brought a lawsuit against the U.S. Government, alleging, among other things, that in connection with the acquisition of American Savings Bank they entered into a contract with agencies of the United States and that the U.S. Government breached that contract. As a result of the Keystone acquisition, the Company succeeded to all of the rights of American Savings Bank, Keystone Holdings and the related parties in such litigation and will receive any recovery from the litigation.

In connection with the Keystone acquisition, there are 6 million shares of the Company's common stock currently in escrow. In addition, as of December 31, 2007, the escrow included $75.9 million in cash dividends paid on escrowed shares as well as interest accumulated on those dividends. Under the terms of the escrow arrangement, upon receipt of net cash proceeds from a final nonappealable judgment in or settlement of the litigation prior to the expiration of the escrow, one share (together with the dividends and interest attributable to such share) will be released from escrow to the Keystone investors for each $18.4944 of net proceeds received by the Company. In September 2007, the escrow agreement was amended to extend the expiration date from December 20, 2008 to June 30, 2020. As a result of the amendment, in 2007, the Company received cash payments totaling $17.2 million from the escrow. Additionally, the Company is entitled during 2008 to receive quarterly cash payments from the escrow, each in an amount equal to approximately 2% of the then value of the escrow. Thereafter, the Company is entitled to receive quarterly distributions from the escrow, each consisting of 130,435 shares of the Company's common stock and the dividends and interest then in the escrow attributable to such shares.

On December 18, 2006, a summary judgment order in favor of plaintiffs was entered in the lawsuit in the amount of $402 million. Following defendant's appeal and oral argument, on March 6, 2008 the United States Court of Appeals for the Federal Circuit affirmed as to liability but partially reversed as to damages and reduced the judgment to $55 million. It also remanded to the trial court for further proceedings including a determination regarding whether damages based on other theories and claims are appropriate. On June 9, 2008, the Court denied defendant's motion for rehearing.

On July 31, 2008, the trial court rendered an oral decision granting plaintiffs' motion to enter a final judgment on the $55 million amount and indicated it would enter an order to that effect in the next several weeks and that the case would be set for trial on all other remaining claims. If such judgment is entered, defendant could file an appeal of that order. The Company cannot estimate when a final resolution of the case at trial level and all appeals will be concluded. In complex litigation such as this case, the appeals process could last several years. In the event of an appeal the amount of the court's damages findings could be reduced or negated.

Dime Bancorp, Inc.

In January 1995, Anchor Savings Bank FSB, filed suit against the U.S. Government for unspecified damages involving supervisory goodwill related to its acquisition of eight troubled savings institutions from 1982-1985. Four of the acquisitions involved financial assistance from the U.S. Government, and four did not. The Dime Savings Bank of New York, FSB acquired Anchor Savings Bank shortly after the case was brought and Dime Savings Bank assumed the rights under the litigation against the U.S. Government. Dime Bancorp distributed a Litigation Tracking Warrant™ (an "LTW") for each share of its common stock outstanding on December 22, 2000 to each of its shareholders on that date. In January 2002, Dime Savings Bank and Dime Bancorp merged into WMB and the Company. As a result of these mergers, the Company assumed the litigation against the U.S. Government and the LTWs are now, when exercisable, exercisable for shares of the Company's common stock. The events and conditions that would entitle a holder to exercise an LTW did not change as a result of these mergers and had not yet occurred as of December 31, 2007. For additional information concerning the Dime goodwill litigation and the LTWs, see the Company's Current Reports on Form 8-K, dated March 12, 2003 and March 14, 2008, File No. 1-14667.

