69,000,000 Shares

The Goldman Sachs Group, Inc.

Common Stock

This is an initial public oÅering of shares of common stock of The Goldman Sachs Group,
Inc. This prospectus relates to an oÅering of 55,200,000 shares in the United States and Canada.
In addition, 9,200,000 shares are being oÅered outside the United States, Canada and the Asia/
PaciÑc region and 4,600,000 shares are being oÅered in the Asia/PaciÑc region.
Goldman Sachs is oÅering 51,000,000 of the shares to be sold in the oÅerings. Sumitomo
Bank Capital Markets, Inc. and Kamehameha Activities Association are each oÅering an
additional 9,000,000 shares.
Prior to this oÅering, there has been no public market for the common stock. Goldman
Sachs will list the common stock on the New York Stock Exchange under the symbol ""GS''.
See ""Risk Factors'' beginning on page 11 to read about factors you should consider before
buying shares of the common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or
disapproved of these securities or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal oÅense.

Per Share Total

Initial public oÅering price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $53.00 $3,657,000,000
Underwriting discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.25 $ 155,250,000
Proceeds, before expenses, to Goldman Sachs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $50.75 $2,588,250,000
Proceeds, before expenses, to the selling shareholders ÏÏÏÏÏÏÏÏÏÏ $50.75 $ 913,500,000
This oÅering includes 9,000,000 shares of common stock purchased by the underwriters
pursuant to options granted by The Goldman Sachs Group, Inc. See ""Underwriting''.
The underwriters expect to deliver the shares in New York, New York on May 7, 1999.

Global Coordinator

Goldman, Sachs & Co.

Goldman, Sachs & Co.

Bear, Stearns & Co. Inc. Credit Suisse First Boston Donaldson, Lufkin & Jenrette

Lehman Brothers Merrill Lynch & Co. J.P. Morgan & Co.

Morgan Stanley Dean Witter PaineWebber Incorporated Prudential Securities

Salomon Smith Barney Sanford C. Bernstein & Co., Inc. Schroder & Co. Inc.

Prospectus dated May 3, 1999.

 Our Business Principles
1. 5. 8. 11.
Our clients’ interests We stress creativity We stress teamwork in We constantly strive to
always come first. Our and imagination in everything we do. While anticipate the rapidly
experience shows that everything we do. individual creativity is changing needs of our
if we serve our clients While recognizing that always encouraged, we clients and to develop
well, our own success the old way may still have found that team new services to meet
will follow. be the best way, we effort often produces the those needs. We know
constantly strive to find best results. We have no that the world of
2.
a better solution to a room for those who put finance will not stand
Our assets are our client’s problems. We their personal interests still and that compla-
people, capital and pride ourselves on having ahead of the interests of cency can lead to
reputation. If any of pioneered many of the the Firm and its clients. extinction.
these is ever diminished, practices and techniques
9. 12.
the last is the most that have become stan-
difficult to restore. dard in the industry. The dedication of our We regularly receive
We are dedicated to people to the Firm and confidential information
6.
complying fully with the intense effort they as part of our normal
the letter and spirit We make an unusual give their jobs are client relationships.
of the laws, rules and effort to identify and greater than one finds To breach a confidence
ethical principles that recruit the very best in most other organiza- or to use confidential
govern us. Our continued person for every job. tions. We think that this information improperly
success depends upon Although our activities is an important part of or carelessly would be
unswerving adherence are measured in billions our success. unthinkable.
to this standard. of dollars, we select our
10. 13.
people one by one. In a
3.
service business, we We consider our size an Our business is highly
Our goal is to provide know that without the asset that we try hard to competitive, and we
superior returns to our best people, we cannot preserve. We want to be aggressively seek to
shareholders. be the best firm. big enough to undertake expand our client rela-
Profitability is critical to the largest project that tionships. However, we
7.
achieving superior any of our clients could must always be fair com-
returns, building our We offer our people contemplate, yet small petitors and must never
capital, and attracting the opportunity to move enough to maintain the denigrate other firms.
and keeping our best ahead more rapidly loyalty, the intimacy
14.
people. Significant than is possible at most and the esprit de corps
employee stock owner- other places. We have that we all treasure and Integrity and honesty
ship aligns the interests yet to find the limits to that contribute greatly are at the heart of our
of our employees and the responsibility that to our success. business. We expect
our shareholders. our best people are able our people to maintain
to assume. Advance- high ethical standards
4.
ment depends solely on in everything they do,
We take great pride in ability, performance both in their work for
the professional quality and contribution to the the Firm and in their
of our work. We have Firm’s success, without personal lives.
an uncompromising regard to race, color,
determination to achieve religion, sex, age,
excellence in everything national origin, disability,
we undertake. Though sexual orientation, or
we may be involved in any other impermissible
a wide variety and heavy criterion or circumstance.
volume of activity, we
would, if it came to a
choice, rather be best
than biggest.
 PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary
does not contain all of the information that you should consider before investing in the common
stock. You should read the entire prospectus carefully, especially the risks of investing in the
common stock discussed under ""Risk Factors'' on pages 11-21.

The Goldman Sachs Group, Inc.

Goldman Sachs is a leading global invest- Because we believe that the needs of our
ment banking and securities Ñrm with three clients are global and that international mar-
principal business lines: kets have high growth potential, we have built
upon our strength in the United States to
‚ Investment Banking; achieve leading positions in other parts of the
‚ Trading and Principal Investments; and world. Today, we have a strong global pres-
‚ Asset Management and Securities ence as evidenced by the geographic breadth
Services. of our transactions, leadership in our core
Our goal is to be the advisor of choice for our products and the size of our international
clients and a leading participant in global operations. As of February 26, 1999, we
Ñnancial markets. We provide services world- operated oÇces in 23 countries and 36% of
wide to a substantial and diversiÑed client our 13,000 employees were based outside the
base, which includes corporations, Ñnancial United States.
institutions, governments and high net worth
individuals. We are committed to a distinctive culture
and set of core values. These values are
For our Ñscal year ended November 27, reÖected in our Business Principles, which
1998, our net revenues were $8.5 billion and emphasize placing our clients' interests Ñrst,
our pre-tax earnings were $2.9 billion, and for integrity, commitment to excellence and inno-
our Ñscal quarter ended February 26, 1999, vation, and teamwork.
our net revenues were $3.0 billion and our
pre-tax earnings were $1.2 billion. As of Goldman Sachs is managed by its princi-
February 26, 1999, our total assets were pal owners. Simultaneously with the oÅerings,
$230.6 billion and our partners' capital was we will grant restricted stock units, stock
$6.6 billion. options or interests in a deÑned contribution
We have over time produced strong earn- plan to substantially all of our employees.
ings growth and attractive returns on part- Following the oÅerings, our employees, in-
ners' capital through diÅerent economic and cluding former partners, will own approxi-
market conditions. Over the last 15 years, our mately 65% of Goldman Sachs. None of our
pre-tax earnings have grown from $462 mil- employees are selling shares in the oÅerings.
lion in 1983 to $2.9 billion in 1998, represent-
ing a compound annual growth rate of 13%. Why We Are Going Public
Economic and market conditions can, how-
ever, signiÑcantly aÅect our performance. For We have decided to become a public
example, in the second half of Ñscal 1998, our company for three principal reasons:
performance was adversely aÅected by turbu-
lence in global Ñnancial markets. ‚ to secure permanent capital to grow;
‚ to share ownership broadly among our
We have achieved this growth, which has employees now and through future
been generated without the beneÑt of a large compensation; and
acquisition, by maintaining an intense commit- ‚ to permit us to use publicly traded
ment to our clients, focusing on our core securities to Ñnance strategic acquisi-
businesses and key opportunities, and oper- tions that we may elect to make in the
ating as an integrated franchise. future.

3
 Summary Financial Data
($ in millions)

As of or for
As of or for Three Months
Year Ended November Ended February
1996 1997 1998 1998 1999

Net revenues:
Investment BankingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,113 $ 2,587 $ 3,368 $ 633 $ 902
Trading and Principal Investments ÏÏÏÏÏÏÏÏÏ 2,693 2,926 2,379 1,182 1,357
Asset Management and Securities Services ÏÏ 1,323 1,934 2,773 657 736
Total net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,129 $ 7,447 $ 8,520 $ 2,472 $ 2,995

Pre-tax earnings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152,046 178,401 217,380 Ì 230,624
Partners' capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,309 6,107 6,310 Ì 6,612
Pre-tax return on average partners' capital(1) ÏÏ 51% 53% 47% Ì Ì

Read the table above in conjunction with the footnotes to ""Selected Consolidated Financial Data'' as well as
the following footnote:
(1) Since we have historically operated in partnership form, payments to our proÑt participating limited
partners have been accounted for as distributions of partners' capital rather than as compensation
expense. As a result, our pre-tax earnings and compensation and beneÑts expense have not reÖected
any payments for services rendered by our managing directors who were proÑt participating limited
partners. Accordingly, our historical pre-tax earnings understate the expected operating costs to be
incurred by us after the oÅerings. As a corporation, we will include payments for services rendered by
our managing directors who were proÑt participating limited partners in compensation and beneÑts
expense. For Ñnancial information that reÖects pro forma compensation and beneÑts expense as if we
had been a corporation, see ""Pro Forma Consolidated Financial Information''.

Strategy and Principal Business Lines

Investment Banking
Our strategy is to grow our three core Investment Banking represented 39% of
businesses Ì Investment Banking, Trading Ñscal 1998 net revenues and 35% of Ñscal
and Principal Investments, and Asset Man- 1997 net revenues. We are a market leader in
agement and Securities Services Ì in mar- both the Ñnancial advisory and underwriting
kets throughout the world. Our leadership businesses, serving over 3,000 clients world-
position in investment banking provides us wide. For the period January 1, 1994 to
with access to governments, Ñnancial institu- December 31, 1998, we had the industry-
tions and corporate clients globally. Trading leading market share of 25.3% in worldwide
and principal investing has been an important mergers and acquisitions advisory services,
part of our culture and earnings, and we having advised on over $1.7 trillion of trans-
remain committed to these businesses irre- actions. Over the same period, we also
spective of their volatility. Managing wealth is achieved number one market shares of 15.2%
one of the fastest growing segments of the in underwriting worldwide initial public oÅer-
Ñnancial services industry and we are posi- ings and 14.4% in underwriting worldwide
tioning our asset management and securities common stock issues. The source for this
services businesses to take advantage of that market share information is Securities Data
growth. Company.

