2 Supplementary operating profit information.

Supplementary IFRS operating profit is one of the Group’s key performance indicators. We provide this measure because we believe it gives shareholders a better understanding of the Group’s underlying performance. In order to further enhance this understanding, we have amended the definition of IFRS operating profit to remove the impact of investment volatility from the non profit Risk and Savings and the Group capital and financing results.

The key changes to our definition of IFRS operating profit are:

i. Operating profit for the Risk and Savings businesses is now based on the investment returns that the Group expects to make on the financial investments that back the non profit business over the reporting period, rather than the actual returns on these investments. The difference between the expected return and the actual return on investments, and the corresponding impact on liabilities, is shown below the operating profit line. This adjustment includes the removal of accounting volatility arising from the mismatch of asset and liability valuations for deferred tax balances within unit linked funds under IFRS.

ii. Group capital and financing operating profit now excludes the profit or loss arising from actuarial gains and losses on annuities held by the Group’s defined benefit pension schemes. As this is driven by bond market yields the effect has been classified as variation from longer term investment return.

iii. The profit or loss impact arising from the elimination of own debt holdings is reflected below operating profit. In previous reporting periods this amount has been £nil.

The amended definition more closely aligns the results of non profit Risk and Savings and Group capital and financing with our other UK businesses and is closer to the European Embedded Value (EEV) definition of operating profit. It changes the allocation of profit between operating and non-operating elements, but it does not affect underlying performance, the economics of our business, the profit before tax attributable to shareholder or the profit for the year.

The table below sets out the effect of the above changes to IFRS supplementary operating profit for the year ended 31 December 2008, and the six months ended 30 June 2009:

Non profit business operational cash generation represents the capital and profit expected to be generated in the period from the in-force non profit business if the embedded value and valuation assumptions are borne out in practice. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model.

The 2008 net capital released analysis has been restated in accordance with the new definition of operating profit (see the beginning of this note).

Both new business strain and operational cash generation exclude required solvency margin from the liability calculation as is required by the ABI SORP.

In 2006 the FSA introduced a more realistic reserving framework for certain non profit business (Policy statement (PS) 06/14). In July 2009, a Part VII transfer of the Nationwide Life Risk business to Society took place and the Group chose to adopt PS06/14 for this business. The impact of this, offset by the amortisation of associated intangible assets, is reflected within changes to FSA reporting and capital rules above.

An analysis of the experience variances, valuation assumption changes and non-cash items, all net of tax, is provided below:

The combined operating ratio is:

Non profit business operational cash generation represents the capital and profit expected to be generated in the period from the in-force non profit business if the embedded value and valuation assumptions are borne out in practice. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model.

The 2008 net capital released analysis has been restated in accordance with the new definition of operating profit (see the beginning of this note).

Both new business strain and operational cash generation exclude required solvency margin from the liability calculation as is required by the ABI SORP.

In 2006, the FSA introduced a more realistic reserving framework for certain non profit business (PS06/14). In 2009, the Group has chosen to implement PS06/14 rule changes relating to the calculation of the regulatory sterling reserves on non profit unit linked contracts. The impact of this is reflected within changes to FSA reporting and capital rules above. However, sterling reserves on investment contracts are eliminated from IFRS reporting and the corresponding reduction is reported through non-cash items.

An analysis of the experience variances, valuation assumption changes and non-cash items, all net of tax, is provided below:

The number of shares in issue at 31 December 2009 was 5,862,216,780 (31 December 2008: 5,861,627,994).