In a series of decisions issued in 2002, the Court of Federal Claims granted the Company's summary judgment motions as to contract liability with respect to the four acquisitions involving financial assistance, but granted the U.S. Government's motions with respect to the four unassisted acquisitions. On September 29, 2003, the Court denied the U.S. Government's motion for summary judgment with respect to the claim for the Company's lost profits, but granted the U.S. Government's motion with respect to the Company's alternative claims for reliance damages and for the value of the lost supervisory goodwill. A six-week trial on the Company's lost profits claim started in June 2005, followed by a post-trial briefing which was completed in November 2005. On March 14, 2008, the U.S. Court of Federal Claims issued an order and findings in the case. The Court's order and findings concluded that Anchor Savings had incurred recoverable damages in the amount of approximately $382 million, plus an undetermined amount for a gross-up of the Company's tax liabilities. The Court ordered the parties to provide certain information with respect to the gross-up by May 1, 2008, so that it could make a final determination in regard to the gross-up. The Court found that Anchor was entitled to damages for the lost profits resulting from its forced sale of its Residential Funding Corporation subsidiary and of large portions of its branch network. The Court awarded additional damages based on expectation damages from reduced stock proceeds, "wounded bank" damages and overpayment of FDIC premiums. On June 27, 2008, per the parties' stipulation, the court entered an order allowing plaintiff to postpone its application for the gross-up until such time as it actually pays taxes upon the award in the case and entered a final judgment for approximately $382 million. On

July 16, 2008, the Court granted the defendant's motion to correct a clerical error in calculation of damages and reduced the judgment to approximately $356 million.

The Company anticipates that, with the exception of the court's July 16, 2008 order reducing the judgment, the government will appeal the judgment. In such event, the Company cannot estimate when a final resolution of all appeals will be concluded. In complex litigation such as this case, the appeals process could last several years. In the event of an appeal the amount of the court's damages findings could be reduced or negated.

Litigation is inherently uncertain, and significant uncertainty surrounds the legal issues involved in cases involving supervisory goodwill that underlie the value of the LTWs. As a result, the Company cannot predict if or when the conditions will be satisfied that will result in holders becoming entitled to exercise their LTWs or the value for which the LTWs will become exercisable.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. Certain of these actions and proceedings are based on alleged violations of consumer protection, wage and hour, fair lending, banking and other laws.

Securities and Related Litigation

In July 2004, the Company and a number of its officers were named as defendants in a series of cases alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 thereunder and Section 20(a) of the Exchange Act. By stipulation, those cases were consolidated into a single case pending in the U.S. District Court for the Western Division of Washington. South Ferry L.P. #2 v. Killinger et al., No. CV04-1599C (W.D. Wa., Filed Jul. 19, 2004) (the "South Ferry Action"). In brief, the plaintiffs in the South Ferry Action allege, on behalf of a putative class of purchasers of Washington Mutual, Inc., securities from April 15, 2003, through June 28, 2004, that in various public statements the defendants purportedly made misrepresentations and failed to disclose material facts concerning, among other things, alleged internal systems problems and hedging issues.

The defendants moved to dismiss the South Ferry Action on May 17, 2005. After briefing, but without oral argument, the Court on November 17, 2005, denied the motion in principal part; however, the Court dismissed the claims against certain of the individual defendants, dismissed claims pleaded on behalf of sellers of put options on Washington Mutual stock, and concluded that the plaintiffs could not rely on supposed violations of accounting standards to support their claims. The remaining defendants subsequently moved for reconsideration or, in the alternative, certification of the opinion for interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. The District Court denied the motion for reconsideration, but on March 6, 2006, granted the motion for certification.

The defendants thereafter moved the Ninth Circuit to have the Appellate Court accept the case for interlocutory review of the District Court's original order denying the motion to dismiss. On June 9, 2006, the Ninth Circuit granted the defendants' motion, indicating that the Court would hear the merits of the defendants' appeal. The defendants filed their initial brief on September 25, 2006. Pursuant to an updated, stipulated briefing schedule, the plaintiffs filed their responsive brief on January 10, 2007, and the defendants filed their reply on March 12, 2007. Oral argument occurred on April 8, 2008. A decision has not been issued.

On November 29, 2005, 12 days after the District Court denied the motion to dismiss the South Ferry Action, a shareholder derivative action was filed nominally on behalf of the Company against certain of its officers and directors. The case was removed to federal court where it is now pending. Lee Family Investments, by and through its Trustee W.B. Lee v. Killinger et al., No. CV05-2121C (W.D. Wa., Filed Nov. 29, 2005) (the "Lee Family Action"). The defendants in the Lee Family Action include those individuals remaining as defendants in the South Ferry Action as well as those of the Company's current independent directors who were directors at any time from April 15, 2003, through June 2004. The allegations in the Lee Family Action mirror those in the South Ferry Action, but seek relief based on claims that the independent director defendants, among other things, failed properly to respond to the misrepresentations alleged in the South Ferry Action and that the filing of that action has caused the Company to expend sums to defend itself and the individual defendants and to conduct internal investigations related to the underlying claims. At the end of February 2006, the parties submitted a stipulation to the District Court that the matter be stayed pending the outcome of the South Ferry Action. On March 2, 2006, the District Court entered an order pursuant to that stipulation, staying the Lee Family Action in its entirety.

