e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
 
Form 10-Q
 
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
 
Commission file number 1-143
 
GENERAL MOTORS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
 
 
     
STATE OF DELAWARE   38-0572515
(State or other jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
300 Renaissance Center, Detroit, Michigan   48265-3000
(Address of Principal Executive Offices)   (Zip Code)
 
(313) 556-5000
Registrant’s telephone number, including area code
 
NA
(former name, former address and former fiscal year, if changed since last report)
 
 
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 þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer 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 þ
 
As of July 31, 2007, the number of shares outstanding of the Registrant’s common stock was 565,870,304 shares.
 
Website Access to Company’s Reports
 
General Motors Corporation’s internet website address is www.gm.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.
 


 

 
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
INDEX
 
             
        Page No.
 
Part I — Financial Information
  Condensed Consolidated Financial Statements (Unaudited)   3
    Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006 (As restated)   3
    Condensed Consolidated Balance Sheets as of June 30, 2007, December 31, 2006, and June 30, 2006 (As restated)   4
    Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Six Months Ended June 30, 2007 and 2006 (As restated)   5
    Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 Notes to Condensed Consolidated Financial Statements   6
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   44
  Quantitative and Qualitative Disclosures About Market Risk   83
  Controls and Procedures   84
 
Part II — Other Information
  Legal Proceedings   86
  Risk Factors   87
  Purchases of Equity Securities   91
  Submission of Matters to a Vote of Security Holders   92
  Exhibits   96
  97
 UAW-Delphi-GM Memorandum of Understanding
 Asset Purchase Agreement
 2007 Cash-Based Restricted Stock Unit Plan
 Form of Special RSU Grant Award Document for March 2007 Award
 Form of Special Cash-Based RSU Grant Award Document for March 2007 Award
 364-Day Revolving Credit Agreement
 Section 302 Certification of the Chief Executive Officer
 Section 302 Certification of the Chief Financial Officer
 Certification of the Chief Executive Officer Pursuant to Section 906
 Certification of the Chief Financial Officer Pursuant to Section 906


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PART I
 
Item 1.   Condensed Consolidated Financial Statements
 
GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
    (Unaudited)  
          (As restated,
          (As restated,
 
          Notes 2 and 15)           Notes 2 and 15)  
 
Net sales and revenue
                               
Automotive sales
  $ 45,918     $ 44,812     $ 88,298     $ 87,808  
Financial services and insurance revenue
    894       9,087       1,830       17,934  
                                 
Total net sales and revenue
    46,812       53,899       90,128       105,742  
                                 
Costs and expenses
                               
Automotive cost of sales
    41,674       47,406       80,407       87,177  
Selling, general, and administrative expense
    3,293       3,219       6,604       6,585  
Financial services and insurance expense
    811       7,727       1,694       16,012  
Other expenses
    575       1,208       575       1,208  
                                 
Total costs and expenses
    46,353       59,560       89,280       110,982  
                                 
Operating income (loss)
    459       (5,661 )     848       (5,240 )
Equity in income (loss) of GMAC LLC
    118             (65 )      
Automotive and other interest expense
    (681 )     (694 )     (1,480 )     (1,332 )
Automotive interest income and other non-operating income
    555       987       991       1,783  
                                 
Income (loss) from continuing operations before income taxes, other equity income and minority interests
    451       (5,368 )     294       (4,789 )
Income tax benefit
    (320 )     (1,715 )     (381 )     (1,546 )
Equity income and minority interests, net of tax
    13       159       67       242  
                                 
Income (loss) from continuing operations
    784       (3,494 )     742       (3,001 )
Income from discontinued operations, net of tax (Note 3)
    107       111       211       220  
                                 
Net income (loss)
  $ 891     $ (3,383 )   $ 953     $ (2,781 )
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ 1.38     $ (6.18 )   $ 1.31     $ (5.31 )
Discontinued operations
    .19       .20       .37       .39  
                                 
Total
  $ 1.57     $ (5.98 )   $ 1.68     $ (4.92 )
                                 
Weighted average common shares outstanding, basic (millions)
    566       566       566       566  
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ 1.37     $ (6.18 )   $ 1.30     $ (5.31 )
Discontinued operations
    .19       .20       .37       .39  
                                 
Total
  $ 1.56     $ (5.98 )   $ 1.67     $ (4.92 )
                                 
Weighted average common shares outstanding, diluted (millions)
    569       566       569       566  
                                 
Cash dividends per share
  $ .25     $ .25     $ .50     $ .50  
                                 
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
 
                         
    June 30,
    December 31,
    June 30,
 
    2007     2006     2006  
    (Unaudited)           (Unaudited)
 
                (As restated,
 
                Note 15)  
 
ASSETS
Current Assets
                       
Cash and cash equivalents
  $ 22,040     $ 23,774     $ 19,997  
Marketable securities
    1,573       138       115  
                         
Total cash and marketable securities
    23,613       23,912       20,112  
Accounts and notes receivable, net
    10,233       8,216       7,572  
Inventories
    15,073       13,921       14,496  
Assets held for sale
    683              
Equipment on operating leases, net
    5,889       6,125       6,891  
Deferred income taxes and other current assets
    11,518       11,957       10,376  
                         
Total current assets
    67,009       64,131       59,447  
Financing and Insurance Operations Assets
                       
Cash and cash equivalents
    258       349       2,848  
Assets held for sale
                274,267  
Equipment on operating leases, net
    9,145       11,794       16,533  
Investment in GMAC LLC
    7,555       7,523        
Other assets
    3,011       2,457       5,857  
                         
Total Financing and Insurance Operations Assets
    19,969       22,123       299,505  
Non-Current Assets
                       
Property, net
    41,404       41,934       38,639  
Deferred income taxes
    32,337       32,967       24,382  
Prepaid pension
    18,305       17,366       37,480  
Other assets
    7,503       7,671       9,538  
                         
Total non-current assets
    99,549       99,938       110,039  
                         
Total Assets
  $ 186,527     $ 186,192     $ 468,991  
                         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
                       
Accounts payable (principally trade)
  $ 30,742     $ 26,931     $ 27,930  
Short-term borrowings and current portion of long-term debt
    5,150       5,666       1,340  
Liabilities related to assets held for sale
    526              
Accrued expenses
    35,487       35,225       48,516  
                         
Total current liabilities
    71,905       67,822       77,786  
Financing and Insurance Operations Liabilities
                       
Liabilities related to assets held for sale
                267,925  
Debt
    7,133       9,438       12,849  
Other liabilities and deferred income taxes
    855       2,139       2,278  
                         
Total Financing and Insurance Operations Liabilities
    7,988       11,577       283,052  
Non-Current Liabilities
                       
Long-term debt
    34,134       33,067       32,946  
Postretirement benefits other than pensions
    48,030       50,086       30,668  
Pensions
    11,654       11,934       11,498  
Other liabilities and deferred income taxes
    15,106       15,957       20,014  
                         
Total non-current liabilities
    108,924       111,044       95,126  
                         
Total liabilities
    188,817       190,443       455,964  
Minority interests
    1,268       1,190       1,084  
Stockholders’ Equity (Deficit)
                       
Preferred stock, no par value, authorized 6,000,000, no shares issued and outstanding
                 
Common stock, $12/3 par value (2,000,000,000 shares authorized, 756,637,541 and 565,864,695 shares issued and outstanding at June 30, 2007, respectively 756,637,541 and 565,670,254 shares issued and outstanding at December 31, 2006, respectively and 756,637,541 and 565,607,779 shares issued and outstanding at June 30, 2006, respectively)
    943       943       943  
Capital surplus (principally additional paid-in capital)
    15,255       15,336       15,306  
Retained earnings (deficit)
    788       406       (117 )
Accumulated other comprehensive loss
    (20,544 )     (22,126 )     (4,189 )
                         
Total stockholders’ equity (deficit)
    (3,558 )     (5,441 )     11,943  
                         
Total Liabilities, Minority Interests, and Stockholders’ Equity (Deficit)
  $ 186,527     $ 186,192     $ 468,991  
                         
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Dollars and shares in millions)
(Unaudited)
 
                                                         
                                  Accumulated
       
                                  Other
    Total
 
    Shares of
                Comprehensive
    Retained
    Comprehensive
    Stockholders’
 
    Common
    Capital
    Capital
    Income
    Earnings
    Income
    Equity
 
    Stock     Stock     Surplus     (Loss)     (Deficit)     (Loss)     (Deficit)  
 
Balance December 31, 2005
    566     $ 943     $ 15,285             $ 2,960     $ (4,535 )   $ 14,653  
Net loss, as restated (Note 15)
                    $ (2,781 )     (2,781 )           (2,781 )
Cumulative effect of a change in accounting principle — adoption of SFAS No. 156, net of tax
                            (13 )           (13 )
Other comprehensive income:
                                                       
Foreign currency translation adjustments
                      450                    
Unrealized gain on derivatives
                      103                    
Unrealized loss on securities
                      (153 )                  
Minimum pension liability adjustment
                      (54 )                  
                                                         
Other comprehensive income
                      346             346       346  
                                                         
Comprehensive loss
                          $ (2,435 )                        
                                                         
Stock options
                21                           21  
Cash dividends paid
                              (283 )           (283 )
                                                         
Balance June 30, 2006, as restated (Note 15)
    566     $ 943     $ 15,306             $ (117 )   $ (4,189 )   $ 11,943  
                                                         
Balance December 31, 2006
    566     $ 943     $ 15,336             $ 406     $ (22,126 )   $ (5,441 )
Net income
                    $ 953       953             953  
Effects of accounting change regarding pension plan and OPEB measurement-dates pursuant to SFAS No. 158, net of tax
                            (425 )     1,153       728  
Cumulative effect of a change in accounting principle — adoption of FIN 48, net of tax
                            137             137  
Other comprehensive income:
                                                       
Foreign currency translation adjustments
                      357                    
Unrealized gain on derivatives
                      42                    
Unrealized loss on securities
                      (3 )                  
Defined benefit plans:
                                                       
Net prior service cost
                      (415 )                  
Net actuarial gain
                      446                    
Net transition asset/obligation
                      2                    
                                                         
Other comprehensive income
                      429               429       429  
                                                         
Comprehensive income
                          $ 1,382                          
                                                         
Stock options
                18                           18  
Cash dividends paid
                              (283 )           (283 )
Purchase of convertible note hedge (Note 8)
                (99 )                         (99 )
                                                         
Balance June 30, 2007
    566     $ 943     $ 15,255             $ 788     $ (20,544 )   $ (3,558 )
                                                         
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
                 
    Six Months Ended
 
    June 30,  
    2007     2006  
    (Unaudited)  
 
Cash provided by (used in) continuing operating activities
  $ 4,027     $ (2,389 )
Cash provided by discontinued operating activities
    240       400  
                 
Net cash provided by (used in) operating activities
    4,267       (1,989 )
Cash flows from investing activities
               
Expenditures for property
    (2,884 )     (3,263 )
Investments in marketable securities, acquisitions
    (1,500 )     (11,580 )
Investments in marketable securities, liquidations
    61       11,909  
Proceeds from sale of finance receivables
          15,213  
Proceeds from sale of business units/equity investments
          10,518  
Operating leases, acquisitions
          (9,135 )
Operating leases, liquidations
    1,613       3,411  
Capital contribution to GMAC LLC
    (1,022 )      
Investments in companies, net of cash acquired
          (349 )
Other
    (111 )     (1,835 )
                 
Cash provided by (used in) continuing investing activities
    (3,843 )     14,889  
Cash used in discontinued investing activities
    (13 )     (11 )
                 
Net cash provided by (used in) investing activities
    (3,856 )     14,878  
Cash flows from financing activities
               
Net decrease in short-term borrowings
    (2,562 )     (7,184 )
Borrowings of long-term debt
    1,572       42,651  
Payments made on long-term debt
    (1,132 )     (43,584 )
Cash dividends paid to stockholders
    (283 )     (283 )
Other
          1,918  
                 
Cash used in continuing financing activities
    (2,405 )     (6,482 )
Cash used in discontinued financing activities
          (1 )
                 
Net cash used in financing activities
    (2,405 )     (6,483 )
Effect of exchange rate changes on cash and cash equivalents
    169       171  
                 
Net increase (decrease) in cash and cash equivalents
    (1,825 )     6,577  
Cash and cash equivalents reclassified to assets held for sale
          (14,458 )
Cash and cash equivalents at beginning of the period
    24,123       30,726  
                 
Cash and cash equivalents at end of the period
  $ 22,298     $ 22,845  
                 
 
Reference should be made to the notes to the condensed consolidated financial statements.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.   Nature of Operations
 
General Motors Corporation (GM) is primarily engaged in the worldwide production and marketing of cars and trucks. GM develops, manufactures, and markets vehicles worldwide through its four automotive regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP). Also, GM’s finance and insurance operations are primarily conducted through GMAC LLC, the successor to General Motors Acceptance Corporation (together with GMAC LLC, GMAC), a wholly-owned subsidiary through November 2006. On November 30, 2006, GM sold a 51% controlling ownership interest in GMAC to a consortium of investors. After the sale, GM has accounted for its 49% ownership interest in GMAC using the equity method. GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential mortgage services, automobile service contracts, personal automobile insurance coverage and selected commercial insurance coverage. GM operates in two businesses, consisting of Automotive (GM Automotive or GMA) and Financing and Insurance Operations (FIO).
 
Note 2.   Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, these Condensed Consolidated Financial Statements include all adjustments, consisting of only normal recurring items, considered necessary for a fair presentation of the financial position and results of operations of GM. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in GM’s Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the SEC.
 
The Condensed Consolidated Financial Statements include the accounts of GM and its subsidiaries that are controlled by GM due to ownership of a majority voting interest. In addition, GM consolidates variable interest entities (VIEs) for which it is the primary beneficiary. GM’s share of earnings or losses of investees are included in the consolidated operating results using the equity method of accounting, when GM is able to exercise significant influence over the operating and financial decisions of the investee. If GM is not able to exercise significant influence over the operating and financial decisions of the investee, the cost method of accounting is used. All intercompany balances and transactions have been eliminated in consolidation.
 
Change in Presentation of Financial Statements
 
In 2007, GM changed its income statement presentation to present costs and expenses of its FIO operations as a separate line. In so doing, GM reclassified FIO’s portion of Selling, general, and administrative expense and Interest expense to Financial services and insurance expense. Also, Automotive and other interest expense has been presented within non-operating income and expenses. Additionally, prior period results have been reclassified for the retroactive effect of discontinued operations. Refer to Note 3. Certain reclassifications have been made to the comparable 2006 restated financial information to conform to the current period presentation.
 
Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans
 
As previously reported in our 2006 Annual Report on Form 10-K, GM recognized the funded status of its benefit plans at December 31, 2006 in accordance with the recognition provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS No. 158). Additionally, GM elected to early adopt the measurement date provisions of SFAS No. 158


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 2.   Basis of Presentation — (continued)
 
at January 1, 2007. Those provisions require the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. Refer to Note 13.
 
Accounting for Uncertainty in Income Taxes
 
During the first quarter of 2007, GM adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for Income Taxes”, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle. GM adopted FIN 48 as of January 1, 2007, and recorded an increase to retained earnings of $137.1 million as a cumulative effect of a change in accounting principle with a corresponding decrease to the liability for uncertain tax positions. Refer to Note 10 for more information regarding the impact of adopting FIN 48.
 
Accounting for Early Retirement or Postemployment Programs with Specific Features
 
On January 1, 2006, GM adopted Emerging Issues Task Force Issue No. 05-5, “Accounting for Early Retirement or Postemployment Programs with Specific Features” (EITF 05-5), which states that the bonus and contributions made into the German government pension program should be accounted for under the guidance in SFAS No. 112, “Employers’ Accounting for Postemployment Benefit Costs” and the government subsidy should be recognized when a company meets the necessary conditions to be entitled to the subsidy. As clarified in EITF 05-5, beginning in 2006, GM recognized the bonus and additional contributions (collectively, additional compensation) into the German government pension plan over the period from which the employee signed the program contract until the end of the active service period. Prior to 2006, GM recognized the full additional compensation one-year before the employee entered the active service period. The change, reported as a change in accounting estimate effected by a change in accounting principle, resulted in additional compensation expense of $68 million for the six months ended June 30, 2006.
 
Accounting for Servicing of Financial Assets
 
On January 1, 2006, GM adopted SFAS No. 156, “Accounting for Servicing of Financial Assets” (SFAS No. 156), which (1) provides revised guidance on when a servicing asset and servicing liability should be recognized, (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable, (3) permits an entity to elect to measure servicing assets and liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur, (4) provides that upon initial adoption, a one-time reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting an entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value, and (5) requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the balance sheet and additional disclosures. GM recorded a reduction to retained earnings as of January 1, 2006 of $13 million as a cumulative effect of a change in accounting principle for the adoption of SFAS No. 156.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 2.   Basis of Presentation — (concluded)
 
Accounting Standards Not Yet Adopted
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 are to be applied prospectively. Management is currently assessing the potential impact of the standard on GM’s financial condition and results of operations.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115” (SFAS No. 159), which permits an entity to measure certain financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. Management is currently assessing the potential impact of the standard on GM’s financial condition and results of operations.
 
In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 “Accounting for Nonrefundable Payments for Goods or Services to Be Used in Future Research and Development Activities”, requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services are performed. The statement is effective for fiscal years beginning after December 15, 2007. Management is currently assessing the potential impact of the standard on GM’s financial condition and results of operations.
 
In June 2007, the FASB ratified EITF Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), which requires entities to record tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards to additional paid-in capital. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those years. Management does not expect this guidance to have a material effect on GM’s financial condition and results of operations.
 
