management’s discussion and analysis GE OPERATING PROFIT is earnings from continuing operations before interest and other financial charges, and income taxes. GE operating profit excluding the effects of pension costs was $15.5 billion in 2006, up from $13.6 billion in 2005 and $11.3 billion in 2004 (15.2%, 14.8% and 13.5% of GE industrial revenues in 2006, 2005 and 2004, respectively). The increase in 2006 operating profi t reflected higher productivity (principally Industrial and Healthcare), volume (Infrastructure) and prices (Infrastructure), partially offset by higher material and other costs across all segments. The increase in 2005 operating profi t reflected higher productivity (principally Healthcare and Infrastructure), volume (Infrastructure and NBC Universal) and prices (Industrial), partially offset by higher material and other costs across all segments. INTEREST ON BORROWINGS AND OTHER FINANCIAL CHARGES amounted to $19.3 billion, $15.1 billion and $11.6 billion in 2006, 2005 and 2004, respectively. Substantially all of our borrowings are through GECS, where interest expense was $18.1 billion, $14.2 billion and $11.1 billion in 2006, 2005 and 2004, respectively. Changes over the three-year period reflected increased average borrowings and increased interest rates. GECS average borrowings were $389.0 billion, $346.1 billion and $319.2 billion in 2006, 2005 and 2004, respectively. GECS average composite effective interest rate was 4.7% in 2006, compared with 4.2% in 2005 and 3.5% in 2004. Proceeds of these borrowings were used in part to fi nance asset growth and acquisitions. In 2006, GECS average assets of $514.5 billion were 9% higher than in 2005, which in turn were 7% higher than in 2004. See the Financial Resources and Liquidity section for a discussion of interest rate risk management. GECS BORROWINGS 2002 2003 2004 2005 2006 (In $ billions) 426 362 356 317 267 A. Senior notes B. Other C. Commercial paper D. Subordinated notes INCOME TAXES are a significant cost. As a global commercial enterprise, our tax rates are affected by many factors, including our global mix of earnings, legislation, acquisitions, dispositions and the tax characteristics of our income. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. Income taxes on consolidated earnings from continuing operations were 16.1% in 2006, compared with 17.8% in 2005 and 18.2% in 2004. Our consolidated income tax rate decreased from 2005 to 2006 as growth in lower-taxed earnings from global operations, including one-time tax benefits from non-U.S. tax net operating losses and the non-U.S. gain on disposition of the Advanced Materials business, exceeded 2005 tax benefi ts from a reorganization of our aircraft leasing business, a repatriation of non-U.S. earnings at a reduced rate of U.S. tax and favorable settlements with tax authorities. Our consolidated income tax rate was essentially unchanged in 2005 from 2004 because the 2005 tax benefits from a reorganization of our aircraft leasing business and from the growth in lower- taxed global operations were about the same as the 2004 tax benefits from favorable U.S. Internal Revenue Service (IRS) settle- ments, the NBC Universal combination, the 2004 reorganization of our aircraft leasing business and a lower tax rate on the sale of a portion of Genpact, our business process outsourcing operation. A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated rate, as well as other informa- tion about our income tax provisions, is provided in note 8. The nature of business activities and associated income taxes differ for GE and for GECS and a separate analysis of each is presented in the paragraphs that follow. Because GE tax expense does not include taxes on GECS earnings, the GE effective tax rate is best analyzed in relation to GE earnings excluding GECS. GE pre-tax earnings from continuing operations excluding comparable GECS earnings were $12.8 billion, $11.9 billion and $10.4 billion for 2006, 2005 and 2004, respec- tively. On this basis, GE’s effective tax rate was 20.2% in 2006, 23.1% in 2005 and 19.0% in 2004. The decrease in the 2006 rate from 2005 was primarily attrib- utable to growth in lower-taxed earnings from global operations, including one-time tax benefits from non-U.S. net operating losses and the non-U.S. gain on the disposition of the Advanced Materials business. These benefits, which decreased the GE rate by 4.5 percentage points, are included in note 8 in the line “Tax on global activities including exports.” Partially offsetting these items was the lack of a counterpart to the 2005 repatriation of non-U.S. earnings at a reduced U.S. tax rate, discussed below (0.9 percentage points) and a decrease in benefits from favorable audit resolutions with tax authorities (0.8 percentage points). The effects of 2006 favorable audit resolutions are reflected in note 8 in the lines “All other — net” (0.8 percentage points) and “Tax on global activities including exports” (0.7 percentage points). The increase in the 2005 rate over the 2004 rate was primarily attributable to the lack of current-year counterparts to the 2004 settlements with the IRS and 2004 tax benefi ts associated with the NBC Universal combination, both discussed below, that together reduced the 2004 rate by 7.2 percentage points. Partially offsetting this increase were the favorable effects of a number of audit resolutions with taxing authorities and our 2005 repatriation of non-U.S. earnings at the reduced U.S. tax rate provided in 2004 legislation (together representing a 3.2 percentage point reduction of the GE tax rate). These 2005 tax benefits are reflected in note 8 in the lines “All other — net” (1.6 percentage points) and “Tax on global activities including exports” (1.6 percentage points). The 2004 GE rate reflects two items that decreased the rate by 7.2 percentage points — settling several issues with the IRS for the years 1985 through 1999 and tax benefi ts associated with the NBC Universal combination. As part of the IRS settlements, 50 ge 2006 annual report