On November 1, 2007, the Attorney General of the State of New York filed a lawsuit against First American Corporation and First American eAppraiseIT. The People of the State of New York by Andrew Cuomo v. First American Corporation and First American eAppraiseIT, No. 07-406796 (N.Y. Sup. Ct. Filed Nov. 1, 2007). According to the Attorney General's Complaint, eAppraiseIT is a First American subsidiary that provides residential real estate appraisal services to various lenders, including the Bank. The Attorney General asserts that, contrary to various state and federal requirements and the Uniform Standards of Professional Appraisal Practice, the Bank conspired with eAppraiseIT in various ways to falsely increase the valuations done by appraisers eAppraiseIT retained to perform appraisals on Bank loans. First American Corporation and First American eAppraiseIT are not affiliates of the Company, and neither the Company nor the Bank is a defendant in the case.

On November 5, 2007, two securities class actions were filed against the Company and certain of its officers. Koesterer v. Washington Mutual, Inc., et al., No. 07-CIV-9801 (S.D.N.Y. Filed Nov. 5, 2007); Abrams v. Washington Mutual, Inc., et al., No. 07-CIV-9806 (S.D.N.Y. Filed Nov. 5, 2007). A third was filed in Seattle on November 7, 2007. Nelson v. Washington Mutual, Inc., et al., No. C07-1809 (W.D. Wa. Filed Nov. 7, 2007). Koesterer sought relief on behalf of all persons who purchased the Company's publicly traded securities between July 19, 2006, and October 31, 2007; Abrams sought relief on behalf of all persons who purchased or otherwise acquired the Company's common stock between October 18, 2006, and November 1, 2007; Nelson sought relief on behalf of all persons who purchased or otherwise acquired the Company's common stock between April 18, 2006, and November 1, 2007. The plaintiffs in these cases assert that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 by allegedly making false and misleading statements and omissions concerning, among other things, the conspiracy with eAppraiseIT as alleged by the Attorney General as well as various aspects of the Company's performance and accounting in light of that alleged conspiracy and of changing conditions in the home lending and credit markets. A fourth lawsuit, Garber v. Washington Mutual, Inc., et al., No. (S.D. N.Y. Filed Dec. 20, 2007), made nearly identical allegations on behalf of persons who purchased the securities of Washington Mutual, Inc., from April 18, 2006, through December 10, 2007. On May 13, 2008, plaintiff Brockton Contributory Retirement System filed a fifth securities complaint that plaintiffs termed "a placeholder complaint to preserve" various rights and claims for potential inclusion in a forthcoming consolidated, amended complaint. On allegations similar to those in the prior-filed securities actions, Brockton asserts that the Company and various co-defendants violated the Securities Act of 1933 (the "Securities Act") with respect to the Company's public offerings of debt in August 2006 and October 2007 and of depositary shares in September 2006. Nelson has been dismissed. Koesterer, Abrams, Garber, and Brockton will be referred to as the "Securities Actions."