Note 3.   Divestures of Businesses
 
Sale of Allison Transmission Business
 
On June 28, 2007, GM entered into a definitive agreement pursuant to which GM will sell the commercial and military operations of our Allison Transmission (Allison) business for a purchase price of approximately $5.6 billion in cash plus assumed liabilities. The purchase price is subject to adjustment based on the amount of Allison’s (1) net working capital and (2) debt on the closing date. Based on these amounts, a payment may be due from either party within approximately thirty-five days after the closing date. Any such payment will be an adjustment to the amount of gain recognized on the transaction. Allison, a division of GM’s Powertrain Operations, is a global leader in the design and manufacture of commercial and military automatic transmissions and a premier global provider of commercial vehicle automatic transmissions for on-highway, including trucks, specialty vehicles, buses and


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 3.   Divestures of Businesses — (continued)
 
recreational vehicles, off-highway and military vehicles, as well as hybrid propulsion systems for transit buses. GM Powertrain Operations Baltimore facility, which manufactures automatic transmissions primarily for GM trucks and hybrid propulsion system, will be retained by GM. GM expects to recognize a gain on the sale of Allison in the range of $5.1 billion to $5.4 billion. GM expects to close the sale of Allison in the third quarter of 2007, subject to regulatory approval.
 
At June 30, 2007, Allison met the held for sale criteria under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), and therefore, certain assets and liabilities of Allison are presented as held for sale, and GM has ceased depreciation on Allison’s long-lived assets classified as held for sale. The results of operations and cash flows of Allison have been reported in the Condensed Consolidated Financial Statements as discontinued operations for all periods presented.
 
Historically, Allison had been reported in the Automotive business. The following table presents Allison’s major classes of assets and liabilities classified as held for sale as of June 30, 2007 (dollars in millions):
 
         
Accounts and notes receivable, net
  $ 103  
Inventories
    124  
Other assets
    84  
Property, plant and equipment, net
    372  
         
Total assets held for sale
  $ 683  
         
Accounts payable
  $ 198  
Accrued expenses and other liabilities
    248  
Deferred revenue
    45  
Postretirement benefits
    35  
         
Total liabilities related to assets held for sale
  $ 526  
         
 
The table above represents the respective assets and liabilities that are held for sale as of June 30, 2007, which excludes certain assets and liabilities, consisting of cash, limited accounts receivable, inventory, tooling, taxes payable, deferred income taxes and a synthetic lease obligation of the facility that is being retained. The held for sale asset and liability balances at June 30, 2007 may differ from the respective balances at closing.
 
The following table summarizes the results of discontinued operations (dollars in millions):
 
                                 
    Three Months
    Six Months
 
    Ended
    Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
 
Net sales
  $ 518     $ 564     $ 1,061     $ 1,110  
Operating income from discontinued operations
    171       174       336       347  
Income tax provision
    62       64       123       127  
Income from discontinued operations
  $ 107     $ 111     $ 211     $ 220  
 
As part of the transaction, GM and the buyers of Allison are negotiating for GM to provide the new parent company of Allison with contingent financing of up to $100 million. Such financing would be made available if, during a defined period of time, Allison were not in compliance with its financial maintenance covenant under the credit agreement and the buyer were to elect to make an equity contribution into Allison to bring it into compliance. Such financing would be contingent on Allison’s buyers committing to provide an equivalent amount of funding to Allison through its parent company on the same terms as the GM loan under such circumstances. Additionally, both


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 3.   Divestures of Businesses — (continued)
 
parties have entered into non-compete arrangements for a term of 10 years in the U.S. and for a term of 5 years in Europe.
 
Sale of 51% Controlling Interest in GMAC
 
In April 2006, GM and its wholly owned subsidiaries, GMAC and GM Finance Co. Holdings Inc., entered into a definitive agreement pursuant to which GM agreed to sell a 51% controlling interest in GMAC for a purchase price of $7.4 billion to FIM Holdings LLC (FIM Holdings). FIM Holdings is a consortium of investors, including Cerberus FIM Investors, LLC, Citigroup Inc., Aozora Bank Limited, and a subsidiary of the PNC Financial Services Group, Inc. The sale was completed on November 30, 2006. GM has retained a 49% interest in GMAC’s Common Membership Interests. The total value of the cash proceeds and distributions to GM after repayment of certain intercompany obligations, and before it purchased the preferred membership interests of GMAC was expected to be approximately $14 billion over three years, comprised of the $7.4 billion purchase price and $2.7 billion cash dividend at closing, and other transaction related cash flows including the monetization of certain retained assets. In March 2007, GM made a capital contribution to GMAC of approximately $1 billion to restore its adjusted tangible equity balance to the contractually required amount of $14.4 billion, due to the decrease in the adjusted tangible equity balance of GMAC as of November 30, 2006.
 
For the three and six months ended June 30, 2006, GMAC’s earnings and cash flows are fully consolidated in GM’s Condensed Consolidated Statements of Operations and Statements of Cash Flows. However, as a result of the agreement to sell 51% equity interest, certain assets and liabilities of GMAC were classified as held for sale in GM’s Condensed Consolidated Balance Sheet as of June 30, 2006. Pursuant to SFAS No. 144, GM ceased depreciation on GMAC long-lived assets classified as held for sale in GM’s consolidated financial statements. The following table presents GMAC’s major classes of assets and liabilities classified as held for sale as of June 30, 2006 (dollars in millions):
 
         
Cash and cash equivalents
  $ 14,458  
Marketable securities
    18,808  
Finance receivables, net
    174,074  
Loans held for sale
    20,455  
Account and notes receivable
    7,733  
Inventories, net
    558  
Net equipment on operating leases, net
    18,805  
Other assets
    20,584  
Allowance to reflect assets held for sale at fair value less cost to sell
    (1,208 )
         
Total assets held for sale
  $ 274,267  
         
Accounts payable
  $ 3,805  
Notes and loans payable
    234,474  
Deferred income taxes
    1,392  
Accrued expenses and other liabilities
    28,254  
         
Total liabilities related to assets held for sale
  $ 267,925  
         
 
The table above represents 100% of the respective assets and liabilities of GMAC that were held for sale as of June 30, 2006. The transaction resulted in the divesture of a 51% interest in GMAC.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 3.   Divestures of Businesses — (concluded)
 
GM recognized a non-cash impairment charge of approximately $2.9 billion in 2006, of which $1.2 billion is recorded in Other expenses in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 to reflect GMAC’s assets that were classified as held for sale at the lower of carrying value or fair value less costs to sell. The total charge is comprised of the write-down of the carrying value of GMAC assets that were sold on November 30, 2006 partially offset by the realization of 51% of the unrecognized net gains reflected in GMAC’s Accumulated other comprehensive income.
 
Refer to Notes 1, 5, and 17 for additional information regarding the sale of, investment in, and transactions with, GMAC.
 
Sale of GMAC Commercial Mortgage
 
In March 2006, GM, through GMAC, sold approximately 79% of our equity in GMAC Commercial Mortgage for approximately $1.5 billion in cash. At the closing, GMAC Commercial Mortgage also repaid to us approximately $7.3 billion of intercompany loans, for total cash proceeds of $8.8 billion. Subsequent to the sale, the remaining interest in GMAC Commercial Mortgage was reflected using the equity method.
 
Note 4.   Inventories
 
Inventories are comprised of the following:
 
                         
    June 30,
    December 31,
    June 30,
 
    2007     2006     2006  
    (Dollars in millions)  
 
Productive material, work in process, and supplies
  $ 5,707     $ 5,810     $ 6,341  
Finished product, including service parts, etc. 
    10,820       9,619       9,678  
                         
Total inventories at FIFO
    16,527       15,429       16,019  
Less LIFO allowance
    (1,454 )     (1,508 )     (1,523 )
                         
Total
    15,073       13,921       14,496  
FIO off-lease vehicles
    240       185        
                         
Total inventories
  $ 15,313     $ 14,106     $ 14,496  
                         
 
Note 5.   Investment in Nonconsolidated Affiliates
 
Nonconsolidated affiliates of GM identified herein are those entities in which GM owns an equity interest and for which GM uses the equity method of accounting, because GM has the ability to exert significant influence over decisions relating to their operating and financial affairs. GM’s significant affiliates and the percent of GM’s current equity ownership or voting interest in them are as follows:
 
United States — GMAC (49% at June 30, 2007 and 100% at June 30, 2006)
 
China — Shanghai General Motors Co., Ltd (50% at June 30, 2007 and 2006) and SAIC-GM-Wuling Automobile Co., Ltd (34% at June 30, 2007 and 2006)
 
GMAC was a wholly-owned subsidiary of GM during the three and six months ended June 30, 2006. In November 2006, GM sold a 51% controlling ownership interest in GMAC. The remaining 49% interest held by GM, in the form of GMAC Common Membership Interests, is accounted for using the equity method. In addition, GM acquired 1,555,000 Preferred Membership Interests representing approximately 74% of the Preferred Membership Interests for a cash price of $1.4 billion. The investment in GMAC Preferred Membership Interests, a cost method


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 5.   Investment in Nonconsolidated Affiliates — (continued)
 
investment, was initially recorded at fair value of $1.6 billion at the date of its acquisition. The excess of fair value over the cash exchanged for the Preferred Membership Interests reduced GM’s investment in GMAC Common Membership Interests. At June 30, 2007, GM’s investment in GMAC Preferred Membership Interests was $1.6 billion. GMAC is required to make certain quarterly distributions to holders of the Preferred Membership Interests in cash on a pro rata basis. The Preferred Membership Interests are issued in units of $1,000 and accrue a yield at a rate of 10% per annum. GM accrued a dividend of $38 million and $77 million for the three and six months ended June 30, 2007, respectively. Refer to Note 17 for a description of the related party transactions with GMAC.
 
Information regarding GM’s share of net income (loss) for the nonconsolidated affiliates is included in the table below:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2007     2006     2007     2006  
    (Dollars in millions)  
 
GMAC
  $ 118     $     $ (65 )   $  
Shanghai General Motors Co., Ltd and SAIC-GM-Wuling Automobile Co., Ltd. 
    116       85       233       156  
Other
    53       118       92       173  
                                 
Total
  $ 287     $ 203     $ 260     $ 329  
                                 
 
Summarized financial information of GMAC is as follows:
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2007     June 30, 2007  
    (Dollars in millions)  
 
Condensed Consolidated Statement of Operations:
               
Total net sales and revenue
  $ 5,316     $ 10,613  
Depreciation expense on operating lease assets
    1,173       2,255  
Interest expense
    3,735       7,407  
Operating income
    452       297  
Income tax expense
    159       309  
Net income (loss)
    293       (12 )
Net income (loss) available to members
    240       (116 )


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 5.   Investment in Nonconsolidated Affiliates — (concluded)
 
         
    June 30, 2007
 
    (Dollars in millions)  
 
Condensed Consolidated Balance Sheet:
       
Loans held for sale
  $ 20,268  
Finance receivables and loans, net
    162,192  
Investment in operating leases, net
    28,893  
Other assets
    25,076  
Total assets
    279,278  
Total debt
    224,454  
Accrued expenses
    25,238  
Total liabilities
    261,465  
Preferred interests
    2,226  
Total stockholders’ equity
    15,587  
 
In March 2006, GM sold 92.4 million shares of its investment in Suzuki Motor Corporation (Suzuki), reducing GM’s equity stake in Suzuki from 20.4% to 3.7% or 16.3 million shares. The sale of GM’s interest generated cash proceeds of $2 billion and resulted in a gain on the sale of $666 million, which was recorded in Automotive interest income and other non-operating income in the Condensed Consolidated Statement of Operations. Effective with completion of the sale, GM’s remaining investment in Suzuki is accounted for as an available-for-sale equity security.
 
In the second quarter of 2006, GMAC recognized a gain of $415 million on the sale of its equity interest in a regional home builder, which was recorded in the Automotive interest and other non-operating income in the Condensed Consolidated Statement of Operations. Under the equity method of accounting, GMAC’s share of income recorded from this investment was $22.5 million and $42.4 million for the three and six months ended June 30, 2006, respectively.
 
Note 6.   Product Warranty Liability
 
Policy, product warranty, recall campaigns and certified used vehicle warranty liabilities include the following:
 
                         
    June 30,
    December 31,
    June 30,
 
    2007     2006     2006  
    (Dollars in millions)  
 
Beginning balance
  $ 9,064     $ 9,135     $ 9,135  
Increase in liability (warranties issued during period)
    2,592       4,517       2,223  
Payments
    (2,240 )     (4,463 )     (2,193 )
Adjustments to liability (pre-existing warranties)
    (95 )     (570 )     (420 )
Effect of foreign currency translation
    142       445       113  
Reclassification of Allison liabilities to Liabilities related to assets held for sale
    (103 )            
                         
Ending balance
  $ 9,360     $ 9,064     $ 8,858  
                         
 
Management reviews and adjusts these estimates on a regular basis based on the differences between actual experience and historical estimates or other available information.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 7.   GMNA Postemployment Benefit Costs
 
Costs to idle, consolidate or close facilities and provide postemployment benefits to employees idled on an other than temporary basis are accrued based on management’s best estimate of the wage and benefits costs that will be incurred for qualified employees under the Job Opportunity Bank-Security program (JOBS Bank) provisions of the current labor agreement through the date of its expiration in September 2007, plus estimated costs expected to be paid thereafter taking into account policy changes that GM intends to negotiate into the JOBS program after the expiration of the current collective bargaining agreement. Costs related to the idling of employees that are expected to be temporary are expensed as incurred. GM reviews the adequacy and continuing need for these liabilities on a quarterly basis in conjunction with its quarterly production and labor forecasts.
 
In March 2006, GM, Delphi Corporation (Delphi) and the International Union, United Auto, Aerospace and Agricultural Implement Workers of America (UAW) reached an agreement (the UAW Attrition Agreement) intended to reduce the number of U.S. hourly employees through an accelerated attrition program (the Attrition Program). Under the Attrition Program, GM provided certain UAW-represented employees at GM with (1) a lump sum payment of $35,000 for normal or early voluntary retirements retroactive to October 1, 2005; (2) a mutually satisfactory retirement for employees with at least 10 years of credited service and 50 years of age or older; (3) payment of gross monthly wages ranging from $2,750 to $2,900 to those employees who participate in a special voluntary pre-retirement program depending on years of credited service and plant work location; and (4) a buy-out of $140,000 for employees with 10 or more years of seniority, or $70,000 for employees with less than 10 years seniority, provided such employees severed all ties with GM except for any vested pension benefits. Approximately 34,400 GM hourly employees agreed to the terms of the Attrition Program. GM recorded a charge of $2.1 billion in 2006 to recognize the wage and benefit cost of those accepting normal and voluntary retirements, buy-outs or pre-retirement leaves. As a result of the Attrition Program, the JOBS Bank was substantially reduced as employees from the JOBS Bank retired, took a buy-out or filled openings created by the Attrition Program. Certain employees who chose to leave GM retired or left by January 1, 2007 but will continue to receive payments until 2010.
 
Throughout 2006, GM recorded favorable adjustments totaling $1 billion to the postemployment benefits reserve primarily as a result of (1) the transfer of employees from idled plants to other plant sites to replace those positions previously held by employees who accepted retirements, buy-outs, or pre-retirement leaves, (2) a higher than anticipated level of Attrition Program participation by employees at idled facilities and facilities to be idled that were previously accrued for under the JOBS Bank provisions, and (3) higher than anticipated headcount reductions associated with the GMNA plant idling activities announced in 2005. In 2005, GM recognized a charge of $1.8 billion for postemployment benefits related to the restructuring of its North American operations. Approximately 17,500 employees were included in the 2005 charge for locations included in this action, some leaving GM through attrition and the remainder transferring to other sites.
 
The liability for postemployment benefit costs of $865 million at June 30, 2007 reflects estimated future wages and benefits for 8,000 employees, primarily located at idled facilities and facilities to be idled and 4,400 employees subject to the terms of the Attrition Program. At December 31, 2006, the postemployment benefit costs liability reflects estimated future wages and benefits of $1.3 billion related to 8,500 employees, primarily located at idled facilities and facilities to be idled as a result of previous GMNA plant idling activities and 10,900 employees subject to the terms of the Attrition Program. The liability for postemployment benefit costs as of June 30, 2006 reflects estimated future wages and benefits of $2.8 billion related to 12,300 employees, primarily at idled facilities and facilities to be idled as a result of previous announcements and 32,500 employees under the terms of the Attrition Program.
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 7.   GMNA Postemployment Benefit Costs — (concluded)
 
                         
    June 30,
    December 31,
    June 30,
 
    2007     2006     2006  
    (Dollars in millions)  
 
Beginning balance
  $ 1,269     $ 2,012     $ 2,012  
Additions
    92       2,212       2,213  
Interest accretion
    9       31       16  
Payments
    (524 )     (1,834 )     (447 )
Adjustments
    19       (1,152 )     (989 )
                         
Ending balance
  $ 865     $ 1,269     $ 2,805  
                         
 
Note 8.   Short-Term Borrowings and Long-Term Debt
 
Revolving Credit Facilities
 
On June 22, 2007, GM entered into a short-term revolving credit agreement with a syndicate of third-party lenders, that provides for borrowings of up to $4.1 billion. Borrowings under the facility bear a variable interest rate at the prime rate or LIBOR, at the borrower’s option. The credit facility is collateralized by GM’s common equity interest in GMAC. The total commitment available under the agreement will be reduced or eliminated if GM’s interest held in the common equity of GMAC is either disposed of or diluted beyond specified thresholds as a result of a common stock issuance by GMAC. Commitment fees accrue and are paid on the used and unused portions of the facility. The borrowings are to be used for general corporate purposes, which may include funding portions of GM’s turnaround plan and addressing the potential risks and contingencies described below and in GM’s 2006 Annual Report on Form 10-K in “Risk Factors — Risks related to GM and its Automotive business”. No borrowings were outstanding under this agreement at June 30, 2007.
 