4
Trading and Principal Investments and acquisitions, executing large and complex
transactions for institutional investors and
Trading and Principal Investments repre- asset management.
sented 28% of Ñscal 1998 net revenues and
39% of Ñscal 1997 net revenues. We make Increasing the Stability of Our Earnings
markets in equity and Ñxed income products,
currencies and commodities; enter into swaps While we plan to continue to grow each
and other derivative transactions; engage in of our core businesses, our goal is to gradu-
proprietary trading and arbitrage; and make ally increase the stability of our earnings by
principal investments. In trading, we focus on emphasizing growth in Investment Banking
building lasting relationships with our most and Asset Management and Securities
active clients while maintaining leadership Services.
positions in our key markets. We believe our
research, market-making and proprietary ac- Pursuing International Opportunities
tivities enhance our understanding of markets
We believe that our global reach will
and ability to serve our clients.
allow us to take advantage of international
growth opportunities. For example, we expect
Asset Management and Securities Services increased business activity as a result of the
Asset Management and Securities Ser- establishment of the European Economic and
vices represented 33% of Ñscal 1998 net Monetary Union, the shift we anticipate to-
revenues and 26% of Ñscal 1997 net reve- ward privatization of pension systems and the
nues. We provide global investment manage- changing demographics around the world.
ment and advisory services; earn
commissions on agency transactions; manage Leveraging the Franchise
merchant banking funds; and provide prime We believe our various businesses are
brokerage, securities lending and Ñnancing generally stronger and more successful be-
services. Our asset management business cause they are part of the Goldman Sachs
has grown rapidly, with assets under supervi- franchise. Our culture of teamwork fosters
sion increasing from $92.7 billion as of No- cooperation among our businesses, which
vember 25, 1994 to $369.7 billion as of allows us to provide our clients with a full
February 26, 1999, representing a compound range of products and services on a coordi-
annual growth rate of 38%. As of Febru- nated basis.
ary 26, 1999, we had $206.4 billion of assets
under management. We manage merchant Competitive Strengths
banking funds that had $15.5 billion of capital
Strong Client Relationships
commitments as of the end of Ñscal 1998.
We focus on building long-term client
Assets under supervision are comprised relationships. For example, in Ñscal 1998,
of assets under management and other client over 75% of our Investment Banking revenues
assets. Assets under management typically represented business from existing clients.
generate fees based on a percentage of their
value. Other client assets are comprised of Distinctive People and Culture
assets in brokerage accounts of primarily high
net worth individuals, on which we earn Our most important asset is our people.
commissions. We seek to reinforce our employees' commit-
ment to our culture and values through
We pursue our strategy to grow our three recruiting, training, a comprehensive review
core businesses through an emphasis on: system and a compensation philosophy that
rewards teamwork.
Expanding High Value-Added Businesses
Global Reach
To achieve strong growth and high re-
turns, we seek to build leadership positions in We have achieved leading positions in
high value-added services such as mergers major international markets by capitalizing on

5
our product knowledge and global research, technology and Ñnancial product innovation.
as well as by building a local presence where We believe that over the last 15 years these
appropriate. As a result, we are one of the trends, coupled with generally declining inter-
few truly global investment banking and secu- est rates and favorable market conditions,
rities Ñrms with the ability to execute large have contributed to a substantially higher rate
and complex cross-border transactions. of growth in activity in the Ñnancial services
industry than the growth in overall economic
Industry and Economic Outlook
activity. While the future economic environ-
We believe that signiÑcant growth and ment may not be as favorable as that exper-
proÑt opportunities exist in the Ñnancial ser- ienced in the last 15 years and there may be
vices industry over the long term. These periods of adverse economic and market
opportunities derive from long-term trends, conditions, we believe that these trends
including Ñnancial market deregulation, the should continue to aÅect the Ñnancial services
globalization of the world economy, the industry positively over the long term.
increasing focus of companies on shareholder
value, consolidations in various industries, The following table sets forth selected
growth in investable funds and accelerating key industry indicators:

Key Industry Indicators

($ in billions, except gross domestic product)
(volume in millions of shares)
As of or for
Year Ended December 31, CAGR(6)
1983 1988 1993 1998 '83-'98
Worldwide gross domestic product (in
trillions)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 10 $ 18 $ 24 $ 29(7) 8%(7)

Worldwide mergers and acquisitions(2) ÏÏÏ 96 527 460 2,522 24

Worldwide equity issued(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 51 172 269 12
Worldwide debt issued(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146 631 1,546 2,932 22
Worldwide equity market capitalization(3)ÏÏ 3,384 9,728 14,016 27,459 15
NYSE average daily volume ÏÏÏÏÏÏÏÏÏÏÏÏÏ 85 162 265 674 15
Worldwide pension assets(4) ÏÏÏÏÏÏÏÏÏÏÏ $1,900 $3,752 $ 6,560 $10,975 12
U.S. mutual fund assets(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 293 810 2,075 5,530 22

(1) Source: The Economist Intelligence Unit, January 1999.

(2) Source: Securities Data Company.
(3) Source: International Finance Corporation.
(4) Source: InterSec Research Corp.
(5) Source: Investment Company Institute.
(6) Compound annual growth rate.
(7) Data as of December 31, 1997; compound annual growth rate 1983-1997.

Our Headquarters
Our headquarters are located at 85 Broad
Street, New York, New York 10004, telephone
(212) 902-1000.

6
 The OÅerings
Common stock:
OÅered by Goldman Sachs(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,000,000 shares
OÅered by Sumitomo Bank Capital Markets, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,000,000 shares
OÅered by Kamehameha Activities Association(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,000,000 shares
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,000,000 shares
U.S. oÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,200,000 shares
International oÅeringÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,200,000 shares
Asia/PaciÑc oÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,600,000 shares
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,000,000 shares
Shares outstanding as adjusted for the oÅerings(3):
Shares issued in the incorporation transactions(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 381,130,459
Shares contributed to the deÑned contribution plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,555,866
Shares outstanding prior to the oÅerings(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 393,686,325
Shares oÅered by Goldman Sachs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,000,000
Shares outstanding as adjusted for the oÅerings(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 444,686,325

(1) Includes 9,000,000 shares of common stock purchased by the underwriters pursuant to the exercise, in
full, of options to purchase additional shares granted by The Goldman Sachs Group, Inc. The
information in this prospectus gives eÅect to this exercise.
(2) Kamehameha Activities Association is the owner of the shares to be oÅered. The Estate of Bernice
Pauahi Bishop, an aÇliate of Kamehameha Activities Association, is joining in and consenting to the
sale.
(3) Excludes 30,025,946 shares of common stock underlying the restricted stock units awarded to
employees based on a formula, 33,292,869 shares of common stock underlying the restricted stock
units awarded to employees on a discretionary basis and 40,127,592 shares of common stock
underlying the stock options awarded to employees on a discretionary basis.
(4) Includes 7,440,362 shares of nonvoting common stock issued to Sumitomo Bank Capital Markets, Inc.
that are convertible into shares of common stock on a one-for-one basis.
(5) Shares outstanding, including the shares of common stock underlying the restricted stock units
awarded to employees based on a formula, are 423,712,271 prior to the oÅerings.
(6) For the purpose of calculating basic earnings per share and book value per share, shares of common
stock and nonvoting common stock outstanding include 30,025,946 shares of common stock underlying
the restricted stock units awarded to employees based on a formula since future service is not required
as a condition to the delivery of the underlying shares of common stock. The shares of common stock
underlying these restricted stock units generally will be issuable and deliverable in equal installments on
or about the Ñrst, second and third anniversaries of the consummation of the oÅerings, assuming the
relevant conditions are satisÑed.

Voting RightsÏÏÏÏÏÏÏÏÏ The holders of common stock will have one vote per share.
Dividend Policy ÏÏÏÏÏÏÏ The holders of common stock, as well as the holders of nonvoting
common stock, will share proportionately on a per share basis in all
dividends and other distributions declared by our board of directors.
Our board of directors currently intends to declare quarterly dividends
on all outstanding shares and expects that the Ñrst quarterly dividend
will be $0.12 per share, and that it will be declared during the third
quarter of Ñscal 1999. For a discussion of the factors that aÅect the
determination by our board of directors to declare dividends, as well as
other matters concerning our dividend policy, see ""Dividend Policy'' and
""Business Ì Regulation''.
Use of ProceedsÏÏÏÏÏÏ We will receive net proceeds from our sales of common stock in the
oÅerings of $2.6 billion. We will use the net proceeds to provide
additional funds for our operations and for other general corporate
purposes, although we have not yet determined a speciÑc use. Pending

7
 speciÑc application of the net proceeds, we expect to use them to
purchase short-term marketable securities.
We will not receive any of the proceeds from sales of common stock by
Sumitomo Bank Capital Markets, Inc. or Kamehameha Activities Associ-
ation in the oÅerings.
Risk Factors ÏÏÏÏÏÏÏÏÏ For a discussion of factors you should consider before buying shares of
common stock, see ""Risk Factors''.
New York Stock
Exchange Symbol ÏÏ GS

8
 Summary Consolidated Financial Data
The summary historical consolidated income for the three months ended February 26, 1999
statement and balance sheet data set forth below may not be indicative of results for the full year.
have been derived from our consolidated financial
statements and their notes. Our consolidated The pro forma data set forth below for the
financial statements have been audited by Price- year ended November 27, 1998 and as of and
waterhouseCoopers LLP, independent for the three months ended February 26, 1999
accountants, as of November 28, 1997 and No- have been derived from the pro forma data set
vember 27, 1998 and for the years ended Novem- forth in ""Pro Forma Consolidated Financial In-
ber 29, 1996, November 28, 1997 and formation'' included elsewhere in this prospec-
November 27, 1998. Our condensed consolidated tus. The pro forma consolidated income
financial statements have been reviewed by Price- statement information set forth in ""Pro Forma
waterhouseCoopers LLP as of February 26, 1999 Consolidated Financial Information'' for the year
and for the three months ended February 26, ended November 27, 1998 has been examined
1999. These financial statements are included by PricewaterhouseCoopers LLP. The pro forma
elsewhere in this prospectus, together with consolidated Ñnancial information as of and for
the reports thereon of Pricewaterhouse- the three months ended February 26, 1999 has
Coopers LLP. been reviewed by PricewaterhouseCoopers LLP.

The summary historical consolidated income In addition to the oÅerings of common

statement and balance sheet data set forth stock, the pro forma adjustments reÖect the
below as of November 25, 1994, November 24, transactions described under ""Certain Relation-
1995 and November 29, 1996 and for the years ships and Related Transactions'', compensation
ended November 25, 1994 and November 24, and beneÑts related to services rendered by our
1995 have been derived from our audited con- managing directors who were proÑt participating
solidated Ñnancial statements that are not in- limited partners, the provision for corporate
cluded in this prospectus. income taxes and the other transactions de-
scribed under ""Pro Forma Consolidated Finan-
The summary historical consolidated income cial Information''.
statement and balance sheet data set forth
below as of and for the three months ended The summary consolidated Ñnancial data
February 26, 1999 have been derived from our should be read in conjunction with ""Manage-
unaudited condensed consolidated Ñnancial ment's Discussion and Analysis of Financial
statements that, in the opinion of management, Condition and Results of Operations'', ""Pro
include all adjustments, consisting only of nor- Forma Consolidated Financial Information'' and
mal recurring adjustments, necessary for a fair the consolidated Ñnancial statements and their
presentation. The interim results set forth below notes.

9
 Summary Consolidated Financial Data
As of or for
As of or for Year Ended November Three Months
1994 1995 1996 1997 1998 Ended February 1999
(unaudited)
(in millions, except per share amounts)
Income Statement Data:
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,537 $ 4,483 $ 6,129 $ 7,447 $ 8,520 $ 2,995
Pre-tax earnings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 508 1,368 2,606 3,014 2,921 1,188

Balance Sheet Data:

Total assets(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $95,296 $100,066 $152,046 $178,401 $217,380 $230,624
Long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,418 13,358 12,376 15,667 19,906 20,405
Partners' capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,771 4,905 5,309 6,107 6,310 6,612

Pro Forma Data(3):

Pro forma net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì $ 1,256 $ 516
Pro forma diluted earnings per share as
adjusted for the oÅerings(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 2.62 1.06
Pro forma stockholders' equity as adjusted for
the oÅeringsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 7,627
Pro forma book value per share as adjusted for
the oÅeringsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 16.07

Selected Data and Ratios (unaudited):

Pre-tax return on average partners' capital(1) ÏÏ 10% 28% 51% 53% 47% Ì
Ratio of compensation and beneÑts to net
revenues(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51 45 40 42 45 43%
Assets under supervision:
Assets under management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $206,380
Other client assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,061 57,716 76,892 102,033 142,018 163,315
Total assets under supervisionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $92,732 $110,074 $171,491 $237,962 $336,839 $369,695

(1) Since we have historically operated in partnership form, payments to our proÑt participating limited partners
have been accounted for as distributions of partners' capital rather than as compensation expense. As a
result, our pre-tax earnings and compensation and beneÑts expense have not reÖected any payments for
services rendered by our managing directors who were proÑt participating limited partners. Accordingly, our
historical pre-tax earnings understate the expected operating costs to be incurred by us after the oÅerings.
As a corporation, we will include payments for services rendered by our managing directors who were proÑt
participating limited partners in compensation and beneÑts expense. For Ñnancial information that reÖects
pro forma compensation and beneÑts expense as if we had been a corporation, see ""Pro Forma
Consolidated Financial Information''.
(2) Total assets and liabilities were increased by $11.64 billion as of November 27, 1998 and $8.99 billion as of
February 26, 1999 due to the adoption of the provisions of Statement of Financial Accounting Standards
No. 125 that were deferred by Statement of Financial Accounting Standards No. 127. For a discussion of
Statement of Financial Accounting Standards Nos. 125 and 127, see ""Accounting Developments'' in Note 2
to the audited consolidated Ñnancial statements.
(3) ReÖects such adjustments as are necessary, in the opinion of management, for a fair presentation of the
results of operations and stockholders' equity of Goldman Sachs on a pro forma basis. See ""Pro Forma
Consolidated Financial Information'' for more detailed information concerning these adjustments.
(4) Calculated based on weighted-average diluted shares outstanding after giving eÅect to the pro forma
adjustments and as adjusted to reÖect the issuance of 51,000,000 shares of common stock oÅered by
Goldman Sachs at the initial public oÅering price set forth on the cover page of this prospectus. See ""Pro
Forma Consolidated Financial Information'' for more detailed information concerning these adjustments and
the calculation of pro forma earnings per share.