On November 13, 2007, two shareholder derivative actions were filed nominally on behalf of the Company against certain of its officers and directors. Sneva v. Killinger, et al., No. C07-1826 (W.D. Wa. Filed Nov. 13, 2007); Harrison v. Killinger, et al., No. C07-1827 (W.D. Wa. Filed Nov. 13, 2007). A third was filed in Washington State Superior Court on November 16, 2007. Catholic Medical Mission v. Killinger et al., No. 07-2-36548-6SEA (Wa. Super. Ct. Filed Nov. 16, 2007). Six additional shareholder derivative actions were subsequently filed in federal court, Slater v. Killinger et al., No. C08-0005 (W.D. Wa. Filed Jan. 3, 2008); Procida v. Killinger et al., No. 08-Civ-0565 (S.D.N.Y. Filed Jan. 18, 2008) (Procida I); Ryan v. Killinger et al., C08-0095 (W.D. Wa. Filed Jan. 18, 2008), Procida v. Killinger et al., No. C08-0389 (W.D. Wa. Filed Mar. 6, 2008) (Procida II), Henry v. Killinger et al., No. C08-0566 (W.D. Wa. Filed Apr. 10, 2008); and Scheller v. Killinger et al., No. C08-0647 (W.D. Wa. Filed Apr. 25, 2008), and three additional shareholder derivative actions were filed in state court, Breene v. Killinger, et al., No. 07-2-41042-2SEA (Wa. Super. Ct. Filed Dec. 28, 2007); Gibb v. Killinger, et al., No. 07-2-41044-9SEA (Wa. Super. Ct. Filed Dec. 28, 2007); and Brody v. First American Corp. et al., No. 08-2-13425-3 SEA. Sneva, Harrison, Slater, Procida I, Ryan, Procida II, Henry, Scheller, Catholic Medical Mission, Breene, Gibb, and Brody will be referred to as the "Derivative Actions." The allegations in the Derivative Actions mirror those in the Securities Actions, but seek relief based on claims that the defendants, among other things, (1) breached their fiduciary duties to the Company and its shareholders by materially misleading the investing public and/or failing to disclose material adverse information about the Company; (2) participated in a conspiracy to defraud the Company and its shareholders; (3) abused their ability to control the Company; (4) caused an illegal waste of Company assets; (5) have been unjustly enriched; and (6) improperly profited from the sale of Company stock based on misappropriated, inside information.

Beginning on November 20, 2007, nine ERISA class actions (the "ERISA Actions") were filed against the Company, certain of its officers and directors, and, in some cases, the Washington Mutual, Inc., Human Resources Committee, and the Plan Administration and Plan Investment Committees of the WaMu Savings Plan. Bushansky v. Washington Mutual, Inc., et al., No. C07-1874 (W.D. Wa. Filed Nov. 20, 2007); Bussey v. Washington Mutual, Inc., et al., No. C07-1879 (W.D. Wa. Filed Nov. 21, 2007); Alexander v. Washington Mutual, Inc., et al., No. C07-1906 (W.D. Wa. Filed Nov. 29, 2007); Mitchell v. Washington Mutual, Inc., et al., No. C07-1938 (W.D. Wa. Filed Dec. 5, 2007); Ware v. Washington Mutual, Inc., et al., No. C07-1997 (W.D. Wa. Filed Dec. 13, 2007); Rosenblatt v. Washington Mutual, Inc., et al., No. C07-2025 (W.D. Wa. Filed Dec. 18, 2007); McDonald v. Washington Mutual, Inc., et al., No. C07-2055 (W.D. Wa. Filed Dec. 21, 2007); Marra v. Washington Mutual, Inc., et al., No. C07-2076 (W.D. Wa. Filed Dec. 27, 2007); Sloan v. Washington Mutual, Inc., et al., No. C08-471 (W.D. Wa. Filed Mar. 24, 2008). The plaintiffs in the ERISA Actions assert that the defendants were fiduciaries of the WaMu Savings Plan and breached their duties to Plan participants by, among other things, (1) failing to manage the Plan for the exclusive benefit of its participants or to use the care, skill, diligence, and prudence necessary to manage the Plan; (2) continuing to offer Company stock as an investment option in the plan despite that they knew or should have known that the stock no longer was a suitable and appropriate investment for the Plan; (3) failing to conduct an appropriate investigation of the merits of continued investment in Company stock; and (5) failing to provide complete and accurate information regarding the Plan to the Plan's participants.

On November 28, 2007, the Company moved before the Federal Judicial Panel on Multi-District Litigation (the "JPML") for an order that those of the Securities, Derivative and ERISA Actions then filed in federal court be transferred to the United States District Court for the Western District of Washington. The JPML granted the Company's motion on February 21, 2008. Pursuant to 28 U.S.C. § 1407 and JPML Rules 7.2 and 7.5, the Company previously had filed with the JPML a Notice of Tag-Along Action with respect to each of the Securities, Derivative and ERISA Actions filed in federal courts after November 28, 2007 and before February 21, 2008 (the Garber Securities Action, the Procida I and Ryan Derivative Actions, and the Alexander, Mitchell, Ware, Rosenblatt, McDonald, and Marra ERISA Actions).