In May, 2007, GM entered into a revolving credit agreement expiring in June, 2008, with a lender that provides for borrowings of up to $.5 billion. Borrowings under the facility bear interest based on LIBOR. Commitment fees accrue and are paid on the unused portion of the facility. The borrowings are to be used for general corporate purposes including working capital needs. No borrowings were outstanding under this agreement at June 30, 2007.
 
Contingent Convertible Debt
 
In May, 2007, GM issued $1.5 billion of 1.5% Series D convertible debentures due in 2009, with interest payable semiannually. The debentures are senior unsecured obligations ranking equally with all other unsecured and unsubordinated debt. The Series D debentures may be converted at the option of the holder into common stock based on an initial conversion rate of .6837 shares per $25.00 principal amount of debentures, which represents an initial conversion price of approximately $36.57 per share. The conversion features of the Series D debentures become convertible upon the occurrence of one of the following events:
 
  •  closing price of common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; or
 
  •  during the five business day period after any nine consecutive trading day period in which the trading price of the debentures for each day of such period was less than 95% of the product of the closing sale price of common stock on such day, and the applicable conversion rate; or
 
  •  upon the occurrence of specified corporate events, as defined, including but not limited to, merger, consolidation, binding share exchange or transfer or lease of all or substantially all of our assets, pursuant to which GM’s common stock would be converted into cash, securities, or other assets, or

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(Unaudited) — (Continued)

Note 8.   Short-Term Borrowings and Long-Term Debt — (concluded)
 
 
  •  at any time from March 1, 2009 to the second business day immediately preceding the maturity date. The Series D debentures mature June 1, 2009.
 
GM has committed to use cash, to settle the principal amount of the debentures if (1) holders choose to convert the debentures or (2) GM is required by the holders to repurchase the debentures. Upon conversion, GM retains the right to use cash, stock or a combination thereof, to settle any amount that may become due to debt holders in excess of the principal amount. The conversion price of $36.57 is subject to adjustment including but not limited to the occurrence of stock dividends, the issuance of rights and warrants, and the distribution of assets or debt securities to all holders of shares of common stock. In addition, in the event of a make-whole fundamental change, as defined in the underlying prospectus supplement, the conversion rate will be increased based on (1) the date on which such make-whole fundamental change becomes effective and (2) GM’s common stock price paid in the make-whole fundamental change or average common stock price. In any event, the conversion rate shall not exceed .8205 per $25.00 principal amount of Series D debentures, subject to adjustment for events previously mentioned. If a fundamental change occurs prior to maturity, the debenture holders may require GM to repurchase all or a portion of the debentures for cash at a price equal to the principal amount plus accrued and unpaid interest, if any, to, but not including, the date of repurchase. GM may not elect to redeem the Series D debentures prior to the maturity date.
 
In connection with the issuance of the Series D debentures, GM purchased a hedging instrument for the Series D debentures in a private transaction. The hedge instrument is expected to reduce the potential dilution with respect to GM’s common stock upon conversion of the Series D debentures to the extent that the market value per share of GM’s common stock does not exceed a specified cap, resulting in an effective conversion price of $45.71 per share. This transaction will terminate at the earlier of the maturity date of the Series D debentures or when the Series D debentures are no longer outstanding due to conversion or otherwise.
 
GM received net proceeds from the issuance of the Series D debentures, net of issue costs and the purchase of the convertible note hedge, of $1.4 billion. Debt issue costs of $32 million were incurred and are being amortized using the effective interest method over the term of the Series D debentures. In accordance with EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” GM recorded the cost of the convertible note hedge, which aggregated $99 million, as a reduction of additional paid-in capital. Any subsequent changes in fair value of the convertible note hedge are not recognized. The net proceeds will be used for general corporate purposes, which may include funding portions of GM’s turnaround plan and addressing the potential risks and contingencies described below and in GM’s 2006 Annual Report on Form 10-K in “Risk Factors — Risks related to GM and its Automotive business.”
 
Note 9.   Commitments and Contingent Matters
 
Commitments
 
GM has provided guarantees in relation to the residual value of certain operating leases, primarily related to the lease of GM’s corporate headquarters. At June 30, 2007, the maximum potential amount of future undiscounted payments that could be required to be made under these guarantees amount to $636 million. These guarantees terminate in periods ranging from 2008 to 2018. Certain leases contain renewal options.
 
GM has agreements with third parties that guarantee the fulfillment of certain suppliers’ commitments. At June 30, 2007, the maximum potential future undiscounted payments that could be required to be made under these guarantees amounted to $80 million. Years of expiration pertaining to these guarantees range from 2007 to 2035. Other guarantees with a maximum potential amount of future undiscounted payments that could be required


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Note 9.   Commitments and Contingent Matters — (continued)
 
amounted to $4 million at June 30, 2007 with the period of expiration determined by business conditions, i.e., emergence from bankruptcy or the sale of the business.
 
In addition, in some instances, certain assets of the party whose debt or performance is guaranteed may offset, to some degree, the effect of the triggering of the guarantee. The offset of certain payables of GM may also apply to certain guarantees. No liabilities were recorded with respect to such guarantees as the amounts were determined to be insignificant.
 
GM also provides payment guarantees on commercial loans made by GMAC and outstanding with certain third-parties. As of June 30, 2007 maximum commercial obligations guaranteed by GM were approximately $132 million. Years of expiration pertaining to these guarantees range from 2007 to 2012. Based on the creditworthiness of these third parties, the value ascribed to the guarantees provided by GM was determined to be insignificant.
 
In addition, GM has entered into agreements with GMAC and FIM Holdings LLC, related to the disposal of its 51% interest in GMAC, that incorporate indemnification provisions. The maximum potential future undiscounted payments to which GM may be exposed in terms of these indemnification provisions amount to $2.5 billion. No amounts have been recorded for such indemnities as the fair value of these indemnifications is immaterial.
 
GM has entered into agreements indemnifying certain parties with respect to environmental conditions pertaining to existing or sold GM properties. Due to the nature of the indemnifications, GM’s maximum exposure under these guarantees cannot be estimated. No amounts have been recorded for such indemnities, as GM’s obligations are not probable or estimable at this time.
 
In addition to the guarantees and indemnifying agreements mentioned above, GM periodically enters into agreements that incorporate indemnification provisions in the normal course of business. Due to the nature of these agreements, the maximum potential amount of future undiscounted payments to which GM may be exposed cannot be estimated. No amounts have been recorded for such indemnities as GM’s obligations under them are not probable and estimable at this time.
 
Environmental
 
GM’s operations, like operations of other companies engaged in similar businesses, are subject to a wide range of environmental protection laws, including laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is in various stages of investigation or remediation for sites where contamination has been alleged. We are involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. Such statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site.
 
The future impact of environmental matters, including potential liabilities, is often difficult to estimate. We record an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites, which typically range from five to 30 years.
 
For many sites, the remediation costs and other damages for which we ultimately may be responsible are not reasonably estimable because of uncertainties with respect to factors such as our connection to the site or to materials there, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions, and the nature and scope of investigations, studies, and remediation to be undertaken (including the technologies to be required and the extent, duration, and success of remediation). As a result, we are


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(Unaudited) — (Continued)

Note 9.   Commitments and Contingent Matters — (continued)
 
unable to determine or reasonably estimate the amount of costs or other damages for which we are potentially responsible in connection with these sites, although that total could be substantial.
 
While the final outcome of environmental matters cannot be predicted with certainty, it is the opinion of GM that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, should a number of these items occur in the same period, it could have a material adverse effect on the results of operations in a particular quarter or fiscal year.
 
Asbestos Claims
 
Like most automobile manufacturers, GM has been subject in recent years to asbestos-related claims. GM has seen these claims primarily arise from three circumstances. A majority of these claims seek damages for illnesses alleged to have resulted from asbestos used in brake components. A limited numbers of claims have arisen from asbestos contained in the insulation and brakes used in the manufacturing of locomotives, and claims brought by contractors who allege exposure to asbestos-containing products while working on premises owned by GM.
 
While GM has resolved many of the asbestos-related cases over the years and continues to do so for strategic litigation reasons such as avoiding defense costs and possible exposure to excessive verdicts, management believes that only a small proportion of the claimants has or will ever develop any asbestos-related impairment. Only a small percentage of the claims pending against GM allege causation of a malignant disease associated with asbestos exposure. The amount expended on asbestos-related matters in any year depends on the number of claims filed, the amount of pretrial proceedings, and the number of trials and settlements during the period.
 
GM records an estimated liability associated with reported asbestos claims when it believes that the expected loss is both probable and can be reasonably estimated. Prior to 2006, with respect to incurred but not yet reported claims, GM concluded that a range of probable losses was not reasonably estimable. Over the last several years, GM has continued to accumulate data associated with asbestos claims. Based on review of this data during the fourth quarter of 2006, management determined that it had enough information to determine a reasonable estimate of its projected incurred, but not yet reported, claims that could be asserted over the next two years. Based on its analysis, GM recorded a $127 million charge for unasserted asbestos claims during the three months ended December 31, 2006. GM believes its liability for asbestos claims is adequate.
 
The amounts recorded by GM for the asbestos-related claims were based upon currently known information. Future events, such as the number of new claims to be filed each year and the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs to be significantly different from those projected. Due to the uncertainty inherent in factors used to determine GM’s asbestos-related liabilities, it is reasonably possible that future costs to resolve asbestos claims may be greater than the estimate; however, GM does not believe that it can reasonably estimate how much greater it could be.
 
While the final outcome of asbestos-related matters cannot be predicted with certainty, after discussion with counsel and considering, among other things liabilities that have been recorded, it is the opinion of management that none of these items, when finally resolved, is expected to have a material adverse effect on GM’s financial position or liquidity. However, should many of these items occur in the same period, they could have a material adverse effect on the results of operations in a particular quarter or fiscal year.
 
Contingent Matters
 
During the second quarter of 2007, GM do Brasil recorded a $43 million charge for potential taxes and related matters concerning improperly registered material included in consignment contracts. This amount represents the low end of the range of potential additional taxes and fines that may be assessed. The range of possible fines based


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(Unaudited) — (Continued)

Note 9.   Commitments and Contingent Matters — (continued)
 
on information available is from $43 million to $450 million. GM do Brasil is providing documentation to the tax authorities that may reduce the fines that will eventually be paid.
 
Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, governmental investigations, claims, and proceedings are pending against GM, including a number of shareholder class actions, bondholder class actions, shareholder derivative suits and ERISA class actions and other matters arising out of alleged product defects, including asbestos-related claims; employment-related matters; governmental regulations relating to safety, emissions, and fuel economy; product warranties; financial services; dealer, supplier, and other contractual relationships; and environmental matters.
 
GM has established reserves for matters in which it believes that losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or other treble damage claims, or demands for recall campaigns, incurred but not reported asbestos-related claims, environmental remediation programs, or sanctions, that if granted, could require the Corporation to pay damages or make other expenditures in amounts that could not be reasonably estimated at June 30, 2007. While the final outcome of these matters cannot be predicted with certainty, after discussion with counsel, it is the opinion of management that such claims are not expected to have a material adverse effect on GM’s consolidated financial condition or results of operations. However, should many of these items occur in the same period, they could have a material adverse effect on the results of operations in a particular quarter or fiscal year.
 
Delphi
 
In connection with GM’s spin-off of Delphi Corporation (Delphi) in 1999, GM entered into separate agreements with the UAW, the IUE-CWA and the United Steel Workers (Benefit Guarantee Agreements) providing contingent benefit guarantees to make payments for limited pension and postretirement health care and life insurance (OPEB) expenses to certain former GM U.S. hourly employees who transferred to Delphi and meet the eligibility requirements for such payments (Covered Employees). Each Benefit Guarantee Agreement contains separate benefit guarantees relating to pension and OPEB obligations, with different triggering events under which GM could be liable if Delphi fails to provide the corresponding benefit at the required level. Therefore, GM could incur liability under one of the guarantees (e.g., OPEB) without triggering the other guarantees (e.g., pension). In addition, with respect to pension benefits, GM’s guarantee of pension benefits arises only to the extent that the pension benefits provided by Delphi and the Pension Benefit Guaranty Corporation fall short of the guaranteed amount. The original benefit guarantees were scheduled to expire on October 18, 2007 unless Delphi triggered the benefit guarantees before that date by failing to provide the specified benefits. In a separate agreement between GM and Delphi, Delphi has indemnified GM for any payments under the Benefit Guarantee Agreements to the UAW employees and retirees (Indemnification Agreement). GM’s rights under this Indemnification Agreement were originally scheduled to expire on October 18, 2007, or on the expiration of any obligations of GM to provide benefits under the Benefit Guarantees. As described more fully below, in June 2007 GM agreed to extend the expiration date of the Benefit Guarantee Agreement with the UAW, and Delphi agreed to extend the expiration date of the Indemnification Agreement, under certain circumstances and within certain time periods.
 
Although GM’s obligations under the Benefit Guarantee Agreements have not been triggered by Delphi’s Chapter 11 filing in October 2005 or its motion in Bankruptcy Court to reject its U.S. labor agreements and modify retiree welfare benefits, GM believes it is probable that it has incurred a liability under the Benefit Guarantee Agreements and has previously recorded charges, net of expected recoveries, totaling $6 billion. The Benefit Guarantee Agreements do not obligate GM to guarantee any benefits for Delphi retirees in excess of the corresponding benefits GM provides at the time to its own hourly retirees. Accordingly, any reduction in the benefits GM provides its hourly retirees reduces GM’s obligation under the corresponding benefit guarantee.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 9.   Commitments and Contingent Matters — (continued)
 
On June 22, 2007, GM, Delphi, and the UAW entered into a Memorandum of Understanding (UAW MOU) which included terms relating to the consensual triggering of the Benefit Guarantee Agreement with the UAW as well as certain new terms relating to Delphi’s restructuring. The UAW MOU was ratified by the UAW membership on June 28, 2007 and became effective upon receipt of Bankruptcy Court approval on July 19, 2007. The more significant items covered in the UAW MOU include (1) the extension of the GM-UAW benefit guarantee and the related Delphi indemnity, (2) an additional attrition program offered to Delphi UAW employees, (3) the settlement by GM of a UAW claim against Delphi, (4) GM support for future operations at certain Delphi sites, and (5) GM’s agreement to provide additional benefits for certain healthcare costs related to the Benefit Guarantee Agreement with the UAW. These items are described more fully below.
 
(1) GM agreed to extend the expiration date of the Benefit Guarantee Agreement with the UAW from October 18, 2007 to December 31, 2007. If Delphi has commenced solicitation of acceptance of its plan of reorganization prior to December 31, 2007, but the plan has not been confirmed and substantially consummated by then, the Benefit Guarantee Agreement with the UAW would be further extended to March 31, 2008. Delphi agreed through the UAW MOU to extend its agreement to indemnify GM for payments made under the Benefit Guarantee Agreement with the UAW on the same basis and for the same time period. GM also agreed that if Delphi terminates its pension plan, ceases to provide on-going service, or fails or refuses to provide post-retirement medical benefits for certain UAW employees at any time before both (a) GM and Delphi execute a comprehensive settlement agreement resolving the financial, commercial and other matters between them (GM-Delphi Settlement Agreement) and (b) the U.S. Bankruptcy Court substantially confirms a Delphi plan of reorganization that incorporates, approves and is consistent with the GM-Delphi Settlement Agreement, the applicable provisions of the Benefit Guarantee Agreement will be triggered for those UAW employees.
 
(2) Delphi and the UAW agreed to the terms of an additional attrition program with terms substantially consistent with that previously offered to GM and Delphi employees as described in Note 7. GM’s financial contributions related to this additional program are currently being negotiated as part of a separate agreement with Delphi which has not yet been finalized (GM-Delphi Settlement Agreement).
 
(3) GM committed to pay $450 million to settle a UAW claim asserted against Delphi, which the UAW has directed GM to pay directly to the GM UAW VEBA trust. GM expects to make this payment upon execution of the GM-Delphi Settlement Agreement and substantial consummation of Delphi’s reorganization plan, confirmed by the Bankruptcy Court, which incorporates the GM-Delphi Settlement Agreement.
 
(4) Delphi and the UAW agreed to plans to close certain Delphi sites and divest others. GM has agreed to assist Delphi with such closures and divestitures which, under certain circumstances, may require GM to facilitate the transfer of operations to third parties by specified dates. In addition, Delphi and the UAW agreed to continue operating certain Delphi sites at which GM will provide future product programs. GM’s financial contributions related to these sites are currently being negotiated as part of the GM-Delphi Settlement Agreement.
 
(5) GM agreed to pay for certain healthcare costs of Delphi retirees and their beneficiaries in order to provide a level of benefits that is consistent with that being provided to GM retirees and their beneficiaries from the Mitigation Plan VEBA. The actuarially determined cost to GM of providing these benefits is estimated to be approximately $360 million.
 
On August 5, 2007, GM, Delphi, and the IUE-CWA entered into a Memorandum of Understanding (IUE-CWA MOU) which provides terms that are similar to the UAW MOU with regard to establishing terms related to the consensual triggering of the Benefit Guarantee Agreement offering an additional attrition program, and continuing operations at certain Delphi sites for which GM committed to certain product programs. The IUE-CWA MOU is subject to ratification by the IUE-CWA members and approval of the Bankruptcy Court. The more significant items covered in the IUE-CWA MOU include (1) an additional attrition program offered to Delphi IUE-CWA employees,


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Note 9.   Commitments and Contingent Matters — (continued)
 
and (2) GM provision of future product programs at certain Delphi sites. These items are described more fully below.
 