10
 RISK FACTORS
An investment in the common stock in- the extent that we own assets, i.e., have long
volves a number of risks, some of which, positions, in any of those markets, a down-
including market, liquidity, credit, operational, turn in those markets could result in losses
legal and regulatory risks, could be substan- from a decline in the value of those long
tial and are inherent in our businesses. You positions. Conversely, to the extent that we
should carefully consider the following infor- have sold assets we do not own, i.e., have
mation about these risks, together with the short positions, in any of those markets, an
other information in this prospectus, before upturn in those markets could expose us to
buying shares of common stock. potentially unlimited losses as we attempt to
cover our short positions by acquiring assets
Market Fluctuations Could Adversely AÅect in a rising market. We may from time to time
Our Businesses in Many Ways have a trading strategy consisting of holding
a long position in one asset and a short
As an investment banking and securities position in another, from which we expect to
Ñrm, our businesses are materially aÅected by earn revenues based on changes in the
conditions in the Ñnancial markets and eco- relative value of the two assets. If, however,
nomic conditions generally, both in the United the relative value of the two assets changes
States and elsewhere around the world. The in a direction or manner that we did not
equity and debt markets in the United States anticipate or against which we are not
and elsewhere have achieved record or near hedged, we might realize a loss in those
record levels, and this favorable business paired positions. We incurred signiÑcant
environment will not continue indeÑnitely. In losses in our Trading and Principal Invest-
the event of a market downturn, our busi- ments business in the second half of Ñscal
nesses could be adversely aÅected in many 1998 from this type of ""relative value'' trade.
ways, including those described below. Our See ""Management's Discussion and Analysis
revenues are likely to decline in such circum- of Financial Condition and Results of Opera-
stances and, if we were unable to reduce tions Ì Business Environment'' for a discus-
expenses at the same pace, our proÑt mar- sion of those losses and the market
gins would erode. For example, in the second environment in which we operated during that
half of Ñscal 1998, we recorded negative net period. In addition, we maintain substantial
revenues from our Trading and Principal In- trading positions that can be adversely af-
vestments business and from mid-August to fected by the level of volatility in the Ñnancial
mid-October the number of equity underwrit- markets, i.e., the degree to which trading
ings and announced mergers and acquisitions prices Öuctuate over a particular period, in a
transactions in which we participated declined particular market, regardless of market levels.
substantially due to adverse economic and
market conditions. See ""Management's Dis-
cussion and Analysis of Financial Condition Our Investment Banking Revenues May Decline
and Results of Operations Ì Business Envi- in Adverse Market or Economic Conditions
ronment'' for a discussion of the market
environment in which we operated during that Unfavorable Ñnancial or economic condi-
period. Even in the absence of a market tions would likely reduce the number and size
downturn, we are exposed to substantial risk of transactions in which we provide underwrit-
of loss due to market volatility. ing, mergers and acquisitions advisory and
other services. Our Investment Banking reve-
We May Incur SigniÑcant Losses from Our nues, in the form of Ñnancial advisory and
Trading and Investment Activities Due to Mar- underwriting fees, are directly related to the
ket Fluctuations and Volatility number and size of the transactions in which
we participate and would therefore be ad-
We generally maintain large trading and versely aÅected by a sustained market down-
investment positions in the Ñxed income, turn. In particular, our results of operations
currency, commodity and equity markets. To would be adversely aÅected by a signiÑcant

11
reduction in the number or size of mergers where the short position has, historically,
and acquisitions transactions. moved in a direction that would oÅset a
change in value in the long position. However,
We May Generate Lower Revenues from these strategies may not be fully eÅective in
Commissions and Asset Management Fees in a mitigating our risk exposure in all market
Market Downturn environments or against all types of risk. We
have often hedged our exposure to corporate
A market downturn could lead to a de- Ñxed income securities by taking a short
cline in the volume of transactions that we position in U.S. Treasury securities, since
execute for our customers and, therefore, to historically the value of U.S. Treasury securi-
a decline in the revenues we receive from ties has changed in a manner similar to
commissions and spreads. In addition, be- changes in the value of corporate Ñxed in-
cause the fees that we charge for managing come securities. Due to the move by inves-
our clients' portfolios are in many cases tors to higher credit quality Ñxed income
based on the value of those portfolios, a securities in mid-August to mid-October 1998,
market downturn that reduces the value of however, the prices for corporate Ñxed in-
our clients' portfolios or increases the amount come securities declined while the prices for
of withdrawals would reduce the revenue we U.S. Treasury securities increased and, as a
receive from our asset management business. result, we incurred losses on both positions.
Unexpected market developments also af-
Holding Large and Concentrated Positions May fected other hedging strategies during this
Expose Us to Large Losses time, and unanticipated developments could
Concentration of risk in the past has impact these or diÅerent hedging strategies in
increased the losses that we have incurred in the future. See ""Management's Discussion
our arbitrage, market-making, block trading, and Analysis of Financial Condition and Re-
underwriting and lending businesses and may sults of Operations Ì Risk Management'' for
continue to do so in the future. Goldman a discussion of the policies and procedures
Sachs has committed substantial amounts of we use to identify, monitor and manage the
capital to these businesses, which often re- risks we assume in conducting our busi-
quire Goldman Sachs to take large positions nesses and of reÑnements we have made to
in the securities of a particular issuer or our risk management policies and procedures
issuers in a particular industry, country or as a result of our recent experience.
region. Moreover, the trend in all major capital
markets is towards larger and more frequent A Prolonged Market Downturn Could Impair
commitments of capital in many of these Our Operating Results
activities. For example, as described under While we encountered extremely diÇcult
""Business Ì Trading and Principal Invest- market conditions in mid-August to mid-Octo-
ments Ì Equities'', we are experiencing an ber 1998, the Ñnancial markets rebounded
increase in the number and size of block late in the fourth quarter of Ñscal 1998. At
trades that we execute, and we expect this some time in the future, there may be a more
trend to continue. sustained period of market decline or weak-
ness that will leave us operating in a diÇcult
Our Hedging Strategies May Not Prevent market environment and subject us to the
Losses risks that we describe in this section for a
longer period of time.
If any of the variety of instruments and
strategies we utilize to hedge our exposure to
Market Risk May Increase the Other Risks That
various types of risk are not eÅective, we may
We Face
incur losses. Many of our strategies are
based on historical trading patterns and cor- In addition to the potentially adverse
relations. For example, if we hold a long eÅects on our businesses described above,
position in an asset, we may hedge this market risk could exacerbate other risks that
position by taking a short position in an asset we face. For example, if we incur substantial

12
trading losses, our need for liquidity could things, policies and procedures to record
rise sharply while our access to liquidity could properly and verify a large number of transac-
be impaired. In addition, in conjunction with a tions and events, and these policies and
market downturn, our customers and procedures may not be fully eÅective.
counterparties could incur substantial losses
of their own, thereby weakening their Ñnancial Liquidity Risk Could Impair Our Ability
condition and increasing our credit risk to to Fund Operations and Jeopardize Our
them. Our liquidity risk and credit risk are Financial Condition
described below.
Liquidity, i.e., ready access to funds, is
Our Risk Management Policies and essential to our businesses. In addition to
Procedures May Leave Us Exposed to maintaining a cash position, we rely on three
UnidentiÑed or Unanticipated Risk principal sources of liquidity: borrowing in the
We have devoted signiÑcant resources to debt markets; access to the repurchase and
develop our risk management policies and securities lending markets; and selling securi-
procedures and expect to continue to do so ties and other assets. See ""Management's
in the future. Nonetheless, our policies and Discussion and Analysis of Financial Condi-
procedures to identify, monitor and manage tion and Results of Operations Ì Liquidity''
risks may not be fully eÅective. Some of our for a discussion of our sources of liquidity.
methods of managing risk are based upon
our use of observed historical market behav- An Inability to Access the Debt Capital Markets
ior. As a result, these methods may not Could Impair Our Liquidity
predict future risk exposures, which could be
signiÑcantly greater than the historical mea- We depend on continuous access to the
sures indicate. For example, the market debt capital markets to Ñnance our day-to-day
movements of the late third and early fourth operations. An inability to raise money in the
quarters of Ñscal 1998 were larger and in- long-term or short-term debt markets, or to
volved greater divergences in relative asset engage in repurchase agreements or securi-
values than we anticipated. This caused us to ties lending, could have a substantial negative
experience trading losses that were greater eÅect on our liquidity. Our access to debt in
and recurred more frequently than some of amounts adequate to Ñnance our activities
our risk measures indicated were likely to could be impaired by factors that aÅect
occur. See ""Management's Discussion and Goldman Sachs in particular or the Ñnancial
Analysis of Financial Condition and Results of services industry in general. For example,
Operations Ì Business Environment'' for a lenders could develop a negative perception
discussion of the market environment in of our long-term or short-term Ñnancial pros-
which we operated during the second half of pects if we incurred large trading losses, if
Ñscal 1998 and ""Ì Risk Management'' for a the level of our business activity decreased
discussion of the policies and procedures we due to a market downturn, if regulatory au-
use to identify, monitor and manage the risks thorities took signiÑcant action against us or if
we assume in conducting our businesses and we discovered that one of our employees had
of reÑnements we have made to our risk engaged in serious unauthorized or illegal
management policies and procedures as a activity. Our ability to borrow in the debt
result of our recent experience. markets also could be impaired by factors
that are not speciÑc to Goldman Sachs, such
Other risk management methods depend as a severe disruption of the Ñnancial mar-
upon evaluation of information regarding mar- kets or negative views about the prospects
kets, clients or other matters that is publicly for the investment banking, securities or Ñ-
available or otherwise accessible by Goldman nancial services industries generally.
Sachs. This information may not in all cases
be accurate, complete, up-to-date or properly We also depend on banks to Ñnance our
evaluated. Management of operational, legal day-to-day operations. As a result of the
and regulatory risk requires, among other recent consolidation in the banking industry,