All of the federally filed cases have been transferred to the U.S. District Court for the Western District of Washington, which on May 7, 2008, consolidated the Securities Actions into a single case, In re Washington Mutual, Inc. Securities Litigation, No. C08-387 MJP (the "Consolidated Securities Action"), and the ERISA Actions into a single case, In re Washington Mutual, Inc. ERISA Litigation, No. C07-1874 MJP (the "Consolidated ERISA Action"). The Court subsequently consolidated the federally filed Derivative Actions on May 21, 2008, into two tracks: In re Washington Mutual, Inc. Derivative Litigation (Demand Made), No. C08-566 MJP; In re Washington Mutual, Inc. Derivative Litigation (Demand Futile), No. C07-1826 MJP (the "Consolidated Federal Derivative Actions"). The Court held an initial status conference on June 9, 2008, and issued a comprehensive scheduling order on July 25, 2008, settling the first trial for May 2, 2011. The Court's order indicates that the Securities Actions will be tried first, followed by the ERISA Actions and the Derivatives Actions.

Pursuant to the Court's scheduling order, a consolidated amended complaint was filed in the Consolidated Federal Derivative Actions on July 15, 2008. The Company moved to dismiss the consolidated amended complaint on July 31, 2008, on the threshold ground that plaintiffs lack standing because they failed to make a demand on the Company's Board of Directors before filing suit. The Court has not yet ruled on the Company's motion. Separately, agreed orders have been entered in the state court-filed Derivative Actions pursuant to which the defendants are not required to respond to the complaints until the federal court resolves the motion to dismiss the Consolidated Securities Action.

A consolidated amended complaint was filed in the Consolidated Securities Action on August 5, 2008. The complaint purports to set out claims under the Exchange Act and the Securities Act, with a defined class period of October 19, 2005 through July 23, 2008. In addition to the Company, defendants in the consolidated amended complaint include certain current and former officers and directors, and various other co-defendants. The Company intends to move to dismiss the consolidated amended complaint by October 6, 2008.

A consolidated amended complaint was filed in the ERISA Action on August 5, 2008. The complaint purports to set out six claims for breaches of fiduciary duty under ERISA, with a defined class period of October 19, 2005 to the present. In addition to the Company, defendants in the consolidated amended complaint include certain current and former members of the Human Resources Committee of the Board of Directors and members of the Plan Investment Committee and Plan Administration Committee of the WaMu Savings Plan. The Company intends to move to dismiss the consolidated amended complaint by September 19, 2008.

On February 8, 2008, a class action was filed against the Company and other defendants on behalf of a putative class of persons in the United States who obtained home loans from the Company and "received an appraisal performed by" appraisal management companies eAppraiseIT and Lender's Service, Inc. Spears v. Washington Mutual, Inc., et al., No. C08-00868-HRL (N.D. Cal. Filed Feb. 8, 2008). An amended complaint was filed in this action on March 28, 2008. On behalf of this putative class, plaintiffs assert that an alleged conspiracy to inflate appraisals by the Company, eAppraiseIT and Lender's Service, Inc., violated RESPA, Section 17200 of California's Business and Professions Code, and California's Consumers Legal Remedies Act. Plaintiffs also bring various common law claims. Plaintiffs seek, among other things, the recovery of actual and treble damages, restitution, an injunction, and costs and attorneys' fees. Motions to dismiss the amended complaint are pending, as is plaintiffs' motion to transfer the case to the Western District of Washington.

Credit Card Industry Litigation

Over the past several years, MasterCard International and Visa U.S.A., Inc., as well as several of their member banks and bank affiliates (including in certain instances the Bank and the Company),

have been involved in several different lawsuits challenging various practices of the MasterCard and Visa associations (the "Associations").

In and around February 2001, a number of cardholder class actions were filed against the Associations and several member banks alleging, among other things, that they had conspired, in violation of antitrust laws, to fix the price of currency conversion services for credit card purchases made in a foreign currency by U.S. cardholders. Providian Financial Corporation and Providian National Bank were named as defendants; after the Providian merger, the Company and the Bank were added as defendants. Pursuant to orders of the Judicial Panel on Multidistrict Litigation, the cases were consolidated or coordinated for pretrial purposes. In re Currency Conversion Fee Antitrust Litigation, MDL 1409 (S.D.N.Y.). In July 2006, the parties agreed to settle the case for $336 million. The Company's share of the settlement, which has been paid into an escrow account, was covered by existing reserves. The Court held a hearing on the motion for Final Judgment and Order of Dismissal on March 31, 2008. The Court has not yet issued its ruling.