(1) Delphi and the IUE-CWA agreed to an additional attrition program with terms substantially consistent with that previously offered to GM and Delphi employees as described in Note 7. GM’s financial contributions related to this additional program are currently being negotiated as part of a separate agreement with Delphi which has not yet been finalized (GM-Delphi Settlement Agreement).
 
(2) Delphi and the IUE-CWA agreed to continue operating certain Delphi sites at which GM will provide future product programs.
 
Under the GM-Delphi Settlement Agreement currently being negotiated, GM expects to provide Delphi with funding in the form of reimbursement of a portion of labor costs incurred by Delphi to produce systems, components and parts for GM. GM expects that this funding will result in future annual labor-related payments of between $300 million and $400 million which will be recognized as period costs as a component of Automotive cost of sales. Also, GM expects to provide cash support to certain Delphi facilities that are producing systems, components and parts for GM. GM expects that this funding will result in future annual facility cash support payments of approximately $100 million, which will be recognized in the future as incurred. In exchange for GM’s commitment to provide labor cost and facility support, GM expects to receive price reductions on certain products it has and will continue to purchase from Delphi. Any such funding as described and price reductions will take effect upon emergence of Delphi from Bankruptcy and extend for a period that is still subject to negotiation.
 
During the second quarter of 2007, as a result of finalizing the UAW MOU and current negotiations with Delphi on the GM-Delphi Settlement Agreement, GM recorded charges totaling $575 million to increase its estimated liability under the Benefit Guarantee Agreement with the UAW and to establish liabilities for certain commitments in connection with the Delphi reorganization plan.
 
On July 7, 2007, Delphi announced the termination of the December 18, 2006 Plan Framework Support Agreement with GM and a consortium of potential investors and the related investment agreement. On July 18, Delphi announced that it would seek bankruptcy court approval of an equity purchase and commitment agreement (EPCA) with a modified investor group led by Appaloosa Management L.P., which would be supported by GM as well as both of Delphi’s Statutory Committees. On August 2, 2007, the Bankruptcy Court as contemplated, issued an order approving the EPCA. Under the terms of the EPCA and the GM-Delphi Settlement Agreement, GM would release claims against Delphi in exchange for $2.7 billion in cash and an unconditional release of any alleged claims against GM by the bankruptcy estate. This recovery has been included as a reduction in the net loss accruals of $6.6 billion as of June 30, 2007. In addition, GM will assume up to $2 billion but not less than $1.5 billion of net pension obligations of Delphi, and GM will receive a note payable for the amount of the obligations assumed, which will be payable in cash by Delphi on market terms within 10 days after the plan of reorganization becomes effective. As with other customers, certain GM claims related to ordinary business would flow through the Chapter 11 proceedings and be satisfied by Delphi after the reorganization in the ordinary course of business.
 
In March 2006, Delphi also filed a motion under the U.S. Bankruptcy Code seeking authority to reject certain supply contracts with GM. A hearing on this motion was adjourned indefinitely by the court pending further developments related to Delphi’s U.S. labor agreements and retiree welfare benefits. Although Delphi has not rejected any GM contracts as of this time and has assured GM that it does not intend to disrupt production at GM assembly facilities, there is a risk that Delphi or one or more of its affiliates may reject or threaten to reject individual contracts with GM, either for the purpose of exiting specific lines of business or in an attempt to increase the price GM pays for certain parts and components. As a result, GM could be materially adversely affected by disruption in the supply of automotive systems, components and parts that could force the suspension of production


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(Unaudited) — (Continued)

Note 9.   Commitments and Contingent Matters — (concluded)
 
at GM assembly facilities. The court order approving the UAW MOU also settled Delphi’s motion to reject the U.S. labor agreements with the UAW.
 
Since negotiations are not complete, the actual effect of the resolution of issues related to Delphi cannot be determined until the Bankruptcy Court’s approval of a comprehensive resolution and plan of reorganization, and there can be no assurance that the parties will reach a comprehensive resolution and plan or Bankruptcy court will approve such a resolution and plan, or that any resolution and plan will include the terms described above.
 
Benefit Guarantees Related to Divested Unit
 
GM has entered into various guarantees regarding benefits for former GM employees at two previously divested plants that manufacture component parts whose results continue to be included in GM’s financial statements in accordance with FIN 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R). For these divested plants, GM entered into agreements with both of the purchasers to indemnify, defend, and hold each purchaser harmless for any liabilities arising out of the divested plants and with the UAW guaranteeing certain postretirement health care benefits and payment of postemployment benefits.
 
In October 2006, it was announced that production would cease at these two plants which would permanently idle 2,000 workers. Accordingly, during the fourth quarter of 2006, GM results included a charge of $206 million comprised of the following related to the closure of these plants: (1) a $214 million charge to recognize wage and benefit costs associated with employees accepting retirement packages, buyouts, or supplemental unemployment benefit costs in connection with the plant closure, (2) a curtailment loss of $3 million related to pension benefits, and (3) a curtailment gain of $11 million with respect to other postretirement benefits. During the three and six months ended June 30, 2007, GM recognized a favorable adjustment of $6.4 million and $9 million, respectively, related to the postemployment benefit reserve in connection with the plant closures. Additionally, during the six months ended June 30, 2007, GM recognized a $38.2 million curtailment gain with respect to OPEB, which was recorded in the first quarter of 2007.
 
Note 10.   Income Taxes
 
Under Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” GM is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. GM is also required to record the tax impact of certain discrete items (unusual or infrequently occurring), including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
 
For the three and six months ended June 30, 2007, GM recorded net favorable adjustments to income tax expense of approximately $500 million, which resulted in the recognition of an income tax benefit for these periods. These favorable adjustments include: foreign income taxed at rates lower than 35% (U.S. federal statutory tax rate); various permanent book-tax differences; and discrete items such as the reversal of valuation allowances and the reversal of previously required tax liabilities in accordance with FIN 48 for uncertain tax positions now deemed more-likely-than-not to be realized.
 
Upon adoption of FIN 48 as of January 1, 2007, GM had approximately $2.7 billion of total gross unrecognized tax benefits, of which $2.1 billion represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. At June 30, 2007 the amount of gross unrecognized tax benefits and the amount that would favorably affect the effective income tax rate in future periods were


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(Unaudited) — (Continued)

Note 10.   Income Taxes — (continued)
 
$2.6 billion and $1.7 billion, respectively. These amounts consider the guidance in FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”. At June 30, 2007, $1.4 billion of the liability for uncertain tax positions is netted against deferred tax assets relating to the same tax jurisdictions; the remainder of the liability for uncertain tax positions is classified as a non-current liability.
 
GM files income tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. In the U.S., GM’s federal income tax returns for 2001 through 2003 are currently under review by the Internal Revenue Service and, except for one transfer pricing matter, it is reasonably possible that this examination will conclude in 2007. A pre-filing meeting was held with the Internal Revenue Service on the transfer pricing matter in preparation for bi-lateral negotiations. GM’s Mexican subsidiary has recently received an income tax assessment related to the 2001 tax year covering warranty, tooling costs, and withholding taxes. In addition, GM is currently under review in Australia, China, France, Indonesia, India, Italy, Thailand, and Turkey, and has received notices that tax audits will commence in Germany, Portugal, Spain, and Taiwan. At June 30, 2007 it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits over the next twelve months.
 
GM has open tax years from primarily 1999 to 2006 with various significant taxing jurisdictions including the U.S., Australia, Canada, Mexico, Germany, the United Kingdom, Korea and Brazil. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. GM has recorded a tax benefit only for those positions that meet the more-likely-than-not standard.
 
GM’s continuing practice is to recognize interest on uncertain tax positions in Automotive and other interest expense and penalties in Selling, general, and administrative expense. For the three and six months ended June 30, 2007, GM reduced accrued interest expense by $193.9 million and $179.8 million and accrued penalties of $3.3 million and $10.8 million, respectively. Interest and penalties of $81.9 million and $6.4 million were reversed for the three months ended June 30, 2007 as a result of the expiration of statutes in a number of countries as well as other amounts becoming effectively settled. In addition, interest income totaling $122 million was recorded in connection with the above mentioned transfer pricing matter. Accrued interest and penalties as of January 1, 2007 were $210.3 million and $75.6 million, respectively, and as of June 30, 2007 accrued interest and penalties were $42.9 million and $69.1 million, respectively.
 
In July 2007, new tax laws were passed or enacted in the United Kingdom, Germany, as well as in the State of Michigan, which will impact GM’s operations in these jurisdictions.
 
In July 2007, the United Kingdom enacted legislation to lower its statutory corporate tax rate from 30% to 28%, effective April 1, 2008.
 
In July 2007, the German Parliament passed legislation to lower its statutory corporate tax rate. It is anticipated that the President will sign the legislation, and it will become law sometime during the third quarter of 2007. The legislation provides for a reduction of approximately 9%, effective as of January 1, 2008, in the combined German statutory tax rate, which consists of the corporate tax rate, the local trade tax rate, and the solidarity levee tax rate.
 
Note 10.   Income Taxes — (concluded)
 
The anticipated adjustments for Germany and the United Kingdom, which management is currently analyzing, will reduce the net deferred tax asset and increase income tax expense by a range of approximately $500 million to $700 million during the third quarter of 2007.
 
In July 2007, the State of Michigan enacted a substantial change to its corporate tax structure. The tax law change includes the elimination of the Single Business Tax (SBT) and the creation of an income tax and a modified


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

gross receipts tax. The new taxes will be effective January 1, 2008. Due to the complex change in the tax law in Michigan, we are still evaluating the impact the change will have on GM’s result of operations and financial condition.
 
Note 11.   Earnings Per Share
 
Basic earnings per share has been computed by dividing income (loss) from continuing operations by the weighted average number of shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Common shares potentially issuable under contingently convertible debt are included in computing diluted EPS using the average share price for the period similar to the treasury stock method.
 
The reconciliation of the amounts used in the basic and diluted earnings per share computations is as follows (in millions, except per share amounts).
 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
 
Income (loss) from continuing operations
  $ 784     $ (3,494 )   $ 742     $ (3,001 )
Income from discontinued operations, net of tax
    107       111       211       220  
                                 
Net income (loss)
  $ 891     $ (3,383 )   $ 953     $ (2,781 )
                                 
Average number of share outstanding
    566       566       566       566  
Incremental effect of shares from exercise of stock options and vesting of restricted stock units
    3             3        
                                 
Average number of dilutive shares outstanding
    569       566       569       566  
                                 
Basic income (loss) per share from continuing operations
  $ 1.38     $ (6.18 )   $ 1.31     $ (5.31 )
Incremental effect of exercise of stock options and vesting of restricted stock units
    (.01 )           (.01 )      
                                 
Diluted income (loss) per share from continuing operations
  $ 1.37     $ (6.18 )   $ 1.30     $ (5.31 )
                                 
 
Certain stock options with exercise prices that exceed the fair market value of GM’s common stock had an antidilutive effect and therefore were excluded from the computation of diluted earnings per share. The number of such shares not included in the computation of diluted earnings per share were 93 million and 107 million at June 30, 2007 and 2006, respectively.
 
GM has contingently convertible debentures of $2.6 billion principal amount of 5.25% Series B due in 2032, $4.3 billion principal amount of 6.25% Series C due in 2033 and $1.5 billion principal amount of 1.50% Series D due in 2009 outstanding that, if converted in the future, would have a potentially dilutive effect on GM’s common stock. GM has unilaterally and irrevocably waived and relinquished its right to use stock, and has committed to use cash, to settle the principal amount of the debentures if holders choose to convert the debentures or GM is required by holders to repurchase the debentures. GM retains the right to use either cash or stock to settle any amount that may become due to debt holders in excess of the principal amount for all outstanding convertible debentures. As of June 30, 2007 and 2006, shares potentially issuable under these debentures, including those shares issuable pursuant to the convertible note hedge related to the Series D convertible debentures, were excluded from the computation of diluted earnings per share as the effect is antidilutive under the treasury stock method.
 
On March 6, 2007, Series A convertible debentures in the amount of $1.1 billion were put to GM and settled entirely in cash.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 12.   Depreciation and Amortization
 
Depreciation and amortization, including asset impairment charges, included in Automotive cost of sales, Selling, general, and administrative expense, and Financial services and insurance expense were as follows:
 
                                 
    Three Months
    Six Months Ended
 
    Ended June 30,     June 30,  
    2007     2006     2007     2006  
    (Dollars in millions)  
 
Depreciation
  $ 1,231     $ 1,058     $ 2,488     $ 2,160  
Amortization of special tools
    858       1,108       1,583       1,843  
Amortization of intangible assets
    18       18       35       35  
                                 
Total
    2,107       2,184       4,106       4,038  
                                 
Financing and Insurance Operations
                               
Depreciation
    334       631       713       2,136  
Amortization of intangible assets
          6             12  
                                 
Total
    334       637       713       2,148  
                                 
Total consolidated depreciation and amortization
  $ 2,441     $ 2,821     $ 4,819     $ 6,186  
                                 
 
Note 13.   Pensions and Other Postretirement Benefits
 
GM recognized the funded status of its benefit plans at December 31, 2006 in accordance with the recognition provisions of SFAS No. 158. Additionally, GM elected to early adopt the measurement date provisions of SFAS No. 158 at January 1, 2007. Those provisions require the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. Using the “two-measurement” approach for those defined benefit plans where the measurement date was not historically consistent with GM’s year-end, GM recorded a decrease to Retained earnings of $.7 billion, or $.4 billion after-tax, representing the net periodic benefit cost for the period between the measurement date utilized in 2006 and the beginning of 2007, which previously would have been recorded during the three months ended March 31, 2007 on a delayed basis. GM also performed a measurement at January 1, 2007 for those benefit plans whose previous measurement dates were not historically consistent with GM’s year-end. As a result of the January 1, 2007 measurement, GM recorded an increase to Accumulated other comprehensive income of $2.3 billion, or $1.5 billion after-tax, representing other changes in the fair value of the plan assets and the benefit obligations for the period between the measurement date utilized in 2006 and January 1, 2007. These amounts are offset principally by an immaterial adjustment of $400 million, or $250 million after-tax, to correct certain demographic information used in determining the amount of the cumulative effect of a change in accounting principle reported at December 31, 2006 to adopt the recognition provisions of SFAS No. 158.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 13.   Pensions and Other Postretirement Benefits — (continued)
 
The components of pension and OPEB expense are as follows:
 
                                                                 
    U.S. Plans
    Non-U.S. Plans
    U.S. Other
    Non-U.S.
 
    Pension Benefits     Pension Benefits     Benefits     Other Benefits  
    Three Months Ended
    Three Months Ended
    Three Months Ended
    Three Months Ended
 
    June 30,     June 30,     June 30,     June 30,  
    2007     2006     2007     2006     2007     2006     2007     2006  
    (Dollars in millions)  
 
Components of (income) expense
                                                               
Service cost
  $ 160     $ 172     $ 110     $ 128     $ 93     $ 168     $ 11     $ 13  
Interest cost
    1,216       1,237       266       217       901       1,043       48       48  
Expected return on plan assets
    (1,986 )     (2,044 )     (229 )     (177 )     (350 )     (375 )            
Amortization of prior service cost
    130       184       7       26       (461 )     (105 )     (21 )     (21 )
Recognized net actuarial loss
    211       280       86       96       339       617       30       34  
Curtailments, settlements, and other
          4,367       20       18       1                    
                                                                 
Net (income) expense
  $ (269 )   $ 4,196     $ 260     $ 308     $ 523     $ 1,348     $ 68     $ 74  
                                                                 
 
                                                                 
    U.S. Plans
    Non-U.S. Plans
    U.S. Other
    Non-U.S.
 
    Pension Benefits     Pension Benefits     Benefits     Other Benefits  
    Six Months Ended
    Six Months Ended
    Six Months Ended
    Six Months Ended
 
    June 30,     June 30,     June 30,     June 30,  
    2007     2006     2007     2006     2007     2006     2007     2006  
    (Dollars in millions)  
 
Components of (income) expense
                                                               
Service cost
  $ 320     $ 425     $ 229     $ 241     $ 186     $ 344     $ 21     $ 26  
Interest cost
    2,431       2,456       521       428       1,803       2,120       94       95  
Expected return on plan assets
    (3,972 )     (4,058 )     (447 )     (351 )     (700 )     (750 )            
Amortization of prior service cost
    259       457       14       50       (922 )     (133 )     (41 )     (41 )
Recognized net actuarial loss
    422       686       168       190       678       1,236       57       66  
Curtailments, settlements, and other
    2       4,390       41       31       1                    
                                                                 
Net (income) expense
  $ (538 )   $ 4,356     $ 526     $ 589     $ 1,046     $ 2,817     $ 131     $ 146  
                                                                 
 
Effective March 31, 2006, the U.S. District Court for the Eastern District of Michigan approved the tentative settlement agreement with the UAW (UAW Settlement Agreement) related to reductions in hourly retiree health care. The UAW Settlement Agreement will remain in effect until at least September 2011, after which either GM or the UAW may cancel the agreement upon 90 days written notice. Similarly, GM’s contractual obligations to provide health care benefits to UAW hourly retirees extends to at least September 2011 and will continue thereafter until terminated by either GM or the UAW. As a result, the provisions of the UAW Settlement Agreement will continue in effect for the UAW retirees beyond the expiration in September 2007 of the current collective bargaining agreement between GM and the UAW. Given the significance of the effect of the UAW Settlement Agreement, the plans were remeasured in March 2006. The remeasurement of the U.S. hourly OPEB plans as of March 31, 2006 due to the UAW Settlement Agreement generated a $1.3 billion reduction in OPEB expense for the remaining periods in 2006 and reduced the U.S. APBO by $14.5 billion. The effects of the settlement were recorded beginning in the third quarter of 2006.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 13.   Pensions and Other Postretirement Benefits — (concluded)
 
The UAW Settlement Agreement also provides that GM make contributions to a new independent Voluntary Employees’ Beneficiary Association (VEBA) (Mitigation Plan). The assets of the Mitigation Plan will be used to mitigate the effect of reduced GM health care coverage on individual UAW retirees and, depending on the level of mitigation, are expected to be available for a number of years. The new independent Mitigation Plan is being partially funded by GM contributions of $1 billion in each of 2006, 2007 and 2011. The 2011 contribution may be accelerated under specified circumstances. GM will also make future contributions subject to provisions of the UAW Settlement Agreement that relate to profit sharing payments, increases in the value of a notional number of shares of GM’s common stock (collectively, the Supplemental Contributions), as well as wage deferral payments and dividend payments. GM made $1 billion contributions to the independent VEBA in both the second quarter of 2007 and 2006.
 