13
some of our lenders have merged or consoli- A Reduction in Our Credit Ratings Could
dated with other banks and Ñnancial institu- Adversely AÅect Our Liquidity and Competitive
tions. While we have not been materially Position and Increase Our Borrowing Costs
adversely aÅected to date, it is possible that
Our borrowing costs and our access to
further consolidation could lead to a loss of a
the debt capital markets depend signiÑcantly
number of our key banking relationships and
on our credit ratings. These ratings are as-
a reduction in the amount of credit extended
signed by rating agencies, which may reduce
to us.
or withdraw their ratings or place Goldman
Sachs on ""credit watch'' with negative impli-
An Inability to Access the Short-Term Debt
cations at any time. Credit ratings are also
Markets Could Impair Our Liquidity
important to Goldman Sachs when competing
We depend on the issuance of commer- in certain markets and when seeking to
cial paper and promissory notes as a princi- engage in longer-term transactions, including
pal source of unsecured short-term funding over-the-counter derivatives. A reduction in
for our operations. As of February 26, 1999, our credit ratings could increase our borrow-
Goldman Sachs had $21.63 billion of out- ing costs and limit our access to the capital
standing commercial paper and promissory markets. This, in turn, could reduce our
notes with a weighted-average maturity of earnings and adversely aÅect our liquidity.
approximately 75 days. Our liquidity depends See ""Management's Discussion and Analysis
to an important degree on our ability to of Financial Condition and Results of Opera-
reÑnance these borrowings on a continuous tions Ì Liquidity Ì Credit Ratings'' for addi-
basis. Investors who hold our outstanding tional information concerning our credit
commercial paper and promissory notes have ratings.
no obligation to purchase new instruments
when the outstanding instruments mature. Credit Risk Exposes Us to Losses Caused
by Financial or Other Problems
Our Liquidity Could Be Adversely AÅected If Experienced by Third Parties
Our Ability to Sell Assets Is Impaired
We are exposed to the risk that third
If we were unable to borrow in the debt parties that owe us money, securities or other
capital markets, we would need to liquidate assets will not perform their obligations.
assets in order to meet our maturing liabili- These parties include our trading counterpar-
ties. In certain market environments, such as ties, customers, clearing agents, exchanges,
times of market volatility or uncertainty, over- clearing houses and other Ñnancial in-
all market liquidity may decline. In a time of termediaries as well as issuers whose securi-
reduced liquidity, we may be unable to sell ties we hold. These parties may default on
some of our assets, or we may have to sell their obligations to us due to bankruptcy, lack
assets at depressed prices, which could ad- of liquidity, operational failure or other rea-
versely aÅect our results of operations and sons. This risk may arise, for example, from
Ñnancial condition. holding securities of third parties; entering
into swap or other derivative contracts under
Our ability to sell our assets may be
which counterparties have long-term obliga-
impaired by other market participants seeking
tions to make payments to us; executing
to sell similar assets into the market at the
securities, futures, currency or commodity
same time. In the late third and early fourth
trades that fail to settle at the required time
quarters of Ñscal 1998, for example, the
due to non-delivery by the counterparty or
markets for some assets were adversely
systems failure by clearing agents, ex-
aÅected by simultaneous attempts by a num-
changes, clearing houses or other Ñnancial
ber of institutions to sell similar assets.
intermediaries; and extending credit to our
clients through bridge or margin loans or
other arrangements. See ""Management's Dis-
cussion and Analysis of Financial Condition
and Results of Operations Ì Risk Manage-

14
ment Ì Credit Risk'' for a further discussion The possibility of default by a major
of the credit risks to which we are exposed. market participant in the second half of Ñscal
1998 and concerns throughout the Ñnancial
We May SuÅer SigniÑcant Losses from Our industry regarding the resulting impact on
Credit Exposures markets led us to participate in an industry-
wide consortium that invested in Long-Term
In recent years, we have signiÑcantly Capital Portfolio, L.P., which is described
expanded our swaps and other derivatives under ""Management's Discussion and Analy-
businesses and placed a greater emphasis on sis of Financial Condition and Results of
providing credit and liquidity to our clients. As Operations Ì Liquidity Ì The Balance
a result, our credit exposures have increased Sheet''. Actual defaults, increases in per-
in amount and in duration. In addition, as ceived default risk and other similar events
competition in the Ñnancial services industry could arise in the future and could have an
has increased, we have experienced pressure adverse eÅect on the Ñnancial markets and
to assume longer-term credit risk, extend on Goldman Sachs.
credit against less liquid collateral and price
more aggressively the credit risks that we
The Information That We Use in Managing Our
take.
Credit Risk May Be Inaccurate or Incomplete

Our Clients and Counterparties May Be Unable Although we regularly review our credit
to Perform Their Obligations to Us as a Result exposure to speciÑc clients and counterpar-
of Economic or Political Conditions ties and to speciÑc industries, countries and
regions that we believe may present credit
Country, regional and political risks are
concerns, default risk may arise from events
components of credit risk, as well as market
or circumstances that are diÇcult to detect,
risk. Economic or political pressures in a
such as fraud. We may also fail to receive full
country or region, including those arising from
information with respect to the trading risks
local market disruptions or currency crises,
of a counterparty. In addition, in cases where
may adversely aÅect the ability of clients or
we have extended credit against collateral, we
counterparties located in that country or re-
may Ñnd that we are undersecured, for exam-
gion to obtain foreign exchange or credit and,
ple, as a result of sudden declines in market
therefore, to perform their obligations to us.
values that reduce the value of collateral.
See ""Ì We Are Exposed to Special Risks in
Emerging and Other Markets'' for a further
discussion of our exposure to these risks. Our Computer Systems and Those of Third
Parties May Not Achieve Year 2000 Readi-
Defaults by a Large Financial Institution Could ness Ì Year 2000 Readiness Disclosure
Adversely AÅect Financial Markets Generally
and Us SpeciÑcally With the year 2000 approaching, many
institutions around the world are reviewing
The commercial soundness of many Ñ- and modifying their computer systems to
nancial institutions may be closely interrelated ensure that they are Year 2000 compliant.
as a result of credit, trading, clearing or other The issue, in general terms, is that many
relationships between the institutions. As a existing computer systems and microproces-
result, concerns about, or a default by, one sors (including those in non-information tech-
institution could lead to signiÑcant liquidity nology equipment and systems) use only two
problems or losses in, or defaults by, other digits to identify a year in the date Ñeld with
institutions. This is sometimes referred to as the assumption that the Ñrst two digits of the
""systemic risk'' and may adversely aÅect year are always ""19''. Consequently, on Jan-
Ñnancial intermediaries, such as clearing uary 1, 2000, computers that are not Year
agencies, clearing houses, banks, securities 2000 compliant may read the year as 1900.
Ñrms and exchanges, with which we interact Systems that calculate, compare or sort using
on a daily basis. the incorrect date may malfunction.

15
Our Computer Systems May Fail If third parties with whom we interact
have Year 2000 problems that are not reme-
Because we are dependent, to a very
died, problems could include the following:
substantial degree, upon the proper function-
ing of our computer systems, a failure of our ‚ in the case of vendors, disruption of impor-
systems to be Year 2000 compliant would tant services upon which Goldman Sachs
have a material adverse eÅect on us. Failure depends, such as telecommunications and
of this kind could, for example, cause settle- electrical power;
ment of trades to fail, lead to incomplete or
‚ in the case of third-party data providers,
inaccurate accounting, recording or process-
receipt of inaccurate or out-of-date infor-
ing of trades in securities, currencies, com-
mation that would impair our ability to
modities and other assets, result in
perform critical data functions, such as
generation of erroneous results or give rise to
pricing our securities or other assets;
uncertainty about our exposure to trading
risks and our need for liquidity. If not reme- ‚ in the case of Ñnancial intermediaries, such
died, potential risks include business interrup- as exchanges and clearing agents, failed
tion or shutdown, Ñnancial loss, regulatory trade settlements, inability to trade in cer-
actions, reputational harm and legal liability. tain markets and disruption of funding
Öows;
The Computer Systems of Third Parties on
Which We Depend May Fail ‚ in the case of banks and other lenders,
disruption of capital Öows potentially result-
We depend upon the proper functioning
ing in liquidity stress; and
of third-party computer and non-information
technology systems. These parties include ‚ in the case of counterparties and custom-
trading counterparties, Ñnancial intermediaries ers, Ñnancial and accounting diÇculties for
such as securities and commodities ex- those parties that expose Goldman Sachs
changes, depositories, clearing agencies, to increased credit risk and lost business.
clearing houses and commercial banks and
Disruption or suspension of activity in the
vendors such as providers of telecommunica-
world's Ñnancial markets is also possible.
tion services and other utilities. We continue
to assess counterparties, intermediaries and Our Revenues May Be Adversely AÅected If
vendors with whom we have important Ñnan- Market Activity Decreases Shortly Before and
cial or operational relationships to determine After the Year 2000
the extent of their Year 2000 preparedness.
We believe that uncertainty about the
We have not yet received suÇcient informa-
success of remediation eÅorts generally may
tion from all parties about their Year 2000
cause many market participants to reduce the
preparedness to assess the eÅectiveness of
level of their market activities temporarily as
their eÅorts. Moreover, in many cases, we are
they assess the eÅectiveness of these eÅorts
not in a position to verify the accuracy or
during a ""phase-in'' period beginning in late
completeness of the information we receive
1999. We believe that lenders are likely to
from third parties and as a result are depen-
take similar steps, which will result in a
dent on their willingness and ability to dis-
reduction in available funding sources. Conse-
close, and to address, their Year 2000
quently, there may be a downturn in customer
problems. In addition, in some international
and general market activity for a short period
markets in which we do business, the level of
of time before and after January 1, 2000. If
awareness and remediation eÅorts relating to
this occurs, our net revenues may be ad-
the Year 2000 issue may be less advanced
versely aÅected, possibly materially, depend-
than in the United States.
ing on how long the reduction in activity
continues and how broadly it aÅects the
markets. In addition, we expect to reduce our
own trading activities and the size of our
balance sheet in order to manage the number
and type of our transactions that settle during

16
this period and our related funding needs. of transactions could also constrain our ability
This also could reduce our net revenues. We to expand our businesses. In recent years,
cannot predict the magnitude of the impact we have substantially upgraded and ex-
that these kinds of reductions would have on panded the capabilities of our data process-
our businesses. ing systems and other operating technology,
and we expect that we will need to continue
We May Be Exposed to Litigation as a Result to upgrade and expand in the future to avoid
of Year 2000 Problems disruption of, or constraints on, our
We may be exposed to litigation with our operations.
customers and counterparties as a result of
Year 2000 problems. For example, litigation Legal and Regulatory Risks Are Inherent and
could arise from problems relating to our Substantial in Our Businesses
internal systems or to external systems on Substantial legal liability or a signiÑcant
which we depend, as well as from problems regulatory action against Goldman Sachs
involving companies in which our clients or could have a material Ñnancial eÅect or cause
the funds we manage hold investments. signiÑcant reputational harm to Goldman
Our Year 2000 Program May Not Be EÅective Sachs, which in turn could seriously harm our
and Our Estimates of Timing and Cost May Not business prospects.
Be Accurate
Our Exposure to Legal Liability Is SigniÑcant
Our Year 2000 program may not be
eÅective and our estimates about the timing We face signiÑcant legal risks in our
and cost of completing our program may not businesses and the volume and amount of
be accurate. For a description of our program damages claimed in litigation against Ñnancial
and the steps that remain to be taken, see intermediaries are increasing. These risks
""Management's Discussion and Analysis of include potential liability under securities or
Financial Condition and Results of Opera- other laws for materially false or misleading
tions Ì Risk Management Ì Operational and statements made in connection with securities
Year 2000 Risks Ì Year 2000 Readiness Dis- and other transactions, potential liability for
closure''. the ""fairness opinions'' and other advice we
provide to participants in corporate transac-
tions and disputes over the terms and condi-
Other Operational Risks May Disrupt Our
tions of complex trading arrangements. We
Businesses, Result in Regulatory Action
also face the possibility that counterparties in
Against Us or Limit Our Growth
complex or risky trading transactions will
We face operational risk arising from claim that we improperly failed to tell them of
mistakes made in the conÑrmation or settle- the risks or that they were not authorized or
ment of transactions or from transactions not permitted to enter into these transactions with
being properly recorded, evaluated or ac- us and that their obligations to Goldman
counted for. Our businesses are highly de- Sachs are not enforceable. Particularly in our
pendent on our ability to process, on a daily rapidly growing business focused on high net
basis, a large number of transactions across worth individuals, we are increasingly ex-
numerous and diverse markets in many cur- posed to claims against Goldman Sachs for
rencies, and the transactions we process recommending investments that are not con-
have become increasingly complex. Conse- sistent with a client's investment objectives or
quently, we rely heavily on our Ñnancial, engaging in unauthorized or excessive trad-
accounting and other data processing sys- ing. During a prolonged market downturn, we
tems. If any of these systems do not operate would expect these types of claims to in-
properly or are disabled, we could suÅer crease. We are also subject to claims arising
Ñnancial loss, a disruption of our businesses, from disputes with employees for alleged
liability to clients, regulatory intervention or discrimination or harassment, among other
reputational damage. The inability of our sys- things. These risks often may be diÇcult to
tems to accommodate an increasing volume assess or quantify and their existence and