management’s discussion and analysis we closed two significant issues: the 1997 tax-free exchange of the Lockheed Martin convertible preferred stock we received on the disposition of our Aerospace business in 1993, and a 1998 tax loss on the sale of a Puerto Rican subsidiary. The tax portion of these settlements is included in the line “IRS settlements of Lockheed Martin tax-free exchange/Puerto Rico subsidiary loss” in note 8. The tax benefits associated with the NBC Universal combination are included in the line “All other — net” in note 8. GECS effective tax rate was 11.6% in 2006, compared with 11.9% in 2005 and 17.4% in 2004. The 2006 GECS rate was about the same as 2005 as growth in lower-taxed earnings from global operations was largely offset by a smaller benefi t on the reorganization, discussed below, of our aircraft leasing business. The increased benefits from lower-taxed earnings from global operations (2.4 percentage points) and the lower benefi ts from the reorganization of our aircraft leasing business (1.9 percentage points) are included in the line “Tax on global activities including exports” in note 8. The 2005 GECS rate reflects the net benefits, discussed below, of a reorganization of our aircraft leasing business and an increase in lower-taxed earnings from global operations. Together, these items more than account for the 7.2 percentage point decrease in rate from 2004 reflected in the line “Tax on global activities including exports” in note 8. Partially offsetting these benefi ts was the nonrecurrence of the benefits from 2004 favorable settlements with the IRS and the low-taxed disposition of a majority interest in Genpact. The lack of counterparts to these items increased the 2005 GECS tax rate by 1.7 percentage points. The favorable settlements with the IRS are included in the line “All other — net” and the benefit of the low-taxed disposition of a majority interest in Genpact is included in the line “Tax on global activities including exports” in note 8. As a result of the repeal of the extraterritorial income (ETI) taxing regime as part of the American Jobs Creation Act of 2004 (the Act), our aircraft leasing business no longer qualifies for a reduced U.S. tax rate. However, the Act also extended to aircraft leasing, the U.S. tax deferral benefits that were already available to other GE non-U.S. active operations. These legislative changes, coupled with a reorganization of our aircraft leasing business and a favorable Irish tax ruling, decreased the GECS effective tax rate 1.1 percentage points in 2006, compared with 3.0 and 1.6 percentage points in 2005 and 2004, respectively. Global Risk Management A disciplined approach to risk is important in a diversifi ed organization such as ours in order to ensure that we are executing according to our strategic objectives and that we only accept risk for which we are adequately compensated. It is necessary for us to manage risk at the individual transaction level, and to consider aggregate risk at the customer, industry, geography and collateral-type levels, where appropriate. The GE Board of Directors oversees the risk management process through clearly established delegation of authority. Board and committee meeting agendas are jointly developed with management to cover risk topics presented to our Corporate Risk Committee, including environmental, compliance, liquidity, credit and market risks. The GECS Board of Directors oversees the risk management process for financial services, and approves all signifi cant acqui- sitions and dispositions as well as borrowings and investments. All participants in the risk management process must comply with approval limits established by the Board. The GECS Chief Risk Officer is responsible, through the Corporate Risk Function, for establishing standards for the measurement, reporting and limiting of risk for managing and evaluating risk managers for approving risk management policies and for reviewing major risk exposures and concentrations across the organization. The GECS Corporate Risk Function analyzes certain business risks and assesses them in relation to aggregate risk appetite and approval limits set by the GECS Board of Directors. Threshold responsibility for identifying, quantifying and miti- gating risks is assigned to our individual businesses. We employ proprietary analytic models to allocate capital to our fi nancing activities, to identify the primary sources of risk and to measure the amount of risk we will take for each product line. This approach allows us to develop early signals that monitor changes in risk affecting portfolio performance and actively manage the portfolio. Other corporate functions such as Financial Planning and Analysis, Treasury, Legal and our Corporate Audit Staff support business- level risk management. Businesses that, for example, hedge financial risk with derivative financial instruments must do so using our centrally-managed Treasury function, providing assurance that the business strategy complies with our corporate policies and achieves economies of scale. We review risks periodically with business-level risk managers, senior management and our Board of Directors. GECS employs about 18,000 dedicated risk professionals, including 11,400 involved in collection activities and 680 special- ized asset managers who evaluate leased asset residuals and remarket off-lease equipment. GE and GECS manage a variety of risks including liquidity, credit and market risks. • Liquidity risk is the risk of being unable to accommodate liability maturities, fund asset growth and meet contractual obligations through access to funding at reasonable market rates. Additional information about our liquidity and how we manage this risk can be found in the Financial Resources and Liquidity section and in notes 18 and 27. ge 2006 annual report 51