As detailed in Note 7, GM, Delphi, and the UAW reached an agreement on March 22, 2006 which intended to reduce the number of U.S. hourly employees through the Attrition Program. As a result of the Attrition Program, GM has recognized curtailment losses under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” due to the significant reduction in the expected aggregate years of future service of the employees in the U.S. hourly pension, OPEB and extended disability plans, respectively. The curtailment losses include recognition of the change in the projected benefit obligation (PBO) or APBO and a portion of the previously unrecognized prior service cost reflecting the reduction in expected future service. GM recognized a curtailment loss related to the U.S. hourly pension plan of approximately $4.4 billion at April 30, 2006. The impact of the curtailment loss related to the U.S. hourly OPEB plans measured at May 31, 2006 as a result of the Attrition Program was recorded in the third quarter of 2006.
 
The remeasurement of GM’s U.S. hourly pension plan as of April 30, 2006 as a result of the Attrition Program generated a $.2 billion reduction in pension expense for the three and six months ended June 30, 2006. This remeasurement reduced the U.S. pension PBO by $1.2 billion. The remeasurement of the U.S. hourly OPEB plans as of May 31, 2006 as a result of the Attrition Program generated a change in OPEB expense beginning in the third quarter of 2006. Accordingly, OPEB expense for the three months ended June 30, 2006 does not reflect any amounts associated with the hourly OPEB plan remeasurement.
 
Note 14.   Impairments, Restructuring and Other Initiatives
 
Impairments
 
During the three and six months ended June 30, 2007, GM recorded impairment charges primarily related to product specific assets totaling $100 million and $109 million, respectively. Of this, $95 million was at GMNA and $5 million was at GMAP for the three months ended June 30, 2007. The remaining $9 million recorded during the six months ended June 30, 2007 related to product specific impairments at GMAP recorded in the first quarter of 2007. These impairments were based on GM’s periodic review of its long lived assets classified as held and used.
 
During the three and six months ended June 30, 2006, GM recorded impairment charges totaling $363 million related to product specific assets. Of this, $303 million was at GMNA and $60 million was at GME. In addition, GM recorded an asset impairment charge of $84 million for the three and six months ended June 30, 2006, in connection with the announced closure of GM’s Portugal assembly plant, which closed in December 2006.
 
Restructuring and Other Initiatives
 
GME results for the three and six months ended June 30, 2007 include charges for separation programs of $30 million and $87 million, respectively. Charges of $27 million and $70 million were recorded in the three and six months ended June 30, 2007, respectively, primarily related to early retirement programs, along with additional


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 14.   Impairments, Restructuring and Other Initiatives — (concluded)
 
minor separations under other current programs in Germany. Approximately 5,000 employees will leave under early retirement programs in Germany through 2013. The cost for the early retirements will be recognized over the remaining service period of the employees. Additionally, a charge of $3 million was recorded in the quarter ended June 30, 2007 primarily relating to the separation of 400 temporary employees in Belgium. The remaining separation charges for the six months ended June 30, 2007 related to separations in Sweden, the closure of GM’s Portugal assembly plant, and the shift reduction at the Ellesmere Port plant in the United Kingdom. These separation programs are substantially complete at June 30, 2007.
 
GME results for the three and six months ended June 30, 2006 included charges for separations and contract cancellations of $129 million and $176 million, respectively. The most significant charges in the three and six months ended June 30, 2006 totaling $61 million and $108 million, respectively, relate to the restructuring plan for the operations in Germany announced in the fourth quarter of 2004. The remaining charges totaling $68 million for the three and six months ended June 30, 2006 relate to the closure of GM’s assembly plant in Portugal and the reduction of one shift at the Ellesmere Port plant in the United Kingdom.
 
GMAP results for the three and six months ended June 30, 2007 include a charge for separation programs of $8 million and $48 million, respectively, at its Australian facilities. This charge relates to the voluntary separation of approximately 650 employees.
 
GMNA results for the three and six months ended June 30, 2006 included a charge of $100 million related to wage and benefit costs incurred under a salaried severance program, which allowed involuntarily terminated employees to receive continued salary and benefits for a period of time after termination.
 
GMLAAM results for the three and six months ended June 30, 2006 include restructuring charges of $16 million and $43 million, respectively. These restructuring charges relate to the costs of voluntary employee separations at GM’s facilities in Brazil.
 
Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements
 
As previously disclosed in our 2006 Annual Report on Form 10-K, GM has restated its prior years consolidated financial statements. As such, the accompanying Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q as of and for the three months and six months ended June 30, 2006 have been restated to correct the accounting for certain derivative transactions under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” as amended (SFAS No 133), and various other accounting adjustments.
 
Additionally, the Condensed Consolidated Financial Statements have been further adjusted as GM has entered into a definitive agreement to sell the commercial and military business of our Allison Transmission division. The operations of Allison have been accounted for as discontinued operations for the three and six months ended June 30, 2006. For additional information concerning the sale of Allison, refer to Note 3.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements — (continued)
 
The following table sets forth a reconciliation of the previously reported and restated net loss for the three and six months ended June 30, 2006, respectively:
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2006     June 30, 2006  
    (Dollars in millions)  
 
Net loss, as previously reported
  $ (3,379 )   $ (2,934 )
Less income from discontinued operations
    120       231  
                 
Loss from continuing operations
    (3,499 )     (3,165 )
Pre-tax adjustments:
               
Derivative and hedge accounting adjustments
               
Commodity Contracts
               
“Normal purchases and normal sales” scope exception for certain commodity contracts
    17       97  
Hedge accounting related to commodity cash flow hedges
    50       320  
Foreign Exchange Contracts
               
Hedge accounting related to foreign currency cash flow and net investment hedges
    (13 )     102  
Interest Rate Contracts
               
Hedge accounting related to certain debt instruments
    (192 )     (383 )
                 
Total derivative and hedge accounting adjustments
    (138 )     136  
Other out-of-period adjustments
    146       68  
                 
Total pre-tax adjustments
    8       204  
Income tax expense
    3       40  
                 
Total of above adjustments, net of tax
    5       164  
                 
Loss from continuing operations, as restated
    (3,494 )     (3,001 )
                 
Income from discontinued operations
    120       231  
Effect of restatement on discontinued operations, net of tax
    (9 )     (11 )
                 
Net income from discontinued operations, as restated
    111       220  
                 
Net loss, as restated
  $ (3,383 )   $ (2,781 )
                 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements — (continued)
 
The following table sets forth a reconciliation of previously reported and restated loss per share for the three months and six months ended June 30, 2006:
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2006     June 30, 2006  
 
Net loss per share, as previously reported
  $ (5.97 )   $ (5.18 )
Less income per share from discontinued operations
    .21       .41  
                 
Loss per share from continuing operations
    (6.18 )     (5.59 )
Adjustments related to continuing operations
          0.28  
                 
Loss per share from continuing operations, as restated
    (6.18 )     (5.31 )
                 
Income per share from discontinued operations
    0.21       0.41  
Adjustments related to discontinued operations
    (0.01 )     (0.02 )
                 
Income per share from discontinued operations, as restated
    0.20       0.39  
                 
Net loss per share, as restated
  $ (5.98 )   $ (4.92 )
                 
 
These restatement adjustments and revisions are further described below:
 
Derivatives and Hedge Accounting Adjustments
 
Commodity Contracts
 
In reviewing the accounting for certain commodity purchase contracts, GM determined that it had incorrectly concluded that the “normal purchases and normal sales” scope exception in paragraph 10(b) of SFAS No. 133 applied. Therefore, these commodity purchase contracts should have been accounted for as derivatives. The financial statements have been restated to record the fair value of these purchase contracts in the 2006 Condensed Consolidated Balance Sheet and record the changes in the fair value of the commodity contracts as charges or credits in the Condensed Consolidated Statements of Operations. As a result of the restatement, additional derivative assets of $268.8 million were recorded at June 30, 2006. Additionally, pre-tax earnings were increased, through a reduction of Automotive cost of sales, by $17 million ($11 million after tax) and $97.1 million ($63.1 million after tax) for the three and six months ended June 30, 2006, respectively.
 
Additionally, GM entered into various commodity derivatives contracts, including swaps and options, to hedge its forecasted purchases of precious and non-ferrous metals and energy. These commodity derivatives were designated as cash flow hedges. Under SFAS No. 133, hedge accounting is appropriate only for those hedging relationships that a company expects will be highly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged. To determine whether transactions satisfy these requirements, companies must periodically assess and document the effectiveness of their hedging relationships both retrospectively and prospectively and measure and recognize any ineffectiveness. For certain commodity cash flow hedges, GM inappropriately applied the “matched terms” method of assessing hedge effectiveness as outlined in paragraph 65 of SFAS No. 133 by not considering in its assessment certain terms of the underlying commodity contracts that created ineffectiveness in the cash flow hedging relationship. In addition, for other commodity cash flow hedges, GM did not properly document the hedging relationship or properly perform the periodic retrospective assessment of effectiveness necessary to qualify for hedge accounting or properly measure hedge ineffectiveness, and did not properly reclassify amounts from Accumulated other comprehensive income (AOCI) when the underlying hedged forecasted transaction affected earnings. Accordingly, the commodity derivatives should have been marked-to-market with gains and losses recorded in Automotive cost of sales. Changes in the fair value of the


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements — (continued)
 
commodity derivatives that had been recorded in OCI as part of these cash flow hedging relationships were reversed and recorded in Automotive cost of sales. Pre-tax earnings were increased through a reduction of Automotive cost of sales, by $49.5 million ($32.2 million after tax) and $319.6 million ($207.7 million after tax) for the three and six months ended June 30, 2006, respectively.
 
Foreign Exchange Contracts
 
GM enters into foreign currency forward contracts and cross-currency swaps to hedge foreign-currency-denominated debt and forecasted transactions. GM also designates foreign-currency-denominated debt as hedges of net investments in foreign operations.
 
GM concluded that it did not properly apply the “matched terms” method of assessing hedge effectiveness as outlined in paragraph 65 of SFAS No. 133, inadequately measured hedging effectiveness and lacked contemporaneous hedge documentation and, therefore, incorrectly applied hedge accounting to certain cash flow hedges and net investment hedges. The changes in fair value of certain derivatives used in cash flow hedging relationships and amounts related to a net investment hedge previously recorded in AOCI were released from OCI and recorded in Automotive cost of sales. Pre-tax earnings were increased by $34.3 million ($22.3 million after tax) and $117.9 million ($76.6 million after tax) for the three and six months ended June 30, 2006, respectively.
 
In addition, GM determined it incorrectly applied cash flow hedge accounting treatment to one of two concurrent offsetting derivatives by accounting for the two derivatives separately instead of treating them as one combined arrangement in accordance with SFAS No. 133, “Implementation Issue F6, Concurrent Offsetting Matching Swaps and Use of One as Hedging Instrument”, and SFAS No. 133, “Implementation Issue K1, Determining Whether Separate Transactions Should Be Viewed as a Unit”. The changes in fair value of the derivatives used in this hedging strategy previously accounted for as cash flow hedges were released from AOCI and recorded in Automotive cost of sales. Pre-tax earnings were decreased by $46.8 million ($30.4 million after tax) and $15.7 million ($10.2 million after tax) for the three and six months ended June 30, 2006, respectively.
 
Interest Rate Contracts
 
GMAC determined that its hedge accounting documentation and hedge effectiveness assessment methodologies did not meet the requirements of paragraph 20(b) of SFAS No. 133 for certain hedges of callable fixed rate debt instruments. Under SFAS No. 133, hedge accounting is appropriate only for those hedging relationships that a company has a sufficiently documented expectation that such relationship will be highly effective in achieving offsetting changes in fair values attributable to the risk being hedged at the inception of the hedging relationship. To determine whether transactions satisfy these requirements, a company must periodically assess the effectiveness of its hedging relationships both prospectively and retrospectively. After review, GMAC determined that the interest rate derivatives did not qualify for hedge accounting. Accordingly, hedge accounting should not have been applied to any of the hedging relationships in this strategy and therefore, market value adjustments on the debt instruments included in the hedging relationships related to changes in fair value due to movements in the designated benchmark interest rate should not have been recorded. Changes in the fair value of the debt instruments recorded in earnings under these fair value hedge relationships were reversed. Pre-tax earnings were decreased, through an increase to Interest expense, by $192.3 million ($125 million after tax) and $383 million ($249 million after tax) for the three and six months ended June 30, 2006, respectively.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements — (continued)
 
Other Out-of-Period Adjustments
 
Also, GM identified adjustments that should have been recorded in the three and six months ended June 30, 2006. Upon identification, GM determined these adjustments to be immaterial, individually and in the aggregate, to our previously filed Condensed Consolidated Financial Statements, and recorded these out-of-period adjustments in the periods in which they were identified. Due to the adjustments that required a restatement of our previously filed Condensed Consolidated Financial Statements, GM is correcting these out-of-period adjustments by recording them in the proper periods.
 
The out-of-period adjustments in the table above include the following:
 
Unemployment benefit payments. Subsequent to December 31, 2005 but prior to the issuance of our 2005 consolidated financial statements, we were notified by the German Labor Office that we were released from certain contingent unemployment benefit payment obligations. We initially recorded the release from these obligations in the three months ended March 31, 2006. We subsequently determined that the adjustment should have been recorded in the three months ended December 31, 2005. Accordingly, as part of our restatement, pre-tax earnings were decreased, through an increase of Automotive cost of sales, by $50.2 million ($31.1 million after tax) for the six months ended June 30, 2006, respectively.
 
Automotive revenue recognition. We recorded an adjustment to correct deferred revenue related to data disks provided to customers to update their vehicle’s navigational system. We did not compute deferred revenue using fair value as determined by vendor specific objective evidence as required by EITF 00-21, “Revenue Arrangements with Multiple Deliverables”. Additionally, we did not defer revenue on the correct number of 2006 model year vehicles containing navigation systems. As part of our restatement, pre-tax earnings were decreased, through a reduction of Automotive sales, by $21.9 million ($14.2 million after-tax) and $43.3 million ($28.1 million after tax) for the three and six months ended June 30, 2006, respectively.
 
Development costs. We recorded an adjustment to correctly expense supplier development costs. As part of our restatement, pre-tax and after-tax earnings were increased, through a reduction of Automotive cost of sales, by $56.7 million for the six months ended June 30, 2006.
 
Advertising expenses. Under our cooperative advertising program with our dealers, we are obligated to match a portion of the funds contributed by our dealers for advertising. We recorded an adjustment to correctly reflect the timing of our obligation under this arrangement. Previously, our matching portion of the advertising costs was expensed as incurred. As part of our restatement, pre-tax earnings were decreased, through an increase to Selling, general, and administrative expenses, by $4.5 million ($2.9 million after-tax) and $39.8 million ($25.9 million after-tax) for the three and six months ended June 30, 2006, respectively.
 
Gain on sale of equity method investment. We erroneously calculated the gain on the sale of a portion of an equity method investment. As part of our restatement, pre-tax earnings were increased by $36 million ($23.4 million after-tax) for the six months ended June 30, 2006.
 
Employee related costs. We erroneously recorded employee-related costs related to the Attrition Program and restructuring activities at GME. As part of our restatement, pre-tax earnings were decreased, through an increase to Automotive cost of sales, by $52.1 million ($32.3 million after-tax) for the six months ended June 30, 2006.
 
Manufacturing utilities costs. We recorded an adjustment to correctly expense manufacturing utilities costs. As part of our restatement, pre-tax earnings were increased by $15.2 million ($9.9 million after-tax) and $22.9 million ($14.9 million after-tax) for the three and six months ended June 30, 2006, respectively.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements — (continued)
 
Extended disability curtailment costs. We recorded an adjustment to correctly state the extended disability curtailment costs based on updated actuarial assumptions. As part of our restatement, pre-tax earnings were increased by $52 million ($33.8 million after-tax) for the three and six months ended June 30, 2006.
 
Special attrition program charge. We recorded an adjustment to correctly state the special attrition program expense as a result of the review of employees’ eligibility. As part of our restatement, pre-tax earnings were increased by $28 million ($18.2 million after-tax) for the three and six months ended June 30, 2006.
 
Extended warranty deferred revenue. We recorded an adjustment to correctly state deferred revenue as a result of the review of prior years’ sales. As part of our restatement, pre-tax earnings were decreased by $14.5 million ($9.4 million after-tax) and $17.5 million ($11.4 million after-tax) for the three and six months ended June 30, 2006, respectively. This adjustment affected the earnings of the Allison Transmission business.
 
Credit card. We recorded an adjustment to appropriately defer credit card revenue in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” (SAB 104). As a result, we recorded an adjustment in the fourth quarter of 2006 to reverse $127.7 million of revenue which was then allocated to and recorded in the appropriate prior periods. As part of our restatement, pre-tax earnings were increased by $10.7 million ($7 million after-tax) and $20 million ($13 million after-tax) for the three and six months ended June 30, 2006, respectively.
 
We also recorded other less significant out-of-period pre-tax and income tax adjustments, the net effect of which increased pre-tax earnings by $66 million and $52.3 million and increased after-tax earnings by $43.3 million and $42.3 million for the three and six months ended June 30, 2006, respectively.
 