17
magnitude often remain unknown for substan- Employee Misconduct Could Harm
tial periods of time. We incur signiÑcant legal Goldman Sachs and Is DiÇcult to
expenses every year in defending against Detect and Deter
litigation, and we expect to continue to do so
There have been a number of highly
in the future. See ""Business Ì Legal Mat-
publicized cases involving fraud or other mis-
ters'' for a discussion of some of the legal
conduct by employees in the Ñnancial ser-
matters in which we are currently involved.
vices industry in recent years, and we run the
risk that employee misconduct could occur.
Extensive Regulation of Our Businesses Limits Misconduct by employees could include
Our Activities and May Subject Us to SigniÑ- binding Goldman Sachs to transactions that
cant Penalties exceed authorized limits or present unaccept-
able risks, or hiding from Goldman Sachs
The Ñnancial services industry is subject unauthorized or unsuccessful activities, which,
to extensive regulation. Goldman Sachs is in either case, may result in unknown and
subject to regulation by governmental and unmanaged risks or losses. Employee mis-
self-regulatory organizations in the United conduct could also involve the improper use
States and in virtually all other jurisdictions in or disclosure of conÑdential information,
which it operates around the world. which could result in regulatory sanctions and
serious reputational or Ñnancial harm. It is not
The requirements imposed by our regula- always possible to deter employee miscon-
tors are designed to ensure the integrity of duct and the precautions we take to prevent
the Ñnancial markets and to protect custom- and detect this activity may not be eÅective in
ers and other third parties who deal with all cases.
Goldman Sachs and are not designed to
protect our shareholders. Consequently, these The Financial Services Industry Is Intensely
regulations often serve to limit our activities, Competitive and Rapidly Consolidating
including through net capital, customer pro- The Ñnancial services industry Ì and all
tection and market conduct requirements. We of our businesses Ì are intensely competi-
face the risk of signiÑcant intervention by tive, and we expect them to remain so. We
regulatory authorities, including extended in- compete on the basis of a number of factors,
vestigation and surveillance activity, adoption including transaction execution, our products
of costly or restrictive new regulations and and services, innovation, reputation and price.
judicial or administrative proceedings that We have experienced intense price competi-
may result in substantial penalties. Among tion in some of our businesses in recent
other things, we could be Ñned or prohibited years, such as underwriting fees on invest-
from engaging in some of our business ment grade debt oÅerings and privatizations.
activities. See ""Business Ì Regulation'' for a We believe we may experience pricing pres-
further discussion of the regulatory environ- sures in these and other areas in the future
ment in which we conduct our businesses. as some of our competitors seek to obtain
market share by reducing prices.
Legal Restrictions on Our Clients May Reduce
the Demand for Our Services We Face Increased Competition Due to a
Trend Toward Consolidation
New laws or regulations or changes in In recent years, there has been substan-
enforcement of existing laws or regulations tial consolidation and convergence among
applicable to our clients may also adversely companies in the Ñnancial services industry.
aÅect our businesses. For example, changes In particular, a number of large commercial
in antitrust enforcement could aÅect the level banks, insurance companies and other broad-
of mergers and acquisitions activity and based Ñnancial services Ñrms have estab-
changes in regulation could restrict the activi- lished or acquired broker-dealers or have
ties of our clients and, therefore, the services merged with other Ñnancial institutions. Many
we provide on their behalf. of these Ñrms have the ability to oÅer a wide

18
range of products, from loans, deposit-taking We Are Exposed to Special Risks in
and insurance to brokerage, asset manage- Emerging and Other Markets
ment and investment banking services, which In conducting our businesses in major
may enhance their competitive position. They markets around the world, including many
also have the ability to support investment developing markets in Asia, Latin America
banking and securities products with commer- and Eastern Europe, we are subject to politi-
cial banking, insurance and other Ñnancial cal, economic, legal, operational and other
services revenues in an eÅort to gain market risks that are inherent in operating in other
share, which could result in pricing pressure countries. These risks range from diÇculties
in our businesses. in settling transactions in emerging markets to
possible nationalization, expropriation, price
Consolidation Has Increased Our Need for
controls and other restrictive governmental
Capital
actions. We also face the risk that exchange
This trend toward consolidation and con- controls or similar restrictions imposed by
vergence has signiÑcantly increased the capi- foreign governmental authorities may restrict
tal base and geographic reach of our our ability to convert local currency received
competitors. This trend has also hastened the or held by us in their countries into U.S.
globalization of the securities and other Ñnan- dollars or other currencies, or to take those
cial services markets. As a result, we have dollars or other currencies out of those
had to commit capital to support our interna- countries.
tional operations and to execute large global
To date, a relatively small part of our
transactions.
businesses has been conducted in emerging
Our Ability to Expand Internationally Will and other markets. As we expand our busi-
Depend on Our Ability to Compete Success- nesses in these areas, our exposure to these
fully with Local Financial Institutions risks will increase.

We believe that some of our most signiÑ- Turbulence in Emerging Markets May
cant challenges and opportunities will arise Adversely AÅect Our Businesses
outside the United States, as described under In the last several years, various emerg-
""Industry and Economic Outlook''. In order to ing market countries have experienced severe
take advantage of these opportunities, we will economic and Ñnancial disruptions, including
have to compete successfully with Ñnancial signiÑcant devaluations of their currencies
institutions based in important non-U.S. mar- and low or negative growth rates in their
kets, particularly in Europe. Some of these economies. The possible eÅects of these
institutions are larger, better capitalized and conditions include an adverse impact on our
have a stronger local presence and a longer businesses and increased volatility in Ñnancial
operating history in these markets. markets generally. Moreover, economic or
market problems in a single country or region
Our Revenues May Decline Due to Competition
are increasingly aÅecting other markets gen-
from Alternative Trading Systems
erally. For example, the economic crisis in
Securities and futures transactions are Russia in August 1998 adversely aÅected
now being conducted through the Internet and other emerging markets and led to turmoil in
other alternative, non-traditional trading sys- Ñnancial markets worldwide. See ""Manage-
tems, and it appears that the trend toward ment's Discussion and Analysis of Financial
alternative trading systems will continue and Condition and Results of Operations Ì Busi-
probably accelerate. A dramatic increase in ness Environment'' for a discussion of the
computer-based or other electronic trading business environment in which we operated
may adversely aÅect our commission and during the second half of Ñscal 1998. A
trading revenues, reduce our participation in continuation of these situations could ad-
the trading markets and associated access to versely aÅect global economic conditions and
market information and lead to the creation of world markets and, in turn, could adversely
new and stronger competitors. aÅect our businesses. Among the risks are

19
regional or global market downturns and, as ject to certain restrictions on transfer under a
noted above, increasing liquidity and credit shareholders' agreement and a portion may be
risks, particularly in Japan where the econ- pledged to support these partners' obligations
omy continues to be weak and we have under noncompetition agreements. The transfer
signiÑcant exposure. restrictions under the shareholders' agreement
may, however, be waived, as described under
Compliance with Local Laws and Regulations ""Certain Relationships and Related Transac-
May Be DiÇcult tions Ì Shareholders' Agreement Ì Transfer
In many countries, the laws and regula- Restrictions'' and ""Ì Waivers''. The steps we
tions applicable to the securities and Ñnancial have taken to encourage the continued service
services industries are uncertain and evolving, of these individuals after the offerings may not
and it may be diÇcult for us to determine the be effective. For a description of the compen-
exact requirements of local laws in every sation plan for our senior professionals to be
market. Our inability to remain in compliance implemented after the offerings, see ""Manage-
with local laws in a particular foreign market ment Ì The Partner Compensation Plan''.
could have a signiÑcant and negative eÅect In connection with the oÅerings and con-
not only on our businesses in that market but version of Goldman Sachs from partnership
also on our reputation generally. These un- to corporate form, employees, other than the
certainties may also make it diÇcult for us to managing directors who were proÑt participat-
structure our transactions in such a way that ing limited partners, will receive grants of
the results we expect to achieve are legally restricted stock units, stock options or inter-
enforceable in all cases. See ""Ì Legal and ests in a deÑned contribution plan. The incen-
Regulatory Risks Are Inherent and Substantial tives to attract, retain and motivate employees
in Our Businesses Ì Our Exposure to Legal provided by these awards or by future ar-
Liability Is SigniÑcant'' for additional informa- rangements may not be as eÅective as the
tion concerning these matters and ""Busi- opportunity, which existed prior to conver-
ness Ì Regulation'' for a discussion of the sion, to become a partner of Goldman Sachs.
regulatory environment in which we conduct See ""Management Ì The Employee Initial
our businesses. Public OÅering Awards'' for a description of
these awards.
Our Conversion to Corporate Form
May Adversely AÅect Our Ability to Recruit,
Goldman Sachs Will Be Controlled by Its
Retain and Motivate Key Employees
Managing Directors Whose Interests May
Our performance is largely dependent on DiÅer from Those of Other Shareholders
the talents and eÅorts of highly skilled individ-
Upon completion of the oÅerings, our
uals. Competition in the Ñnancial services
managing directors will collectively own not
industry for qualiÑed employees is intense.
less than 281,000,000 shares of common
Our continued ability to compete eÅectively in
stock, or 60% of the total shares of common
our businesses depends on our ability to
stock outstanding, which includes the shares
attract new employees and to retain and
of common stock underlying the restricted
motivate our existing employees.
stock units to be awarded based on a
In connection with the offerings and the formula. These shares will be subject to a
conversion of Goldman Sachs from partnership shareholders' agreement, which will provide
to corporate form, the managing directors who for coordinated voting by the parties. Further,
were profit participating limited partners will both Sumitomo Bank Capital Markets, Inc.
receive substantial amounts of common stock and Kamehameha Activities Association,
in exchange for their interests in Goldman which together will own 43,400,473 shares of
Sachs. Because these shares of common stock common stock, or 9.3% of the total shares of
will be received in exchange for partnership common stock outstanding after consumma-
interests, ownership of these shares will not be tion of the oÅerings, have agreed to vote their
dependent upon these partners' continued em- shares of common stock in the same manner
ployment. However, these shares will be sub- as a majority of the shares held by our

20
managing directors are voted. See ""Certain or the waiver of transfer restrictions or in
Relationships and Related Transactions Ì accordance with registration rights. See
Shareholders' Agreement Ì Voting'' and ""Shares Eligible for Future Sale'' for a discus-
""Ì Voting Agreement'' for a discussion of sion of the shares of common stock that may
these voting arrangements. be sold into the public market in the future.
As a result of these arrangements, the
Our Common Stock May Trade at
managing directors initially will be able to
Prices Below the Initial Public
elect our entire board of directors, control the
OÅering Price
management and policies of Goldman Sachs
and, in general, determine, without the con- The price of the common stock after the
sent of the other shareholders, the outcome oÅerings may Öuctuate widely, depending
of any corporate transaction or other matter upon many factors, including the perceived
submitted to the shareholders for approval, prospects of Goldman Sachs and the securi-
including mergers, consolidations and the sale ties and Ñnancial services industries in gen-
of all or substantially all of the assets of eral, diÅerences between our actual Ñnancial
Goldman Sachs. The managing directors ini- and operating results and those expected by
tially will be able to prevent or cause a investors and analysts, changes in analysts'
change in control of Goldman Sachs. recommendations or projections, changes in
general economic or market conditions and
Provisions of Our Organizational Documents
broad market Öuctuations. The common stock
May Discourage an Acquisition of Goldman
may trade at prices signiÑcantly below the
Sachs
initial public oÅering price.
Our organizational documents contain
provisions that will impede the removal of The Liquidity of Our Common Stock
directors and may discourage a third party May Be Adversely AÅected by an Inability
from making a proposal to acquire us. For of Goldman, Sachs & Co. to Act as a
example, our board of directors may, without Market-Maker in the Common Stock
the consent of shareholders, issue preferred
stock with greater voting rights than the We will list the common stock on the
common stock. See ""Description of Capital NYSE. The NYSE listing does not, however,
Stock Ì Certain Anti-Takeover Matters'' for a guarantee that a trading market for the com-
discussion of these anti-takeover provisions. mon stock will develop or, if a market does
develop, the liquidity of that market for the
Our Share Price May Decline Due to the common stock.
Large Number of Shares Eligible After the oÅerings, because Goldman,
for Future Sale Sachs & Co. is a member of the NYSE and
Sales of substantial amounts of common because of Goldman, Sachs & Co.'s relation-
stock, or the possibility of such sales, may ship to us, it will not be permitted under the
adversely affect the price of the common stock rules of the NYSE to make markets in, or
and impede our ability to raise capital through recommendations regarding the purchase or
the issuance of equity securities. See ""Shares sale of, the common stock. This may ad-
Eligible for Future Sale'' for a discussion of versely aÅect the trading market for the
possible future sales of common stock. common stock.
Upon consummation of the oÅerings,
We Expect to Record a Substantial Pre-Tax
there will be 467,271,909 shares of common
Loss in the Second Quarter of Fiscal 1999
stock outstanding. Of these shares, the
69,000,000 shares of common stock sold in We expect to record a substantial pre-tax
the oÅerings will be freely transferable without loss in the second quarter of Ñscal 1999 due
restriction or further registration under the to a number of nonrecurring items described
Securities Act of 1933. The remaining under ""Management's Discussion and Analy-
398,271,909 shares of common stock will be sis of Financial Condition and Results of
available for future sale upon the expiration Operations Ì Results of Operations''.