On November 15, 2004, American Express filed an antitrust lawsuit against the Associations and several member banks, alleging, among other things, that the defendants jointly and severally implemented and enforced illegal exclusionary agreements that prevented member banks from issuing American Express cards. American Express Travel Related Services Company, Inc. v. Visa U.S.A. Inc., et al, No. 04-Civ-08967 (S.D.N.Y. Filed Nov. 15, 2004). Providian Financial Corporation and Providian National Bank were named as defendants; after the Providian merger, the Company and the Bank were added as defendants. On November 7, 2007, American Express issued a press release announcing that it had reached an agreement with Visa Inc., Visa USA and Visa International to drop Visa and five of its member banks, including the Company, as defendants in the American Express Litigation. The settlement amounts totaling $2.25 billion due to American Express are to be paid directly by Visa over the next four years. In November 2007, the Company announced that it would recognize a charge of $38 million for its share of the settlement.

On June 22, 2005, a group of retail merchants filed a purported class action against the Associations and several member banks alleging, among other things, that the defendants conspired in violation of the antitrust laws to fix the level of interchange fees. Providian Financial Corporation and Providian National Bank were named as defendants; after the Providian merger, the Company and the Bank were added as defendants. Photos Etc. Corporation, et al. v. Visa U.S.A. Inc., et al., No. 305-CV-1007 (D. Conn. Filed June 22, 2005). Since then, approximately 48 similar complaints have been filed on behalf of merchants against the card Associations and, in some cases, against member banks including the Bank. On October 19, 2005, the Judicial Panel on Multidistrict Litigation issued an order coordinating the cases for pretrial proceedings. In re Payment Card Interchange Fee Litigation, MDL 1720 (E.D.N.Y.). On April 24, 2006, the group of purported class plaintiffs filed a First Amended Class Action Complaint. The case is now in discovery.

Refer to Note 15 to the Consolidated Financial Statements – "Commitments, Guarantees and Contingencies" in the Company's 2007 Annual Report on Form 10-K/A for a further discussion of pending and threatened litigation action and proceedings against the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below displays share repurchases made by the Company for the quarter ended June 30, 2008. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.

Issuer Purchases of Equity Securities		Average Price Paid Per Share (or Unit)

April 1, 2008 to April 30, 2008	11,377	$	11.33	–	47,454,022
May 1, 2008 to May 30, 2008	20,988		11.62	–	47,454,022
June 2, 2008 to June 30, 2008	4,245		7.33	–	47,454,022

Total	36,610		11.03	–	47,454,022

⁽¹⁾: This column includes shares acquired under equity compensation arrangements with the Company's employees and directors. The Company has not engaged in share repurchase activities since the third quarter of 2007.
⁽²⁾: Effective July 18, 2006, the Company adopted a share repurchase program approved by the Board of Directors (the "2006 Program"). Under the 2006 Program, the Company was authorized to repurchase up to 150 million shares of its common stock, as conditions warrant, and had repurchased 102,545,978 shares under this program as of June 30, 2008.

For a discussion regarding working capital requirements and dividend restrictions applicable to the Company's banking subsidiaries, refer to the Company's 2007 Annual Report on Form 10-K/A, "Business – Regulation and Supervision" and Note 20 to the Consolidated Financial Statements – "Regulatory Capital Requirements and Dividend Restrictions" in the Company's 2007 Annual Report on Form 10-K/A.