In addition to the above adjustments, to comply with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs” (EITF 00-10), in 2006 GM reclassified shipping and handling costs incurred to transport product to its customers. The correction for this reclassification increased Automotive sales and Automotive cost of sales by $1.1 billion and $2.1 billion for the three and six months ended June 30, 2006, respectively.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements — (continued)
 
The following is a summary of the effect of the restatement on the originally issued Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheet:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2006     June 30, 2006  
    Previously
          Previously
       
    Reported
          Reported
       
    and
          and
       
    Reclassified(a)     Restated     Reclassified(a)     Restated  
    (Dollars in millions, except per share amounts)  
 
Net sales and revenue
                               
Automotive sales
  $ 43,732     $ 44,812     $ 85,736     $ 87,808  
Financial services and insurance revenue
    9,067       9,087       17,922       17,934  
                                 
Total net sales and revenue
    52,799       53,899       103,658       105,742  
                                 
Costs and expenses
                               
Automotive cost of sales
    46,520       47,406       85,732       87,177  
Selling, general, and administrative expense
    3,222       3,219       6,561       6,585  
Financial services and insurance expense
    7,530       7,727       15,605       16,012  
Other expenses
    1,208       1,208       1,208       1,208  
                                 
Total costs and expenses
    58,480       59,560       109,106       110,982  
                                 
Operating income (loss)
    (5,681 )     (5,661 )     (5,448 )     (5,240 )
Automotive and other interest expense
    (723 )     (694 )     (1,407 )     (1,332 )
Automotive interest income and other non-operating income
    1,013       987       1,860       1,783  
                                 
Income before (loss) from continuing operations before income taxes, other equity income and minority interests
    (5,391 )     (5,368 )     (4,995 )     (4,789 )
Income tax benefit
    (1,724 )     (1,715 )     (1,594 )     (1,546 )
Equity income and minority interests, net of tax
    168       159       235       242  
                                 
Loss from continuing operations
    (3,499 )     (3,494 )     (3,166 )     (3,001 )
Income from discontinued operations, net of tax
    120       111       232       220  
                                 
Net loss
  $ (3,379 )   $ (3,383 )   $ (2,934 )   $ (2,781 )
                                 
Basic earnings (loss) per share:
                               
Continuing operations
  $ (6.18 )   $ (6.18 )   $ (5.59 )   $ (5.31 )
Discontinued operations
    .21       .20       .41       .39  
                                 
Total
  $ (5.97 )   $ (5.98 )   $ (5.18 )   $ (4.92 )
                                 
Weighted average common shares outstanding, basic (millions)
    566       566       566       566  
                                 
Diluted earnings (loss) per share:
                               
Continuing operations
  $ (6.18 )   $ (6.18 )   $ (5.59 )   $ (5.31 )
Discontinued operations
    .21       .20       .41       .39  
                                 
Total
  $ (5.97 )   $ (5.98 )   $ (5.18 )   $ (4.92 )
                                 
Weighted average common shares outstanding, diluted (millions)
    566       566       566       566  
                                 
 
 
(a) The previously reported and reclassified columns have been restated to reflect Allision as discontinued operations for the three and six months ended June 30, 2006.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 15.   Restatement of Previously Issued Condensed Consolidated Financial Statements — (concluded)
 
                 
    June 30, 2006  
    Previously
       
    Reported     Restated  
    (Dollars in millions)  
 
ASSETS
Current Assets
               
Cash and cash equivalents
  $ 19,997     $ 19,997  
Marketable securities
    115       115  
                 
Total cash and marketable securities
    20,112       20,112  
Accounts and notes receivable, net
    10,302       7,572  
Inventories
    14,449       14,496  
Equipment on operating leases, net
    6,892       6,891  
Deferred income taxes and other current assets
    10,260       10,376  
                 
Total current assets
    62,015       59,447  
Financing and Insurance Operations Assets
               
Cash and cash equivalents
    2,848       2,848  
Assets held for sale
    274,294       274,267  
Equipment on operating leases, net
    16,533       16,533  
Other assets
    8,408       5,857  
                 
Total Financing and Insurance Operations Assets
    302,083       299,505  
Non-Current Assets
               
Property, net
    38,535       38,639  
Deferred income taxes
    23,083       24,382  
Prepaid pension
    37,594       37,480  
Other assets
    7,196       9,538  
                 
Total non-current assets
    106,408       110,039  
                 
Total Assets
  $ 470,506     $ 468,991  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
               
Accounts payable (principally trade)
  $ 27,674     $ 27,930  
Short-term borrowings and current portion of long-term debt
    1,254       1,340  
Accrued expenses
    48,441       48,516  
                 
Total current liabilities
    77,369       77,786  
Financing and Insurance Operations Liabilities
               
Liabilities related to assets held for sale
    267,551       267,925  
Debt
    12,849       12,849  
Other liabilities and deferred income taxes
    4,827       2,278  
                 
Total Financing and Insurance Operations Liabilities
    285,227       283,052  
Non-Current Liabilities
               
Long-term debt
    31,275       32,946  
Postretirement benefits other than pensions
    30,668       30,668  
Pensions
    11,502       11,498  
Other liabilities and deferred income taxes
    21,744       20,014  
                 
Total non-current liabilities
    95,189       95,126  
                 
Total liabilities
    457,785       455,964  
Minority interest
    1,081       1,084  
Stockholders’ Equity
               
Preferred stock, no par value, authorized 6,000,000, no shares issued and outstanding
           
Common stock, $12/3 par value (2,000,000,000 shares authorized, 756,637,541 and 565,607,779 shares issued and outstanding, respectively)
    943       943  
Capital surplus (principally additional paid-in capital)
    15,306       15,306  
Retained deficit
    (869 )     (117 )
Accumulated other comprehensive loss
    (3,740 )     (4,189 )
                 
Total stockholders’ equity
    11,640       11,943  
                 
Total Liabilities, Minority Interests, and Stockholders’ Equity
  $ 470,506     $ 468,991  
                 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 16.   Segment Reporting
 
GM operates in two businesses, consisting of Automotive (GM Automotive or GMA) and Financing and Insurance Operations (FIO). GM’s four automotive regions consist of GMNA, GME, GMLAAM and GMAP. For the three and six months ended June 30, 2007, GM’s FIO business primarily consists of its 49% share of GMAC’s operating results, which we accounted for under the equity method, and two special purpose entities holding automotive leases previously owned by GMAC and its affiliates that were retained by GM, as well as the elimination of intercompany transactions with GM Automotive and Corporate and Other. For the three and six months ended June 30, 2006, GM’s FIO business consists of the consolidated operating results of GMAC’s lines of business: Automotive Finance Operations, Mortgage Operations; Insurance, and Other, which includes its Commercial Finance business and GMAC’s equity investment in Capmark (previously GMAC Commercial Finance). Also included in FIO is Other Financing, which consists of the equity earnings of financing entities that are not consolidated by GMAC as well as the elimination of intercompany transactions with GM Automotive and Corporate and Other. Corporate and Other includes the elimination of intersegment transactions, certain non-segment specific revenues and expenditures, including costs related to postretirement benefits for Delphi and other retirees, and certain corporate activities.
 
In 2007, GM changed its segment presentation to reflect the elimination of transactions occurring between GM Automotive regions, previously included in the GMNA region, in the Auto Eliminations column within total GMA. These transactions consist primarily of intra-segment vehicle and service parts sales in accordance with GM’s transfer pricing policy. Accordingly, 2006 amounts have been revised for comparability. Additionally, the three and six months ended June 30, 2006, have been reclassified for the retroactive effect of discontinued operations. Refer to Note 3.
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC(a)     Financing     Financing     Total  
    (Dollars in millions)  
 
For the Three Months Ended June 30, 2007
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 28,686     $ 9,102     $ 4,259     $ 3,848     $     $ 45,895     $ 23     $ 45,918     $     $     $     $ 45,918  
Intersegment
    888       456       71       1,598       (3,012 )     1       (1 )                              
                                                                                                 
Total automotive sales
    29,574       9,558       4,330       5,446       (3,012 )     45,896       22       45,918                         45,918  
Financial services and insurance revenue
                                                          894       894       894  
                                                                                                 
Total net sales and revenue
  $ 29,574     $ 9,558     $ 4,330     $ 5,446     $ (3,012 )   $ 45,896     $ 22     $ 45,918     $     $ 894     $ 894     $ 46,812  
                                                                                                 
Depreciation and amortization
  $ 1,446     $ 431     $ 78     $ 131     $ 14     $ 2,100     $ 7     $ 2,107     $     $ 334     $ 334     $ 2,441  
Interest income
  $ 298     $ 166     $ 40     $ 41     $     $ 545     $ (152 )   $ 393     $     $ 126     $ 126     $ 519  
Interest expense
  $ 778     $ 198     $ (59 )   $ 60     $ 3     $ 980     $ (299 )   $ 681     $     $ 207     $ 207     $ 888  
Income tax expense (benefit)
  $ (49 )   $ 98     $ 83     $ 53     $     $ 185     $ (549 )   $ (364 )   $ 15     $ 29     $ 44     $ (320 )
Earnings (losses) of nonconsolidated affiliates
  $ 27     $ 12     $ 8     $ 122     $     $ 169     $     $ 169     $ 118     $     $ 118     $ 287  
Net income (loss)
  $ 68     $ 217     $ 213     $ 227     $     $ 725     $ (30 )   $ 695     $ 139     $ 57     $ 196     $ 891  
Investments in nonconsolidated affiliates
  $ 315     $ 436     $ 133     $ 1,080     $     $ 1,964     $ 35     $ 1,999     $ 7,555     $     $ 7,555     $ 9,554  
Total assets
  $ 128,378     $ 27,411     $ 5,447     $ 14,897     $ (9,335 )   $ 166,798     $ (240 )   $ 166,558     $ 13,059     $ 6,910     $ 19,969     $ 186,527  
Goodwill
  $ 192     $ 500     $     $     $     $ 692     $     $ 692     $     $     $     $ 692  
 


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 16.   Segment Reporting — (continued)
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC     Financing     Financing     Total  
    (Dollars in millions)  
 
For the Three Months Ended June 30, 2006
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 30,100     $ 8,234     $ 3,696     $ 2,834     $     $ 44,864     $ (52 )   $ 44,812     $     $     $     $ 44,812  
Intersegment
    750       506       133       948       (2,337 )                                          
                                                                                                 
Total automotive sales
    30,850       8,740       3,829       3,782       (2,337 )     44,864       (52 )     44,812                         44,812  
Financial services and insurance revenue
                                                    9,048       39       9,087       9,087  
                                                                                                 
Total net sales and revenue
  $ 30,850     $ 8,740     $ 3,829     $ 3,782     $ (2,337 )   $ 44,864     $ (52 )   $ 44,812     $ 9,048     $ 39     $ 9,087     $ 53,899  
                                                                                                 
Depreciation and amortization
  $ 1,477     $ 545     $ 56     $ 94     $ 7     $ 2,179     $ 5     $ 2,184     $ 1,412     $ (775 )   $ 637     $ 2,821  
Interest income
  $ 291     $ 125     $ 26     $ 26     $ (2 )   $ 466     $ (317 )   $ 149     $ 701     $ (157 )   $ 544     $ 693  
Interest expense
  $ 822     $ 159     $ 71     $ 52     $     $ 1,104     $ (410 )   $ 694     $ 4,022     $ (10 )   $ 4,012     $ 4,706  
Income tax expense (benefit)
  $ (2,151 )   $ (9 )   $ 28     $ 104     $     $ (2,028 )   $ (307 )   $ (2,335 )   $ 361     $ 259     $ 620     $ (1,715 )
Earnings (losses) of nonconsolidated affiliates
  $ 93     $ 10     $ 5     $ 99     $     $ 207     $     $ 207     $ (4 )   $     $ (4 )   $ 203  
Net income (loss)
  $ (3,839 )   $ (39 )   $ 139     $ 376     $ (1 )   $ (3,364 )   $ (119 )   $ (3,483 )   $ 787     $ (687 )   $ 100     $ (3,383 )
Investments in nonconsolidated affiliates
  $ 243     $ 365     $ 144     $ 1,060     $     $ 1,812     $ 38     $ 1,850     $     $     $     $ 1,850  
Total assets
  $ 135,839     $ 24,219     $ 4,619     $ 11,679     $ (7,317 )   $ 169,039     $ 447     $ 169,486     $ 308,345     $ (8,840 )   $ 299,505     $ 468,991  
Goodwill
  $ 302     $ 466     $     $     $     $ 768     $     $ 768     $     $     $     $ 768  
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC(a)     Financing     Financing     Total  
    (Dollars in millions)  
 
For the Six Months Ended June 30, 2007
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 56,106     $ 17,186     $ 7,719     $ 7,241     $     $ 88,252     $ 46     $ 88,298     $     $     $     $ 88,298  
Intersegment
    1,431       857       184       2,764       (5,235 )     1       (1 )                              
                                                                                                 
Total automotive sales
    57,537       18,043       7,903       10,005       (5,235 )     88,253       45       88,298                         88,298  
Financial services and insurance revenue
                                                          1,830       1,830       1,830  
                                                                                                 
Total net sales and revenue
  $ 57,537     $ 18,043     $ 7,903     $ 10,005     $ (5,235 )   $ 88,253     $ 45     $ 88,298     $     $ 1,830     $ 1,830     $ 90,128  
                                                                                                 
Depreciation and amortization
  $ 2,829     $ 812     $ 151     $ 278     $ 23     $ 4,093     $ 13     $ 4,106     $     $ 713     $ 713     $ 4,819  
Interest income
  $ 551     $ 321     $ 66     $ 75     $     $ 1,013     $ (371 )   $ 642     $     $ 266     $ 266     $ 908  
Interest expense
  $ 1,522     $ 389     $ (23 )   $ 116     $ 6     $ 2,010     $ (530 )   $ 1,480     $     $ 455     $ 455     $ 1,935  
Income tax expense (benefit)
  $ (75 )   $ 97     $ 136     $ 80     $ (3 )   $ 235     $ (666 )   $ (431 )   $ (4 )   $ 54     $ 50     $ (381 )
Earnings (losses) of nonconsolidated affiliates
  $ 40     $ 20     $ 14     $ 249     $     $ 323     $ 2     $ 325     $ (65 )   $     $ (65 )   $ 260  
Net income (loss)
  $ (10 )   $ 222     $ 414     $ 343     $ (4 )   $ 965     $ (122 )   $ 843     $ 24     $ 86     $ 110     $ 953  

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 16.   Segment Reporting — (concluded)
 
                                                                                                 
                                              Total
                         
                GM
          Auto
    Total
    Corporate
    Excluding
          Other
    Total
       
    GMNA     GME     LAAM     GMAP     Eliminations     GMA     & Other     FIO     GMAC     Financing     Financing     Total  
    (Dollars in millions)  
 
For the Six Months Ended June 30, 2006
                                                                                               
Automotive sales
                                                                                               
External customers
  $ 59,880     $ 15,799     $ 6,679     $ 5,549     $     $ 87,907     $ (99 )   $ 87,808     $     $     $     $ 87,808  
Intersegment
    1,292       996       311       1,619       (4,218 )                                          
                                                                                                 
Total automotive sales
    61,172       16,795       6,990       7,168       (4,218 )     87,907       (99 )     87,808                         87,808  
Financial services and insurance revenue
                                                    17,861       73       17,934       17,934  
                                                                                                 
Total net sales and revenue
  $ 61,172     $ 16,795     $ 6,990     $ 7,168     $ (4,218 )   $ 87,907     $ (99 )   $ 87,808     $ 17,861     $ 73     $ 17,934     $ 105,742  
                                                                                                 
Depreciation and amortization
  $ 2,821     $ 900     $ 110     $ 181     $ 16     $ 4,028     $ 10     $ 4,038     $ 2,923     $ (775 )   $ 2,148     $ 6,186  
Interest income
  $ 593     $ 232     $ 46     $ 51     $ 1     $ 923     $ (633 )   $ 290     $ 1,306     $ (311 )   $ 995     $ 1,285  
Interest expense
  $ 1,621     $ 312     $ 99     $ 107     $     $ 2,139     $ (807 )   $ 1,332     $ 7,836     $ (27 )   $ 7,809     $ 9,141  
Income tax expense (benefit)
  $ (2,225 )   $ 26     $ 85     $ 356     $ (2 )   $ (1,760 )   $ (628 )   $ (2,388 )   $ 583     $ 259     $ 842     $ (1,546 )
Earnings (losses) of nonconsolidated affiliates
  $ 105     $ 17     $ 9     $ 200     $     $ 331     $ 2     $ 333     $ (4 )   $     $ (4 )   $ 329  
Net income (loss)
  $ (4,131 )   $ 20     $ 179     $ 868     $ (5 )   $ (3,069 )   $ (309 )   $ (3,378 )   $ 1,282     $ (685 )   $ 597     $ (2,781 )
 
 
(a) Refer to Note 5 for summarized financial information of GMAC for the three and six months ended June 30, 2007.
 
Note 17.   Transactions with GMAC
 
GM has entered into various operating and financing arrangements with GMAC. The nature and terms of these arrangements were negotiated at arm’s length. The following describes the transactions and related impacts that occurred between GM and GMAC for the three and six month periods ended June 30, 2007 that have not been eliminated in GM’s Condensed Consolidated Financial Statements:
 
Marketing Incentives and Operating Lease Residuals
 
As a marketing incentive, GM may sponsor interest rate support, capitalized cost reduction and residual support programs as a way to lower customers’ monthly lease and retail contract payments. In addition GM may sponsor lease pull-ahead programs to encourage customers to terminate their leases early in conjunction with the acquisition of a new GM vehicle.
 