21
 USE OF PROCEEDS
Based upon the initial public oÅering net proceeds to provide additional funds for
price of $53.00 per share, Goldman Sachs will our operations and for other general corpo-
receive net proceeds from the U.S., interna- rate purposes, although we have not yet
tional and Asia/PaciÑc oÅerings of $2.6 bil- determined a speciÑc use. Pending speciÑc
lion, after deducting the underwriting application of the net proceeds, we intend to
discounts and estimated expenses that are use them to purchase short-term marketable
payable by Goldman Sachs in the oÅerings. securities.
The above amounts do not include underwrit- We will not receive any of the proceeds
ing discounts that will be received by from the sale of shares of our common stock
Goldman, Sachs & Co., Goldman Sachs Inter- by Sumitomo Bank Capital Markets, Inc. or
national and Goldman Sachs (Asia) L.L.C. as Kamehameha Activities Association.
underwriters in the oÅerings. We will use the

DIVIDEND POLICY
The holders of common stock and non- board of directors. Our board of directors will
voting common stock of Goldman Sachs will take into account such matters as general
share proportionately on a per share basis in business conditions, our Ñnancial results,
all dividends and other distributions declared capital requirements, contractual, legal and
by our board of directors. Our board of regulatory restrictions on the payment of
directors currently intends to declare quarterly
dividends by us to our shareholders or by our
dividends on all outstanding shares of com-
subsidiaries to us, the eÅect on our debt
mon stock and nonvoting common stock and
expects that the Ñrst quarterly dividend will be ratings and such other factors as our board
$0.12 per share, and that it will be declared of directors may deem relevant. See ""Busi-
during the third quarter of Ñscal 1999. ness Ì Regulation'' for a discussion of
potential regulatory limitations on our receipt
The declaration of dividends by Goldman
of funds from our regulated subsidiaries.
Sachs is subject to the discretion of our

22
 REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA CONSOLIDATED INCOME STATEMENT INFORMATION

To the Partners,
The Goldman Sachs Group, L.P.:

We have examined the pro forma adjustments reÖecting (i) the incorporation transactions
and the related transactions described under ""Certain Relationships and Related Transactions Ì
Incorporation and Related Transactions''; (ii) compensation to managing directors who were
proÑt participating limited partners; (iii) compensation in the form of restricted stock units
awarded to employees in lieu of ongoing cash compensation; and (iv) the provision for
corporate income taxes (collectively, the ""Pro Forma Adjustments''), and the oÅerings, all as
described in Note 2 to the Pro Forma Consolidated Financial Information (included on pages 25
to 31 of this prospectus) and the application of those adjustments to the historical amounts in
the Pro Forma Consolidated Income Statement Information for the year ended November 27,
1998. The historical consolidated income statement information is derived from the historical
consolidated Ñnancial statements of Goldman Sachs, which were audited by us and which are
included elsewhere in this prospectus. The Pro Forma Adjustments are based upon manage-
ment's assumptions described in Note 2 to the Pro Forma Consolidated Financial Information.
Our examination was made in accordance with standards established by the American Institute of
CertiÑed Public Accountants and, accordingly, included such procedures as we considered
necessary in the circumstances.
The objective of this pro forma consolidated Ñnancial information is to show what the
signiÑcant eÅects on the historical income statement information of Goldman Sachs might have
been had the Pro Forma Adjustments and the oÅerings occurred at an earlier date. However, the
Pro Forma Consolidated Income Statement Information is not necessarily indicative of the results
of operations that would have been attained had the above-mentioned Pro Forma Adjustments
and the oÅerings actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for presenting the
signiÑcant eÅects directly attributable to the above-mentioned Pro Forma Adjustments and the
oÅerings, all as described in Note 2 to the Pro Forma Consolidated Financial Information, the
related pro forma adjustments give appropriate eÅect to those assumptions, and the ""Pro
Forma'' and ""Pro Forma as Adjusted for OÅerings'' columns reÖect the proper application of
those adjustments to the historical consolidated income statement amounts in the Pro Forma
Consolidated Income Statement Information for the year ended November 27, 1998.

PricewaterhouseCoopers LLP

New York, New York

May 3, 1999.

23
 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS ON
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
To the Partners,
The Goldman Sachs Group, L.P.:
We have reviewed the pro forma adjustments reÖecting (i) the incorporation transactions
and the related transactions described under ""Certain Relationships and Related Transactions Ì
Incorporation and Related Transactions''; (ii) compensation to managing directors who were
proÑt participating limited partners; (iii) compensation in the form of restricted stock units
awarded to employees in lieu of ongoing cash compensation; (iv) the provision for corporate
income taxes; (v) the redemption of Goldman Sachs' senior limited partnership interests;
(vi) cash distributions by The Goldman Sachs Group, L.P. to its partners in the second quarter
of Ñscal 1999 in accordance with the Goldman Sachs partnership agreement, including
distributions for partner income taxes related to Goldman Sachs' earnings in the Ñrst quarter of
Ñscal 1999, capital withdrawals by the managing directors who were proÑt participating limited
partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association and
distributions to satisfy obligations to retired limited partners; and (vii) the recognition of net tax
assets (collectively, the ""Pro Forma Adjustments''), and the oÅerings, all as described in Note 2
to the Pro Forma Consolidated Financial Information (included on pages 25 to 31 of this
prospectus) and the application of those adjustments to the historical amounts in the Pro Forma
Consolidated Balance Sheet Information as of February 26, 1999 and the Pro Forma
Consolidated Income Statement Information for the three months then ended. The historical
consolidated Ñnancial statement information is derived from the historical condensed consoli-
dated Ñnancial statements of Goldman Sachs, which were reviewed by us and which are included
elsewhere in this prospectus. The Pro Forma Adjustments are based upon management's
assumptions described in Note 2 to the Pro Forma Consolidated Financial Information. Our
review was made in accordance with standards established by the American Institute of CertiÑed
Public Accountants.
A review is substantially less in scope than an examination, the objective of which is the
expression of an opinion on management's assumptions, the pro forma adjustments and the
application of those adjustments to historical Ñnancial information. Accordingly, we do not
express such an opinion.
The objective of this pro forma consolidated Ñnancial information is to show what the
signiÑcant eÅects on the historical Ñnancial information of Goldman Sachs might have been had
the Pro Forma Adjustments and the oÅerings occurred at an earlier date. However, the Pro
Forma Consolidated Income Statement Information and the Pro Forma Consolidated Balance
Sheet Information are not necessarily indicative of the results of operations or related eÅects on
Ñnancial position that would have been attained had the above-mentioned Pro Forma
Adjustments and the oÅerings actually occurred earlier.
Based on our review, nothing came to our attention that caused us to believe that
management's assumptions do not provide a reasonable basis for presenting the signiÑcant
eÅects directly attributable to the above-mentioned Pro Forma Adjustments and the oÅerings, all
as described in Note 2 to the Pro Forma Consolidated Financial Information, that the related pro
forma adjustments do not give appropriate eÅect to those assumptions, or that the ""Pro Forma''
and ""Pro Forma as Adjusted for OÅerings'' columns do not reÖect the proper application of
those adjustments to the historical consolidated Ñnancial statement amounts in the Pro Forma
Consolidated Balance Sheet Information as of February 26, 1999 and the Pro Forma
Consolidated Income Statement Information for the three months then ended.

PricewaterhouseCoopers LLP
New York, New York
May 3, 1999.

24
 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Consolidated The Pro Forma Consolidated Income
Financial Information is based upon the his- Statement Information does not give eÅect to
torical consolidated Ñnancial statements of the following items because of their non-
Goldman Sachs. In addition to the oÅerings, recurring nature:
this information reÖects the pro forma eÅects
of the following items: ‚ the restricted stock units awarded to em-
ployees based on a formula;
‚ the incorporation transactions and the re-
lated transactions described under ""Certain
‚ the initial irrevocable contribution of shares
Relationships and Related Transactions Ì
of common stock to the deÑned contribu-
Incorporation and Related Transactions'';
tion plan;
‚ compensation to managing directors who
were proÑt participating limited partners; ‚ the recognition of net tax assets; and
‚ compensation in the form of restricted
‚ a contribution to the Goldman Sachs Fund,
stock units awarded to employees in lieu of
a charitable foundation.
ongoing cash compensation;
‚ the provision for corporate income taxes; The Pro Forma Consolidated Balance
Sheet Information, however, does give eÅect
‚ the redemption of our senior limited part-
to these non-recurring items.
nership interests;
‚ cash distributions by The Goldman Sachs The Pro Forma Adjustments are based
Group, L.P. to its partners in the second upon available information and certain as-
quarter of Ñscal 1999 in accordance with its sumptions that management believes are rea-
partnership agreement, including distribu- sonable. The Pro Forma Consolidated
tions for partner income taxes related to Financial Information and accompanying
earnings in the Ñrst quarter of Ñscal 1999, notes should be read in conjunction with the
capital withdrawals by the managing direc- consolidated Ñnancial statements and their
tors who were proÑt participating limited notes.
partners, Sumitomo Bank Capital Markets,
Inc. and Kamehameha Activities Association The Pro Forma Consolidated Financial
and distributions to satisfy obligations to Information presented is not necessarily in-
retired limited partners; and dicative of the results of operations or
Ñnancial position that might have occurred
‚ the recognition of net tax assets.
had the Pro Forma Adjustments actually
These items are collectively referred to as the taken place as of the dates speciÑed, or
""Pro Forma Adjustments''. that may be expected to occur in the future.

25
 Pro Forma Consolidated Income Statement Information
(in millions, except per share data)

Year Ended November 27, 1998

Pro Forma
Pro Forma Adjustment as Adjusted
Historical Adjustments Pro Forma for OÅerings for OÅerings

Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22,478 $ Ì $22,478 $ Ì $22,478

Interest expense, principally on short-term
funding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,958 28 (a) 13,986 Ì 13,986
Revenues, net of interest expenseÏÏÏÏÏÏÏÏÏÏÏ 8,520 (28) 8,492 Ì 8,492
Compensation and beneÑts, excluding
employee initial public oÅering awards ÏÏÏÏÏ 3,838 303 (b) 4,141 Ì 4,141
Employee initial public oÅering awards ÏÏÏÏÏÏÏ Ì 461 (c) 461 Ì 461
Other operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,761 Ì 1,761 Ì 1,761
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,599 764 6,363 Ì 6,363
Pre-tax earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,921 (792) 2,129 Ì 2,129
Provision for taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 493 380 (d) 873 Ì 873
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,428 $(1,172) $ 1,256 $ Ì $ 1,256

Shares outstanding:
BasicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 424(e) 51(f) 475
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 428(e) 51(f) 479
Earnings per share:
BasicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.96 $ 2.65
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.93 2.62

Pro Forma Consolidated Income Statement Information

(unaudited)
(in millions, except per share data)

Three Months Ended February 26, 1999

Pro Forma
Pro Forma Adjustment as Adjusted
Historical Adjustments Pro Forma for OÅerings for OÅerings

Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,856 $ Ì $ 5,856 $ Ì $ 5,856

Interest expense, principally on short-term
funding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,861 7 (a) 2,868 Ì 2,868
Revenues, net of interest expenseÏÏÏÏÏÏÏÏÏÏÏ 2,995 (7) 2,988 Ì 2,988
Compensation and beneÑts, excluding
employee initial public oÅering awards ÏÏÏÏÏ 1,275 191 (b) 1,466 Ì 1,466
Employee initial public oÅering awards ÏÏÏÏÏÏÏ Ì 115 (c) 115 Ì 115
Other operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 532 Ì 532 Ì 532
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,807 306 2,113 Ì 2,113
Pre-tax earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,188 (313) 875 Ì 875
Provision for taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 181 178 (d) 359 Ì 359
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,007 $ (491) $ 516 $ Ì $ 516

Shares outstanding:
BasicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 427(e) 51(f) 478
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 437(e) 51(f) 488
Earnings per share:
BasicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.21 $ 1.08
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.18 1.06

The accompanying notes are an integral part of the Pro Forma Consolidated Financial Information.