Item 4. Submission of Matters to a Vote of Security Holders

Washington Mutual, Inc. held its annual meeting of shareholders on April 15, 2008. A brief description of each matter voted on and the results of the shareholder voting are set forth below:



1.	The election of twelve directors set forth below:
	Stephen I. Chazen	663,432,095	45,886,112
	Stephen E. Frank	443,699,913	275,618,294
	Kerry K. Killinger	628,653,137	80,665,070
	Thomas C. Leppert	665,371,479	43,946,728
	Charles M. Lillis	420,836,238	288,481,969
	Phillip D. Matthews	495,047,832	214,270,375
	Regina T. Montoya	521,520,183	187,798,024
	Michael K. Murphy	518,305,365	191,012,842
	Margaret Osmer McQuade	432,639,770	276,678,437
	William G. Reed, Jr.	519,183,445	190,134,762
	Orin C. Smith	665,661,125	43,657,081
	James H. Stever	410,045,932	299,272,276

				For			Against			Abstain

2.		Ratification of the appointment of Deloitte & Touche LLP as the Company's independent auditor for 2008			687,055,166			11,005,724			11,257,307

				For			Against			Abstain			Broker Non-Votes

3.		Amendment to Amended and Restated Employee Stock Purchase Plan for the purpose of increasing the number of shares available under the plan by 4,000,000 to 8,863,590			501,372,978			20,682,918			7,539,885			179,722,427

				For			Against			Abstain			Broker Non-Votes

4.		Shareholder proposal regarding an independent board chairman			271,935,891			250,398,481			7,261,409			179,722,427

				For			Against			Abstain			Broker Non-Votes

5.		Shareholder proposal regarding the Company's director election process			221,619,872			299,916,456			8,059,453			179,722,427

Washington Mutual, Inc. held a special meeting of shareholders on June 24, 2008. A brief description of each matter voted on and the results of the shareholder voting are set forth below:

				For			Against			Abstain

1.		Amendment to the Company's Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock from 1,600,000,000 to 3,000,000,000			735,441,135			25,007,544			10,478,751

				For			Against			Abstain

2.		Authorization for Conversion of Series S and Series T Contingent Convertible Perpetual Non-Cumulative Preferred Stock into common stock and exercise of warrants to purchase common stock			737,547,392			22,584,827			10,795,211

Item 6. Exhibits

(a): Exhibits

See Index of Exhibits on page 97.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 11, 2008.


				WASHINGTON MUTUAL, INC.
		By:		/s/ THOMAS W. CASEY Thomas W. Casey Executive Vice President and Chief Financial Officer
		By:		/s/ MELISSA J. BALLENGER Melissa J. Ballenger Senior Vice President and Controller (Principal Accounting Officer)

WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS

		Exhibit No.

			3.1		Amended and Restated Articles of Incorporation of the Company, as amended (Filed herewith).
			3.2		Restated Bylaws of the Company (Filed herewith).
			4.1		The Company will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of the Company and its consolidated subsidiaries.
			4.2		Form of Warrant to purchase common stock of the Company issued to certain investors under the Investment Agreement dated as of April 7, 2008 between the Company and the investors party thereto (Filed herewith).
			4.3		Form of Warrant to purchase common stock of the Company issued to certain investors under the Securities Purchase Agreement (Common Stock/Preferred Stock/Warrants) dated as of April 7, 2008 between the Company and the purchasers party thereto (Filed herewith).
			10.1		Investment Agreement dated as of April 7, 2008 between the Company and the investors party thereto (Incorporated by reference to the Company's Current Report on Form 8-K filed April 11, 2008, File No. 1-14667).
			10.2		Securities Purchase Agreement (Common Stock) dated as of April 7, 2008 between the Company and the purchasers party thereto (Filed herewith).
			10.3		Securities Purchase Agreement (Common Stock/Preferred Stock) dated as of April 7, 2008 between the Company and the purchasers party thereto (Filed herewith).
			10.4		Securities Purchase Agreement (Common Stock/Preferred Stock/Warrants) dated as of April 7, 2008 between the Company and the purchasers party thereto (Filed herewith).
			31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
			31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
			32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith).
			32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith).
			99.1		Computation of Ratios of Earnings to Fixed Charges (Filed herewith).
			99.2		Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends (Filed herewith).

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TABLE OF CONTENTS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOW
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Summary of Significant Accounting Policies

Note 2: Restructuring Activities

Note 3: Mortgage Banking Activities

Note 4: Guarantees

Note 5: Covered Bond Program

Note 6: Equity Issuance

Note 7: Earnings Per Common Share

Note 8: Employee Benefits Programs

Note 9: Fair Value

Note 10: Operating Segments

SIGNATURES
INDEX OF EXHIBITS