Under the interest rate support program, GM pays an amount to GMAC at the time of lease or retail contract origination to adjust the interest rate implicit in the lease or retail contract below GMAC’s standard interest rate. Such marketing incentives are referred to as rate support or subvention and the amount paid at contract origination represents the present value of the difference between the customer rates and the GMAC standard rates.
 
Under the capitalized cost reduction program, GM pays an amount to GMAC at the time of lease or retail contract origination to reduce the principal amount implicit in the lease or retail contract below GM’s standard MSRP (manufacturers suggested retail price) value.
 
Under the residual support program, the customers’ contractual residual value is adjusted above GMAC’s standard residual values. GM reimburses GMAC to the extent that sales proceeds are less than the customers’ contractual residual value, limited to GMAC’s standard residual value. As it relates to U.S. lease originations and U.S. balloon retail contract originations occurring after April 30, 2006 that GMAC retained after the consummation of the GMAC sale, GM agreed to begin payment of the present value of the expected residual support owed to GMAC at the time of contract origination as opposed to after contract termination when the related used vehicle is sold. The residual support amount owed to GMAC is adjusted as the contracts terminate and, in cases where the estimate is adjusted, GM may be obligated to pay GMAC or GMAC may be obliged to reimburse GM. At June 30,


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 17.   Transactions with GMAC — (continued)
 
2007 the maximum additional amount that could be paid by GM under the residual support programs is approximately $662 million. GM’s assessment is that it would be unlikely that the proceeds from the entire portfolio of assets would be lower than both the contractual residual value and GMAC’s standard residual rates.
 
Under the lease pull-ahead program, customers are encouraged to terminate their leases early in conjunction with the acquisition of a new GM vehicle. As part of this program, GMAC waives the customer’s remaining payment obligation under their current lease, and GM compensates GMAC for any foregone revenue from the waived payments. Since these programs generally accelerate the re-sale of the vehicle, the proceeds are typically higher than otherwise would have been realized had the vehicle been sold at the contract maturity. The reimbursement to GMAC for the foregone payments is reduced by the amount of this benefit. GM makes anticipated payments to GMAC at the end of each month following lease termination. As with residual support payments discussed above, these estimates are adjusted to actual once all vehicles that could have been pulled ahead have terminated and the vehicles have been resold. To the extent that the original estimates were adjusted, GM or GMAC may be obligated to pay each other the difference, as appropriate under the lease pull-ahead programs.
 
In addition to the interest rate support, capitalized cost reduction, residual support and lease pull-ahead programs, GM also participates in a risk sharing arrangement that was amended on November 30, 2006 and applies to all new lease contracts. GM is responsible for risk sharing on returns of lease vehicles in the U.S. and Canada whose resale proceeds are less than standard GMAC residual values, subject to a limitation. GM will also pay GMAC a quarterly leasing payment in connection with the agreement beginning in the first quarter of 2009 and ending in the fourth quarter of 2014. At June 30, 2007, the maximum amount guaranteed under the risk sharing arrangement is $781 million and would only be paid in the unlikely event that the proceeds from all outstanding lease vehicles would be lower than GMAC’s standard residual rates, subject to the limitation.
 
In accordance with GM’s revenue recognition accounting policy, the marketing incentives, apart from the lease pull-ahead programs, as well as the risk sharing arrangement, are accrued as reductions to Automotive sales at the time of the sale of the vehicle to the dealers based on the estimated GMAC lease and retail contract penetration. The lease pull-ahead programs are accrued as reductions to Automotive sales when the specific lease pull-ahead program is announced. GM paid $1.2 billion and $2.2 billion under these programs during the three and six months ended June 30, 2007, respectively.
 
The terms and conditions of interest rate support, capitalized cost reduction, residual support and lease pull-ahead programs, as well as the risk sharing arrangement, are included in the U.S., Canadian, and International Consumer Financing Services Agreements, which expire in November 2016.
 
Operating Lease Assets Transferred to GM by GMAC
 
In November 2006, GMAC transferred to GM certain U.S. lease assets, along with related debt and other assets. GMAC retained an investment in a note, which had a balance of $406 million at June 30, 2007, and is secured by the lease assets transferred to GM. GMAC will continue to service the leased assets and related debt on behalf of GM and receive a servicing fee. GMAC is obligated as servicer to repurchase any leased asset that is in breach of any of the covenants in the securitization agreements. In addition, in a number of the transactions securitizing the lease assets, the trusts issued one or more series of floating rate debt obligations and entered into derivative transactions to eliminate the market risk associated with funding the fixed payment lease assets with floating interest rate debt. To facilitate these securitization transactions, GMAC entered into secondary derivative transactions with the primary derivative counterparties, essentially offsetting the primary derivatives. As part of the transfer, GM assumed the rights and obligations of the primary derivative while GMAC retained the secondary, leaving both companies exposed to market value movements of their respective derivatives. GM and GMAC


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 17.   Transactions with GMAC — (continued)
 
subsequently entered into derivative transactions with each other that are intended to offset the exposure each party has to its component of the primary and secondary derivatives.
 
Exclusivity Arrangement
 
Subject to GMAC’s fulfillment of certain conditions, GM has granted GMAC exclusivity for U.S., Canadian, and international GM-sponsored consumer and wholesale marketing incentives for GM products in specified markets around the world, with the exception of Saturn branded products. In return for this exclusivity, GMAC will pay GM an annual exclusivity fee of $105 million ($75 million for the U.S. retail business, $15 million for the Canadian retail business, $10 million for retail business in international operations, and $5 million for the dealer business) and is committed to provide financing to GM customers and dealers consistent with historical practices. The amount of exclusivity fee revenue recognized by GM for the three and six months ended June 30, 2007 was $26.3 million and $52.5 million, respectively.
 
Marketing Service Agreement
 
GM and GMAC have entered into a 10 year marketing, promoting, advertising, and customer support arrangement related to GM products, GMAC products and the retail financing for GM products. This agreement expires in November 2016.
 
Royalty Arrangement
 
For certain insurance products, GM and GMAC have entered into 10 year intellectual property license agreements giving GMAC the right to use the GM name on certain insurance products. In exchange, GMAC will pay a royalty fee of 3.25% of revenue, net of cancellations, related to these products with a minimum annual guarantee of $15 million. The amount of royalty recognized for the three and six months ended June 30, 2007 was $4.4 million and $8.9 million, respectively.
 
Shared and Transition Services Agreement
 
GM and GMAC entered into a Shared and Transition Services Agreement to continue to provide to each other global support services, primarily treasury, tax, real estate, and human resources, for a transition period of 1 to 2 years from the transaction date. GM expects that when the Shared and Transition Services Agreement expires, GM and GMAC will either renew this services agreement or GM and GMAC will perform the related services internally or potentially outsource to other providers.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Continued)

Note 17.   Transactions with GMAC — (concluded)
 
Balance Sheet
 
A summary of the balance sheet effects of transactions with GMAC at June 30, 2007 are as follows (dollars in millions):
 
         
Assets:
       
Accounts and notes receivable(a)
  $ 1,245  
Other assets(b)
    97  
Liabilities:
       
Accounts payable(c)
    621  
Short-term borrowings and current portion of long-term debt(d)
    2,870  
Accrued expenses(e)
    63  
Long-term debt(f)
    366  
 
 
(a) Represents wholesale settlements due from GMAC, amounts owed by GMAC with respect to the operating lease assets transferred to GM, and the exclusivity fee and royalty arrangement as discussed above.
 
(b) Represents primarily distributions due from GMAC on GM’s Preferred Membership Interests.
 
(c) Represents amounts accrued with respect to interest rate support, capitalized cost reduction, residual support and lease pull-ahead programs and well as the risk sharing arrangement.
 
(d) Represents wholesale financing, sales of receivable transactions and the short term portion of term loans provided to certain dealerships wholly-owned by GM or in which GM has an equity interest. In addition, it includes borrowing arrangements with Adam Opel and arrangements related to GMAC’s funding of GM company-owned vehicles, rental car vehicles awaiting sale at auction, and funding of the sale of GM vehicles in which GM retains title while the vehicles are consigned to GMAC or dealers in the United Kingdom. The financing to GM remains outstanding until the title is transferred to the dealers. Also included is the short-term portion of a note provided to a wholly-owned subsidiary of GM holding debt related to the operating leases transferred to GM and a note related to the overpayment of approximately $317 million of income taxes by GMAC. These taxes were paid by GMAC to GM and are expected to be refunded to GMAC on or before December 15, 2007.
 
(e) Represents mainly interest accrued on the transactions in (d) above.
 
(f) Represents primarily the long-term portion of term loans and a note payable with respect to the operating leases transferred to GM discussed in (d) above.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Concluded)
 

Statement of Operations
 
A summary of the income statement effects of transactions with GMAC are as follows:
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2007     June 30, 2007  
    (Dollars in millions)  
 
Net sales and revenue(a)
  $ 69     $ 125  
Cost of sales and other expenses
          1  
Automotive interest income and other non-operating income(b)
    105       212  
Derivatives(c)
    (6 )     (1 )
Interest expense(d)
    73       153  
Servicing expense(e)
    45       95  
 
 
(a) Represents primarily the sale of vehicles to a subsidiary of GMAC for a GM employee lease program.
 
(b) Represents income on GM’s Preferred Membership Interest in GMAC, exclusivity and royalty fee income, as well as reimbursements by GMAC for certain services provided by GM. Included in this amount is rental income related to GMAC’s primary executive and administrative offices located in the Renaissance Center in Detroit, Michigan. The lease agreement expires on November 30, 2016.
 
(c) Represents gains recognized in connection with a derivative transaction entered into with GMAC as the counterparty.
 
(d) Represents interest incurred on term loans, notes payable and wholesale settlements.
 
(e) Represents servicing fees paid to GMAC on the automotive leases retained by GM.
 
Note 18.   Subsequent Events
 
Antwerp Plant Workforce Reduction
 
On July 1, 2007, GM and the European hourly workers union agreed upon the terms of the employee separation program for the Antwerp, Belgium facility, which primarily consists of personnel reductions of 1,861 employees (180 salaried) with permanent contracts.
 
It is expected that this program will consist primarily of two voluntary separation programs. The first program will be an early retirement package for employees over the age of 50. The second is a buy-out program for employees not over the age of 50 and therefore not eligible for early retirement. If these programs do not reach the targeted reduction of 1,861 full time employees then the parties will enter into negotiations to implement an involuntary program designed to reach the target reductions. The total cost of these separations is estimated at $300 million. The charge for the separation programs will depend on the timing of employee acceptances. Management expects the charge to be primarily recorded in the third and fourth quarters of 2007.


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GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) — (Concluded)
 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
General Motors Corporation (GM) is primarily engaged in the worldwide development, production, and marketing of automobiles, consisting of cars and trucks. GM develops, manufactures, and markets vehicles worldwide through four automotive regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP) (collectively the Automotive business). Also, GM’s finance and insurance operations are primarily conducted through GMAC, the successor to General Motors Acceptance Corporation, a wholly-owned subsidiary until the end of November 2006 when GM sold a 51% controlling ownership interest in GMAC to a consortium of investors (the GMAC Transaction). Since the GMAC Transaction, GM has accounted for its 49% ownership interest in GMAC using the equity method. GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential mortgage services, automobile service contracts, personal automobile insurance coverage and selected commercial insurance coverage.
 
From time to time, GM discusses issues of shared interest such as possible transactions with other parties, including other vehicle manufacturers. Frequently these proposals do not come to fruition. We do not confirm or comment on any potential transactions or other matters unless, and until, we determine that disclosure is appropriate.
 
On June 28, 2007, GM entered into a definitive agreement pursuant to which GM will sell the commercial and military operations of our Allison Transmission (Allison) business for a purchase price of approximately $5.6 billion in cash plus assumed liabilities. The purchase price is subject to adjustment based on the amount of Allison’s (1) net working capital and (2) debt on the closing date. Based on these amounts, a payment may be due from either party within approximately thirty-five days after the closing date. Any such payment will be an adjustment to the amount of gain recognized on the transaction. Allison, a division of GM’s Powertrain Operations, is a global leader in the design and manufacture of commercial and military automatic transmissions and a premier global provider of commercial vehicle automatic transmissions for on-highway, including trucks, specialty vehicles, buses and recreational vehicles, off-highway and military vehicles, as well as hybrid propulsion systems for transit buses. GM Powertrain Operations Baltimore facility, which manufactures automatic transmissions primarily for GM trucks and hybrid propulsion system, will be retained by GM. GM expects to recognize a gain on the sale of Allison in the range of $5.1 billion to $5.4 billion. GM expects to close the sale of Allison in the third quarter of 2007, subject to regulatory approval. The results of operations and cash flows of Allison have been reported in the Condensed Consolidated Financial Statements as discontinued operations for all periods presented.
 
Financial Results
 
Consolidated net sales and revenue was $46.8 billion during the three months ended June 30, 2007 as compared to $53.9 billion during the three months ended June 30, 2006. Consolidated net income was $1 billion for the three months ended June 30, 2007, an increase of $4.3 billion from the three months ended June 30, 2006. For the six months ended June 30, 2007, GM’s consolidated net sales and revenues were $90.1 billion, a decrease of $15.6 billion, or 14.7% below the $105.7 billion for the six months ended June 30, 2006. Since the sale of a 51% controlling interest in GMAC on November 30, 2006, GM began accounting for its remaining interest in GMAC using the equity method. Therefore, GM’s consolidated results reflect its 49% share of the operating results of GMAC on an equity basis for the three and six months ended June 30, 2007 as compared to the operating results of GMAC on a consolidated basis for the comparable periods in 2006. A discussion of our regional automotive operating results and FIO financial review follows.


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Strategy
 
As GM previously described in more detail in its Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K), our top priorities continue to be improving our business in North America and achieving global competitiveness in an increasingly global environment, thus positioning GM for sustained profitability and growth in the long term, while at the same time maintaining strong liquidity.
 
Our growth and profitability priorities for 2007 are straightforward:
 
Continue to execute the North America turnaround plan. Our first priority in 2007 is improving our earnings and cash flow, particularly in GMNA, the traditional core of our operations and financial results. Our turnaround plan for GMNA is built on four elements: achieve and sustain product excellence; revitalize our sales and marketing strategy; accelerate cost reductions and quality improvements; and address the health care/legacy cost burden. Our primary revenue related goals for 2007 include improving our contribution margin in North America by selling a more profitable vehicle product mix which we are pursuing by emphasizing the quality and value of our vehicles, reducing reliance on sales incentives and increasing our marketing efforts on our newly launched products. Our primary cost related goals for 2007 in North America remain addressing our legacy cost burden and reducing our structural costs. We are on track to achieve, beginning in 2007, our announced target of reducing our annual structural costs in GMNA and Corporate and Other by $9 billion, on average, less than those costs in 2005. We remain focused on repositioning our business for long-term competitiveness, including achieving a successful resolution to the issues related to the bankruptcy proceedings of Delphi Corporation (Delphi), a major supplier and former subsidiary, and a new collective bargaining agreement with the International Union, United Auto, Aerospace and Agricultural Implement Workers of America (UAW) in 2007 that benefits both GM and its hourly employees.
 
Grow Aggressively in Emerging Markets. Our second key priority is to focus on emerging markets and capitalize on the growth in areas such as China, India, and the Southeast Asian region, as well as Russia, Brazil, the Middle East, and the Andean region. Vehicle sales and revenues continue to grow globally, with the strongest growth in these emerging markets. In response, we are planning to expand capacity in China, Russia, and India, and to pursue additional growth opportunities through our relationships with Shanghai General Motors Co., Ltd. and GM Daewoo Auto & Technology Company (GM Daewoo). During the six months ended June 30, 2007, key metrics such as net margin, operating income, and market share show continued growth across key markets.
 
Continue to Drive the Benefits of Managing the Business Globally. Our third key priority is to continue to integrate our operations around the world to manage our business on a global basis. GM has been focusing on restructuring its operations and has already taken a number of steps to globalize our principal business functions such as product development, manufacturing, powertrain, and purchasing, to improve our performance in an ever-more competitive environment.
 
Continue to Develop and Implement GM’s Advanced Propulsion Strategy. Our fourth key priority is to continue to develop and advance our alternative propulsion strategy, focused on fuel and other technologies, making energy diversity and environmental leadership a critical element of our ongoing strategy. In addition to continuing to improve the efficiency of our internal combustion engines, we are focused on the introduction of propulsion technologies which utilize alternative fuels and have intensified our efforts to displace traditional petroleum-based fuels. In June 2007, we announced two contracts for advanced lithium-ion battery development to support the development of the electrically powered Chevy Volt as a production vehicle.
 
Improve Business Results — Earnings and Cash Flow. We anticipate improved automotive earnings and cash flow in 2007, resulting from further cost reductions and increased vehicle sales, particularly of newly introduced models. In addition to our other priorities outlined above, we are focused on the continued improvement of our balance sheet and liquidity position. On June 28, 2007, we announced that we have agreed to sell the commercial and military business of our Allison Transmission division for $5.6 billion in cash plus assumed liabilities. We anticipate that this sale will close during the third quarter of 2007, subject to regulatory approval.


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Strategy — (concluded)
 
Basis of Presentation
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) gives effect to the restatement discussed in Note 15 to the Condensed Consolidated Financial Statements and should be read in conjunction with GM’s 2006 Form 10-K. Additionally, the Condensed Consolidated Financial Statements have been further adjusted as GM has entered into a definitive agreement to sell the commercial and military operations of our Allison Transmission business. The operations of Allison have been accounted for as discontinued operations for the three and six months ended June 30, 2006. For additional information, relating to the sale of Allison, refer to Note 3.
 
GM operates in two businesses, consisting of Automotive (GM Auto or GMA) and Financing and Insurance Operations (FIO).
 