26
 Pro Forma Consolidated Balance Sheet Information
(unaudited)
(in millions, except per share data)
As of February 26, 1999
Pro Forma
Pro Forma Adjustment as Adjusted
Historical Adjustments Pro Forma for OÅerings for OÅerings
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,345 $ (200)(g) $ 134 $2,568(f) $ 2,702
(891)(h)
(888)(i)
(1,232)(k)
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227,279 1,815 (l) 229,094 Ì 229,094
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $230,624 $(1,396) $229,228 $2,568 $231,796

Long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 20,405 $ 371 (a) $ 20,776 $ Ì $ 20,776

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 203,228 165 (b) 203,393 Ì 203,393
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223,633 536 224,169 Ì 224,169
Partners' capital, partners' capital allocated for
income taxes and potential withdrawals, and
accumulated other comprehensive income ÏÏÏ 6,991 (371)(a)
(891)(h)
(888)(i)
(3,609)(j)
(1,232)(k)
Total partnership capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,991 (6,991) Ì Ì Ì
Common stock and nonvoting common stock,
par value $0.01 per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4 (j) 4 Ì 4
Restricted stock units ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,356 (m) 3,356 Ì 3,356
Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,605 (j) 4,271 2,568(f) 6,839
666 (m)
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (165)(b) (807) Ì (807)
(200)(g)
1,815 (l)
(2,257)(m)
Unearned compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (1,765)(m) (1,765) Ì (1,765)
Total stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5,059 5,059 2,568 7,627
Total liabilities, partnership capital and
stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $230,624 $(1,396) $229,228 $2,568 $231,796

Book value per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11.94 $ 16.07

The accompanying notes are an integral part of the Pro Forma Consolidated Financial Information.

27
 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

Note 1: Basis of Presentation that would have been paid, in corporate form,
to the managing directors who were proÑt
As permitted by the rules and regulations
participating limited partners for services ren-
of the SEC, the Pro Forma Consolidated
dered in Ñscal 1998 and in the three months
Financial Information is presented on a con-
ended February 26, 1999. Accordingly, man-
densed basis. The Pro Forma Consolidated
agement has estimated these amounts, which
Balance Sheet Information was prepared as if
are substantially performance-based, by ref-
the Pro Forma Adjustments had occurred as
erence to a pro forma ratio of total compen-
of February 26, 1999. Book value per share
sation and beneÑts to net revenues that it
equals stockholders' equity divided by the
deemed appropriate for Goldman Sachs as a
shares of common stock and nonvoting com-
whole, given the historical operating results in
mon stock outstanding, including the shares
these periods. As a result, additional compen-
of common stock underlying the restricted
sation and beneÑts expense related to the
stock units awarded to employees based on a
managing directors who were proÑt participat-
formula, of 423,712,271 prior to the oÅerings
ing limited partners of $427 million in Ñscal
and 474,712,271 as adjusted for the oÅerings.
1998 and $242 million in the three months
See Note 2(e) below for a further discussion
ended February 26, 1999 has been recorded
of shares outstanding.
on the Pro Forma Consolidated Income State-
The Pro Forma Consolidated Income ment Information.
Statement Information for the Ñscal year en- The future compensation and beneÑts
ded November 27, 1998 and the three-month related to services rendered by the managing
Ñscal period ended February 26, 1999 was directors who were proÑt participating limited
prepared as if the Pro Forma Adjustments partners will be based upon measures of
had taken place at the beginning of Ñscal Ñnancial performance, including net revenues,
1998. pre-tax earnings and the ratio of compensa-
For pro forma purposes, the oÅerings tion and beneÑts to net revenues, as de-
and, where applicable, the related transac- scribed under ""Management Ì The Partner
tions reÖect the initial public oÅering price of Compensation Plan Ì Determination of Salary
$53.00 per share. and Bonus''. Management anticipates that,
consistent with industry practice, it will adjust
Note 2: Pro Forma Adjustments and Adjust- the form and structure of its compensation
ment for OÅerings arrangements to achieve a relationship of
compensation and beneÑts to net revenues
(a) Retired limited partners exchange within a range that it believes is appropriate
of interests for debentures. Adjustment to given prevailing market conditions.
reÖect the issuance of junior subordinated
debentures to the retired limited partners in In addition to the employee initial public
exchange for their interests in The Goldman oÅering awards, restricted stock units will
Sachs Group, L.P. and certain aÇliates. also be granted to employees in lieu of a
These junior subordinated debentures will portion of ongoing cash compensation. Of the
have a principal amount of $295 million, an total restricted stock units assumed to be
initial carrying value of $371 million and an granted in lieu of cash compensation, 50%
eÅective interest rate of 7.5%. The annual will require future service as a condition to
interest expense to be recorded on these the delivery of the underlying shares of com-
debentures in the Ñrst year will be $28 million. mon stock. In accordance with Accounting
Principles Board Opinion No. 25, the re-
(b) Compensation and beneÑts, exclud- stricted stock units with future service re-
ing employee initial public oÅering awards. quirements will be recorded as compensation
Since Goldman Sachs has operated as a expense over the four-year service period
partnership, there is no meaningful historical
measure of the compensation and beneÑts

28
 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Ì (Continued)

following the date of grant. Goldman Sachs as a non-cash expense in the twelve months
expects to record this expense over the following the date of grant. The remaining
service period as follows: 52%, 28%, 14% and 74% of the value of these restricted stock
6% in years one, two, three and four, respec- units will be amortized over the next four
tively. If these stock-based awards had been years as follows: 26%, 26%, 15% and 7% in
made from the beginning of Ñscal 1998, years two, three, four and Ñve, respectively.
historical compensation expense would have
been reduced by $124 million in Ñscal 1998 The options to purchase 40,127,592
and $51 million in the three months ended shares of common stock awarded to employ-
February 26, 1999 because a portion of cash ees on a discretionary basis will be accounted
compensation recorded in these periods for pursuant to Accounting Principles Board
would have been replaced by restricted stock Opinion No. 25, as permitted by paragraph 5
units with future service requirements. These of Statement of Financial Accounting Stan-
reductions are reÖected in the Pro Forma dards No. 123. Since these options will have
Consolidated Income Statement Information. no intrinsic value on the date of grant, no
compensation expense will be recognized.
The adjustment of $165 million to the Pro
Forma Consolidated Balance Sheet Informa- The estimated fair value of these discre-
tion reÖects the additional compensation and tionary options on the date of grant is $709
beneÑts that we would have recorded assum- million using a Black-Scholes option pricing
ing the Pro Forma Adjustments had occurred model. If Statement of Financial Accounting
as of February 26, 1999. This adjustment Standards No. 123 had been applied, com-
includes $232 million in compensation and pensation expense of $185 million and $46
beneÑts related to the managing directors million would have been included in the Pro
who were proÑt participating limited partners Forma Consolidated Income Statement Infor-
oÅset by a reduction of $67 million related to mation in Ñscal 1998 and the three months
the issuance of restricted stock units to ended February 26, 1999, respectively. See
employees, in lieu of a portion of cash ""Management Ì The Employee Initial Public
compensation, for which future service is OÅering Awards'' for a description of these
required as a condition to the delivery of the awards.
underlying shares of common stock. This
adjustment to the Pro Forma Consolidated (d) Pro forma provision for income
Balance Sheet Information excludes the com- taxes. Adjustment to reÖect a pro forma
pensation expense of $26 million in the Ñrst provision for income taxes for Goldman
quarter of Ñscal 1999 related to the portion of Sachs in corporate form at an eÅective tax
restricted stock units that, for pro forma rate of 41%.
income statement purposes only, were as-
(e) Pro forma common stock and non-
sumed to be awarded in Ñscal 1998. See
voting common stock. Shares outstanding,
""Management's Discussion and Analysis of
computed on a weighted-average basis, after
Financial Condition and Results of Opera-
giving eÅect to the Pro Forma Adjustments.
tions Ì Results of Operations Ì Operating
For the purpose of calculating basic earnings
Expenses'' for a discussion of the actual
per share and book value per share, shares
expense we expect to record in the second
outstanding prior to the oÅerings includes the
quarter of Ñscal 1999.
nonvoting common stock, the shares of com-
(c) Expense related to employee initial mon stock irrevocably contributed to the de-
public oÅering awards. Adjustment to reÖect Ñned contribution plan and, pursuant to
the amortization of the 33,292,869 restricted Statement of Financial Accounting Standards
stock units awarded to employees on a No. 128, the shares of common stock under-
discretionary basis. These restricted stock lying the restricted stock units awarded to
units will have a value of $1,765 million, employees based on a formula since future
approximately 26% of which will be amortized service is not required as a condition to the

29
 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Ì (Continued)

delivery of the underlying shares of common partnership interests for cash of $888 million
stock. by The Goldman Sachs Group, L.P. prior to
the incorporation transactions described
With respect to the three months ended under ""Certain Relationships and Related
February 26, 1999, pro forma basic shares Transactions Ì Incorporation and Related
outstanding also includes the shares of com- Transactions Ì Incorporation Transactions''.
mon stock underlying the restricted stock
units assumed to be awarded in lieu of
ongoing cash compensation in Ñscal 1998 for (j) Partner exchanges of interests for
which future service would not have been shares. Adjustment of $3,609 million to re-
required as a condition to the delivery of the Öect the issuance of 265,019,073 shares of
underlying shares of common stock. common stock to the managing directors who
were proÑt participating limited partners,
Pro forma diluted shares outstanding 47,270,551 shares of common stock to retired
prior to the oÅerings reÖects the dilutive eÅect limited partners, 30,425,052 shares of com-
of the common stock deliverable pursuant to mon stock and 7,440,362 shares of nonvoting
the restricted stock units awarded to employ- common stock to Sumitomo Bank Capital
ees on a discretionary basis, and, with re- Markets, Inc. and 30,975,421 shares of com-
spect to the three months ended February 26, mon stock to Kamehameha Activities Associ-
1999, the dilutive eÅect of the shares of ation, in exchange for their respective
common stock underlying the restricted stock interests in The Goldman Sachs Group, L.P.
units assumed to be awarded in lieu of and certain aÇliates.
ongoing cash compensation in Ñscal 1998 for
which future service would have been re- (k) Cash distributions. Adjustment to
quired as a condition to the delivery of the reÖect cash distributions of $1,232 million by
underlying shares of common stock. The Goldman Sachs Group, L.P. to its part-
(f) Adjustment for the oÅerings. ners, including Sumitomo Bank Capital Mar-
Shares as adjusted to reÖect the issuance of kets, Inc. and Kamehameha Activities
51,000,000 shares of common stock oÅered Association, in the second quarter of Ñscal
by The Goldman Sachs Group, Inc., which 1999 in accordance with its partnership
reÖects the exercise, in full, of the underwrit- agreement, including distributions for partner
ers' options to purchase 9,000,000 shares of income taxes related to earnings in the Ñrst
common stock. Net proceeds from the oÅer- quarter of Ñscal 1999, capital withdrawals by
ings reÖect the deduction of underwriting the managing directors who were proÑt par-
discounts and of estimated expenses payable ticipating limited partners, Sumitomo Bank
by Goldman Sachs in connection with the Capital Markets, Inc. and Kamehameha Activi-
oÅerings. ties Association and distributions to satisfy
obligations to certain retired limited partners.
(g) Charitable contribution. Adjustment
to reÖect the charitable contribution of $200 Goldman Sachs expects that additional
million. cash distributions for partner income taxes
(h) Retired limited partner exchanges related to earnings in the second quarter of
of interests for cash. Adjustment to reÖect Ñscal 1999 will be signiÑcant due, in part, to
the payment of $891 million in cash to the certain expenses that are not deductible by
retired limited partners in exchange for their the partners. Goldman Sachs expects to re-
interests in The Goldman Sachs Group, L.P. cord a substantial tax asset on the consum-
and certain aÇliates. mation of the oÅerings related to these
expenses. These cash distributions and the
(i) Redemption of senior limited part- related tax asset are not reÖected in the Pro
nership interests for cash. Adjustment to Forma Consolidated Balance Sheet
reÖect the redemption of the senior limited Information.