GM’s Auto business consists of GMNA, GME, GMLAAM, GMAP, and intra-segment eliminations classified within Auto Eliminations which together constitute GM Automotive (GMA).
 
GM’s FIO business consists of the operating results of GMAC for the three and six months ended June 30, 2006 on a consolidated basis and includes GM’s 49% share of GMAC’s operating results for the three and six months ended June 30, 2007 on an equity method basis. FIO also includes Other Financing which for the three and six months ended June 30, 2006 includes financing entities that were not consolidated by GMAC and for the three and six months ended June 30, 2007, includes certain assets with respect to automotive leases previously owned by GMAC and its affiliates having a net book value of approximately $3.6 billion at June 30, 2007.
 
Consistent with industry practice, our market share information includes estimates of sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis.


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Consolidated Results of Operations
 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
    (Dollars in millions)     (Dollars in millions)  
 
Net sales and revenue
                               
Automotive sales
  $ 45,918     $ 44,812     $ 88,298     $ 87,808  
Financial services and insurance revenue
    894       9,087       1,830       17,934  
                                 
Total net sales and revenue
    46,812       53,899       90,128       105,742  
                                 
Automotive cost of sales
    41,674       47,406       80,407       87,177  
Selling, general, and administrative expense
    3,293       3,219       6,604       6,585  
Financial services and insurance expense
    811       7,727       1,694       16,012  
Other expenses
    575       1,208       575       1,208  
                                 
Operating income (loss)
    459       (5,661 )     848       (5,240 )
Equity in income (loss) of GMAC LLC
    118             (65 )      
Automotive interest and other income (expense)
    (126 )     293       (489 )     451  
                                 
Income (loss) from continuing operations before income taxes, other equity income and minority interests
    451       (5,368 )     294       (4,789 )
Income tax benefit
    (320 )     (1,715 )     (381 )     (1,546 )
Equity income and minority interests, net of tax
    13       159       67       242  
                                 
Income (loss) from continuing operations
    784       (3,494 )     742       (3,001 )
Income from discontinued operations, net of tax
    107       111       211       220  
                                 
Net income (loss)
  $ 891     $ (3,383 )   $ 953     $ (2,781 )
                                 
Net margin from continuing operations
    1.7 %     (6.5 )%     .8 %     (2.8 )%
 
GM’s consolidated net sales and revenue was $46.8 billion in the second quarter of 2007 compared to $53.9 billion in the second quarter of 2006. GM’s consolidated income from continuing operations was $784 million for the second quarter of 2007, an increase of $4.3 billion from the second quarter of 2006. The reduction in revenue was primarily due to GM’s sale of a 51% controlling ownership interest in GMAC in November of 2006. Since then, GM has accounted for its 49% ownership interest in GMAC using the equity method. Therefore, GM’s consolidated results reflect its 49% share of the operating results of GMAC on an equity basis in the second quarter of 2007, as compared to the operating results of GMAC on a consolidated basis for the comparable period of 2006. Revenue and net income related to GMAC’s operations included in GM’s consolidated results in the second quarter of 2006 were $9 billion and $788 million, respectively. The increase in income from continuing operations was primarily due to improved automotive results. Further information on each of GM’s businesses and geographic regions are discussed below.
 
GM’s consolidated net sales and revenue for six months was $90.1 billion and $105.7 billion for 2007 and 2006, respectively. GM’s consolidated income from continuing operations was $742 million for the six months ended June 30, 2007, and a loss of $3 billion for the corresponding period in 2006. The reduction in revenue was primarily due to GM’s sale of a 51% controlling ownership interest in GMAC in November of 2006. The improved income from continuing operations was driven by higher automotive earnings.


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Changes in Consolidated Financial Condition
 
Accounts and notes receivable, net
 
Accounts and notes receivable at June 30, 2007 was $10.2 billion as compared to $8.2 billion at December 31, 2006, an increase of $2.0 billion or 24.5%. This increase is primarily due to the lower receivable balance at GMNA of $1.3 billion on December 31, 2006 as a result of the seasonal plant shutdowns during the holiday season that significantly reduce shipments during the last 2 weeks of the period while we continue to collect existing receivables. GME and GMLAAM contributed an additional $200 million and $125 million to the increased receivables balance due to increased unit sales. GMAP’s receivables balance increased $148 million, primarily due to increased dividends receivable from its nonconsolidated affiliate, Shanghai General Motors Co., Ltd.
 
Inventories
 
Inventories at June 30, 2007 were $15.1 billion as compared to $13.9 billion at December 31, 2006, an increase of $1.2 billion or 8.3%. The increase in inventory at June 30, 2007 is primarily due to a $900 million increase in finished product at GME, driven by a 43,000 vehicle inventory increase together with mix and currency effects, Additionally, GMAP and GMLAAM’s inventory balances have each increased approximately $350 million to support sales forecasts for the rest of the year. GMNA has also increased its raw materials balance by $300 million to support future production. These increases in the inventory balance have been offset by a reduction of daily rental purchases at GMNA of $450 million.
 
Financing equipment on operating leases, net
 
Equipment on operating leases, net at June 30, 2007 was $9.1 billion as compared to $11.8 billion at December 31, 2006, a decrease of $2.7 billion or 22.5%. The decrease is due to the termination of vehicle leases that are not being replaced.
 
Automotive accounts payable (principally trade)
 
Automotive accounts payable at June 30, 2007 was $30.7 billion as compared to $26.9 billion at December 31, 2006, an increase of $3.8 billion or 14.2%. The increase of $3.8 billion in accounts payable is primarily due to normal resumption in production as compared to production volumes during the year end shut down period. The increase in automotive payables related to volume increases at each of the regions is approximately, GMNA, $1.8 billion, GME, $400 million, GMLAAM, $200 million, and GMAP, $700 million. During the shut down period purchasing is significantly reduced while GM continues to pay suppliers on their normal payment terms.
 
Financing debt
 
Financing debt at June 30, 2007 was $7.1 billion as compared to $9.4 billion at December 31, 2006, a decrease of $2.3 billion or 24.4%. The decrease in debt is primarily due to the repayment of the secured debt associated with the bankruptcy-remote subsidiaries that hold the equity interests in a number of trusts that own leased vehicles.
 
Financing other liabilities and deferred income taxes
 
Financing other liabilities and deferred income taxes at June 30, 2007 was $855 million as compared to $2.1 billion at December 31, 2006, a decrease of $1.2 billion or 60%. The decrease is primarily related to a $1 billion payment to GMAC for amounts owed under the GMAC sales agreement to restore their tangible equity balance to $14.4 billion.


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GM Automotive Operations Financial Review
 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
    (Dollars in millions)  
 
Total net sales and revenue
  $ 45,896     $ 44,864     $ 88,253     $ 87,907  
Automotive cost of sales
    41,650       47,265       80,294       86,833  
Selling, general, and administrative expense
    3,134       3,042       6,278       6,201  
                                 
Operating income (loss)
    1,112       (5,443 )     1,681       (5,127 )
Automotive interest and other income (expense)
    (322 )     (224 )     (759 )     (156 )
                                 
Income (loss) before income taxes, other equity income and minority interests
    790       (5,667 )     922       (5,283 )
Income tax expense (benefit)
    185       (2,028 )     235       (1,760 )
Equity income and minority interests, net of tax
    13       164       67       234  
                                 
Income (loss) from continuing operations
    618       (3,475 )     754       (3,289 )
Income from discontinued operations
    107       111       211       220  
                                 
Net income (loss)
  $ 725     $ (3,364 )   $ 965     $ (3,069 )
                                 
Net margin from continuing operations
    1.3 %     (7.7 )%     .9 %     (3.7 )%
     
    (Volume in thousands)
GM production volume(1)
    2,409       2,420       4,749       4,835  
Vehicle unit sales(2)
                               
Industry
    18,125       17,438       35,548       34,293  
GM
    2,406       2,396       4,674       4,595  
GM as a% of industry
    13.3 %     13.7 %     13.1 %     13.4 %
 
 
(1) Production volume represents the number of vehicles manufactured from GM’s assembly facilities, and also includes vehicles produced by joint ventures.
 
(2) Vehicle unit sales primarily represent sales to the ultimate customer.
 
GM’s management evaluates its Automotive business and makes certain decisions using supplemental categories for variable expenses and non-variable expenses. GM believes that because these categories provide them with useful information, investors would find it beneficial to have the opportunity to view the business in a similar manner.
 
Management believes that contribution costs, structural costs, and impairment and restructuring charges provide meaningful supplemental information regarding our expenses because they place Automotive expenses into categories that allow GM management to assess the cost performance of GMA. GM management uses these categories to evaluate GM’s expenses and believes these categories allow GM management to readily view operating trends, perform analytical comparisons, benchmark expenses among geographic regions, and assess whether the turnaround and globalization strategy for cutting costs are on target. GM management uses these categories for forecasting purposes, evaluating management, and determining its future capital investment allocations. Accordingly, GM believes these categories are useful to investors in allowing for greater transparency of supplemental information used by management in its financial and operational decision-making.
 
While GM believes that contribution costs, structural costs, and impairment and restructuring charges provide useful information, there are limitations associated with the use of these categories. Contribution costs, structural costs, and impairment and restructuring charges may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. As a result,


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GM Automotive Operations Financial Review — (continued)
 
these categories have limitations and should not be considered in isolation from, or as a substitute for, other measures such as Automotive cost of sales and Selling, general, and administrative expense. GM compensates for these limitations by using these categories as supplements to Automotive cost of sales and Selling, general, and administrative expense.
 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
    (Dollars in millions)  
 
Automotive net sales and revenue
  $ 45.9     $ 44.9     $ 88.3     $ 87.9  
Contribution costs(a)
    32.0       31.3       61.2       60.8  
Structural costs(b)
    12.6       12.8       25.1       25.8  
Impairment and restructuring charges(c)
    .2       6.2       .3       6.4  
 
 
(a) Contribution costs are expenses that vary with production. The amount of contribution costs included in Automotive cost of sales is $31.7 billion and $31 billion in the second quarters of 2007 and 2006, respectively. These costs primarily consist of material costs, freight, and policy and warranty expenses. The amount of contribution costs classified in Selling, general and administrative expense is $.3 billion in the second quarters of both 2007 and 2006, which were incurred primarily in connection with our dealer advertising programs. The amount of contribution costs included in Automotive cost of sales is $60.7 billion and $60.2 billion in the first six months of 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, $.5 billion and $.6 billion, respectively of contribution costs, primarily related to advertising, were included in Selling, general and administrative expense.
 
(b) Structural costs are expenses that do not generally vary in direct proportion with production and are recorded in both Automotive cost of sales and Selling, general, and administrative expense. Such costs include manufacturing labor, pension and OPEB costs, engineering expense, and marketing related costs. Certain costs related to restructuring and impairments that are included in Automotive cost of sales are also excluded from structural costs. The amount of structural costs included in Automotive cost of sales was $9.7 billion and $10.1 billion in the second quarter of 2007 and 2006, respectively, and the amount of structural costs included in Selling, general, and administrative expense is approximately $2.9 billion in 2007 and $2.7 billion in 2006. The amount of structural costs included in Automotive cost of sales was $19.3 billion and $20.2 billion in the first six months of 2007 and 2006, respectively, and the amount of structural costs included in Selling, general, and administrative expense is approximately $5.8 billion and $5.6 billion in the same respective periods.
 
(c) The amount of impairment and restructuring charges included in Automotive cost of sales was $.2 billion and $6.2 billion in the second quarters of 2007 and 2006, respectively, and $.3 billion and $6.4 billion for the six months ended June 30, 2007 and 2006, respectively. See below for further discussion.
 
Industry Global Vehicle Sales
 
Worldwide industry vehicle unit sales increased 700,000 units during the three months ended June 30, 2007, to 18.1 million units, compared to 17.4 million units during the three months ended June 30, 2006. Industry sales decreased in North America by 94,000 units, to 5.3 million units during the three months ended June 30, 2007, compared to 5.4 million units during the three months ended June 30, 2006. All other regions experienced growth in industry unit volume compared to 2006, particularly the Asia Pacific region, up more than 400,000 units to 5.1 million units in 2007, and the Latin America/Africa/Mid-East region, up nearly 300,000 units to 1.7 million units in 2007.
 
For the six months ended June 30, 2007, worldwide industry vehicle unit sales increased over 1.3 million units to 35.5 million units, compared to 34.3 million units during the six months ended June 30, 2006. Industry sales decreased in North America 161,000 units, to 10 million units during the six months ended June 30, 2007. All other regions experienced growth in industry unit volume compared to 2006, with the Asia Pacific region up more than


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GM Automotive Operations Financial Review — (continued)
 

Industry Global Vehicle Sales — (continued)
 
700,000 units, the Latin America/Africa/Mid-East region up more than 450,000 units, and Europe up more than 200,000 units in 2007.
 
GM Global Vehicle Sales
 
Worldwide GM vehicle unit sales were 2.4 million units, an increase of 10,000 units compared to the three months ended June 30, 2006. GME, GMLAAM, and GMAP all reported sales unit increases, while a sales decline was reported in GMNA. Global market share for GM was 13.3% compared to 13.7% during the three months ended June 30, 2006. Market share declines occurred in GMNA due to planned reductions in sales to rental car fleet customers, a soft U.S. market, and loss of truck sales as the market shifted to more cars. This decline was partially offset by market share gains in GME and GMLAAM.
 
For the six months ended June 30, 2007, worldwide GM vehicle unit sales increased 78,000 units, to 4.7 million units, compared to 4.6 million units for the six months ended June 30, 2006. Increases at GME, GMLAAM, and GMAP more than offset a sales decline in GMNA. For the first half of 2007, global market share for GM was 13.1% compared to 13.4% for the six months ended June 30, 2006. As in the second quarter of 2007, market share declines in GMNA were partially offset by market share gains in GME, GMLAAM and GMAP.
 
GM global production volume for the three months ended June 30, 2007 was 2.4 million units, a decrease of 11,000 units from the three months ended June 30, 2006. This was due to decreases at GMNA and GME of 96,000 units and 31,000 units, respectively, which were partially offset by production increases at GMLAAM and GMAP of 27,000 and 89,000 units, respectively.
 
For the six months ended June 30, 2007, GM’s global production volume for was 4.7 million units, a decrease of 86,000 units from the year earlier period. A decrease at GMNA of 288,000 units and a slight decline in GME were partially offset by production increases at GMLAAM and GMAP.
 
Automotive Net Sales and Revenue
 
GM automotive net sales and revenue was a quarterly record of $45.9 billion in the second quarter of 2007, an increase of $1 billion from the comparable prior period. Revenue improvements at GME, GMLAAM and GMAP offset a revenue decline at GMNA. Net pricing was also positive at GMNA and GME and the weak U.S. dollar against most foreign currencies had a favorable impact on global revenue.
 
Total net sales and revenue for GMA was $88.3 billion for the six months ended June 30, 2007, an increase of $.3 billion from the comparable period of 2006. This increase was driven by a significant revenue increase in GMAP, with increases also in GME and GMLAAM, mostly offset by a decrease in revenue in GMNA.
 
Contribution Costs
 
Contribution costs in the second quarter of 2007 were $32.0 billion, an increase of $.7 billion from the comparable period of 2006. Higher prices for steel and non-ferrous metals resulted in an increase of $.3 billion in material costs from the prior period. A weak U.S. dollar against most foreign currencies also contributed $.6 billion to higher contribution costs. Policy and warranty and vehicle recall campaign expense increased in the second quarter of 2007 by $.6 billion primarily due to an adjustment made in the second quarter of 2006 to pre-existing warranties, and costs associated with the GMNA extended warranty program announced in the third quarter of 2006. Contribution costs decreased by $.8 billion as a result of lower global sales volumes including the effect of mix associated with new vehicle launches and lower volumes at GMNA.
 
Contribution costs for the first six months of 2007 were $61.2 billion, an increase of $.4 billion over the first six months of 2006. Cost increases relating to vehicle content, the weak U.S. dollar, price increases for non-ferrous metals and steel, and policy, warranty and campaign expense drove the cost increase, which was partially offset by


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GM Automotive Operations Financial Review — (continued)
 

Contribution Costs — (continued)
 
lower contribution costs in the six months ended June 30, 2007 due to reduced unit sales volume at GMNA and GME.
 
Structural Costs
 
Automotive structural costs were $12.6 billion in the second quarter of 2007, a reduction of $.2 billion from the second quarter of 2006. Contributing to this reduction were savings on retiree pension/OPEB of $.8 billion, primarily due to GM’s UAW Health Care Settlement Agreement, as well as manufacturing savings of approximately $.3 billion from lower hourly headcount levels driven by the UAW Attrition Program. Global product engineering and development expense was higher by $.4 billion in the second quarter of 2007, reflecting increased global vehicle development spending. Structural costs were higher by $.5 billion in the second quarter of 2007 compared to 2006 due to the impact of the weak U.S. dollar and higher spending related to production and sales volume increases at GMLAAM and GMAP.
 
Automotive structural costs for the six months ending June 30, 2007 were $25.1 billion, a reduction of $.7 billion from same period in 2006. Expenses in the six months ended June 30, 2007 were lower by $2.6 billion in GMNA, resulting from reduced OPEB, pension, and manufacturing costs relating to the UAW health care settlement and UAW attrition program. The increase in costs related to the weak U.S. dollar offset a portion of the savings in GMNA. Global engineering costs increased consistent with the strategy to support global vehicle program development, and certain costs increased in line with volume expansion, particularly in GMLAAM and GMAP.
 
Impairment and Restructuring Charges
 
GM incurred certain expenses primarily related to restructuring initiatives and asset impairments, which are included in Automotive cost of sales. Such costs totaled $.2 billion and $6.2 billion for the quarters ended June 30, 2007 and 2006, respectively.