30
 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Ì (Continued)

(l) Net tax assets. Adjustment to re- tial tax asset on the consummation of the
Öect the addition to retained earnings related oÅerings related to certain expenses that are
to the recognition of a net tax asset of not deductible by the partners in Ñscal 1999.
$1,815 million under Statement of Financial The tax asset associated with these expenses
Accounting Standards No. 109 at an eÅective in the second quarter of Ñscal 1999 is not
tax rate of 41%. The components of this net reÖected in the Pro Forma Consolidated Bal-
tax asset, which will be included in ""Other ance Sheet Information.
assets'' on the consolidated statement of
Ñnancial condition, are (i) a net beneÑt of (m) EÅect on stockholders' equity of
$808 million related to the conversion of The employee initial public oÅering awards. Ad-
Goldman Sachs Group, L.P. to corporate justment to reÖect the eÅect on the compo-
form, (ii) a beneÑt of $925 million related to nents of stockholders' equity, excluding the
the 30,025,946 restricted stock units awarded tax beneÑt described in Note 2(l) above, of
to employees based on a formula and the (i) the restricted stock units awarded to
initial irrevocable contribution of employees based on a formula, (ii) the initial
12,555,866 shares of common stock to the irrevocable contribution of shares of common
deÑned contribution plan and (iii) a beneÑt of stock to the deÑned contribution plan and
$82 million related to the charitable (iii) the restricted stock units awarded to
contribution. employees on a discretionary basis.

As discussed in Note 2(k) above, The following table sets forth each of
Goldman Sachs expects to record a substan- these components as of February 26, 1999:

Common Stock Additional

and Nonvoting Restricted Paid-In Retained Unearned
Common Stock Stock Units Capital Earnings Compensation
(in millions)

Restricted stock units awarded based on

a formula ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $1,591 $ Ì $(1,591) $ Ì
Contribution of shares of common stock
to the deÑned contribution plan ÏÏÏÏÏÏÏÏ Ì Ì 666 (666) Ì
Restricted stock units awarded on a
discretionary basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,765 Ì Ì (1,765)
Total Adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $3,356 $666 $(2,257) $(1,765)

31
 DILUTION

As of February 26, 1999, the pro forma common stock in the oÅerings at the initial
net tangible book value of Goldman Sachs public oÅering price of $53.00 per share and
was approximately $4.89 billion, or approxi- after deducting the underwriting discounts
mately $11.55 per share (which includes the and estimated expenses payable by Goldman
shares of nonvoting common stock, the Sachs in the oÅerings, the pro forma net
shares of common stock irrevocably contrib- tangible book value of Goldman Sachs as of
uted to the deÑned contribution plan and the February 26, 1999 would have been approxi-
shares of common stock underlying the re- mately $7.46 billion, or approximately $15.72
stricted stock units awarded to employees per share. This represents an immediate
based on a formula). ""Pro forma net tangible increase in net tangible book value of $4.17
book value'' per share represents the amount per share to existing shareholders and an
of Goldman Sachs' total consolidated tangible immediate dilution in net tangible book value
assets minus total consolidated liabilities, di- of $37.28 per share to new investors
vided by the 423,712,271 shares outstanding purchasing shares of common stock at the
on a pro forma basis after giving eÅect to the initial public oÅering price.
Pro Forma Adjustments described under ""Pro The following table illustrates this dilution
Forma Consolidated Financial Information''. on a per share basis:
After giving eÅect to the sale by The Goldman
Sachs Group, Inc. of 51,000,000 shares of

Initial public oÅering price per share of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $53.00
Pro forma net tangible book value per share before giving eÅect to the
oÅerings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11.55
Increase in net tangible book value per share attributable to the sale of
common stock in the oÅerings(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.17
Pro forma net tangible book value per share after giving eÅect to the
oÅerings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.72
Dilution in net tangible book value per share to new investors(3) ÏÏÏÏÏÏÏÏÏÏÏÏ $37.28

(1) Goldman Sachs' intangible assets as of February 26, 1999 were $166 million, comprised primarily of
goodwill, equivalent to $0.39 per share, after giving eÅect to the Pro Forma Adjustments described under
""Pro Forma Consolidated Financial Information'', and $0.35 per share after giving eÅect to the oÅerings.
(2) After deducting the underwriting discounts and estimated expenses payable by Goldman Sachs in the
oÅerings.
(3) Dilution is determined by subtracting pro forma net tangible book value per share after giving eÅect to the
oÅerings from the initial public oÅering price per share paid by a new investor.

Shares outstanding excludes 40,127,592 on a discretionary basis and shares of com-

shares of common stock deliverable pursuant mon stock that may be awarded in the future
to the options awarded to employees on a under the stock incentive plan. See ""Manage-
discretionary basis, 33,292,869 shares of ment Ì The Employee Initial Public OÅering
common stock deliverable pursuant to the Awards'' for a description of these awards
restricted stock units awarded to employees and the stock incentive plan.

32
 CAPITALIZATION
The following table sets forth the consoli- Sachs Group, Inc. in the oÅerings at the
dated capitalization of Goldman Sachs as of initial public oÅering price of $53.00 per
February 26, 1999: share, after deduction of the underwriting
‚ on an historical basis; discounts and estimated expenses payable
by Goldman Sachs in the oÅerings.
‚ on a pro forma basis after giving eÅect to
the Pro Forma Adjustments described This table should be read in conjunction
under ""Pro Forma Consolidated Financial with the consolidated Ñnancial statements and
Information''; and their notes and the Pro Forma Consolidated
Financial Information and their notes.
‚ as adjusted for the sale of 51,000,000
shares of common stock by The Goldman
As of February 26, 1999
Pro Forma
as Adjusted
Historical Pro Forma for the OÅerings
($ in millions)
Short-term borrowings (including commercial paper)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $33,863 $33,863 $33,863
Long-term borrowings(2):
Senior debt(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,405 $20,405 $20,405
Junior subordinated debentures(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 371 371
Total long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,405 20,776 20,776
Partners' capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,612 Ì Ì
Stockholders' equity:
Preferred stock, par value $0.01 per share; 150,000,000 shares
authorized, no shares issued and outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì
Common stock, par value $0.01 per share; 4,000,000,000 shares
authorized, 386,245,963 shares issued and outstanding
(437,245,963 shares issued and outstanding as adjusted)(5)ÏÏÏÏÏÏ Ì 4 4
Restricted stock units; 63,318,815 units issued and outstanding(6)ÏÏÏ Ì 3,356 3,356
Nonvoting common stock, par value $0.01 per share; 200,000,000
shares authorized, 7,440,362 shares issued and outstanding ÏÏÏÏÏÏÏ Ì 0 0
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 4,271 6,839
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (807) (807)
Unearned compensation(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,765) (1,765)
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5,059 7,627
Total capitalizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27,017 $25,835 $28,403
(1) Includes current portion of long-term borrowings of $6,285 million. See Note 4 to the unaudited condensed
consolidated Ñnancial statements as of February 26, 1999 for further information regarding Goldman Sachs' short-
term borrowings.
(2) After the oÅerings and subject to market conditions, we intend to raise additional funds in the public debt securities
market, including through an anticipated $1 billion oÅering of long-term debt securities and an anticipated 01 billion
oÅering of long-term debt securities payable in euros.
(3) Includes subordinated debt of Goldman, Sachs & Co. of $275 million.
(4) Consists of junior subordinated debentures issued to the retired limited partners as part of the incorporation
transactions. See ""Certain Relationships and Related Transactions Ì Incorporation and Related Transactions'' for
further information regarding the issuance of the debentures.
(5) Common stock outstanding includes 12,555,866 shares of common stock irrevocably contributed to the deÑned
contribution plan. Common stock outstanding excludes 40,127,592 shares of common stock deliverable pursuant
to the options awarded to employees on a discretionary basis. See ""Management Ì The Employee Initial Public
OÅering Awards'' for more detailed information regarding these awards.
(6) Restricted stock units include 30,025,946 shares of common stock underlying the restricted stock units awarded to
employees based on a formula and 33,292,869 shares of common stock underlying the restricted stock units
awarded to employees on a discretionary basis.
(7) Unearned compensation relates to the award of the restricted stock units awarded to employees on a discretionary
basis.

33
 SELECTED CONSOLIDATED FINANCIAL DATA

The selected historical consolidated income ended February 27, 1998 have been derived
statement and balance sheet data set forth from Goldman Sachs' unaudited condensed
below have been derived from Goldman Sachs' consolidated Ñnancial statements that, in the
consolidated Ñnancial statements and their opinion of management, include all adjustments,
notes. Goldman Sachs' consolidated Ñnancial consisting only of normal recurring adjustments,
statements have been audited by Price- necessary for a fair presentation. The interim
waterhouseCoopers LLP, independent public ac- results set forth below for the three months
countants, as of November 28, 1997 and ended February 26, 1999 may not be indicative
November 27, 1998 and for the years ended of results for the full year.
November 29, 1996, November 28, 1997 and
November 27, 1998. Goldman Sachs' condensed The pro forma data set forth below for the
consolidated Ñnancial statements have been re- year ended November 27, 1998 and as of and
viewed by PricewaterhouseCoopers LLP as of for the three months ended February 26, 1999
February 26, 1999 and for the three months have been derived from the pro forma data set
ended February 27, 1998 and February 26, forth in ""Pro Forma Consolidated Financial In-
1999. These Ñnancial statements are included formation'' included elsewhere in this prospec-
elsewhere in this prospectus, together with the tus. The pro forma consolidated income
reports thereon of PricewaterhouseCoopers statement information set forth in ""Pro Forma
LLP. Consolidated Financial Information'' for the year
ended November 27, 1998 have been examined
The selected historical consolidated income by PricewaterhouseCoopers LLP. The pro forma
statement and balance sheet data set forth consolidated Ñnancial information as of and for
below as of November 25, 1994, November 24, the three months ended February 26, 1999 has
1995 and November 29, 1996 and for the years been reviewed by PricewaterhouseCoopers LLP.
ended November 25, 1994 and November 24,
1995 have been derived from audited consoli- The selected consolidated Ñnancial data
dated Ñnancial statements of Goldman Sachs should be read in conjunction with ""Manage-
not included in this prospectus. ment's Discussion and Analysis of Financial
Condition and Results of Operations'', ""Pro
The selected historical consolidated income Forma Consolidated Financial Information'' and
statement and balance sheet data set forth the consolidated Ñnancial statements and their
below as of and for the three months ended notes.
February 26, 1999 and for the three months
As of or for
Three Months
As of or for Year Ended November Ended February
1994 1995 1996 1997 1998 1998 1999
(unaudited)
(in millions, except per share amounts)
Income Statement Data:
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,452 $ 14,324 $ 17,289 $ 20,433 $ 22,478 $ 5,903 $ 5,856
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,915 9,841 11,160 12,986 13,958 3,431 2,861
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,537 4,483 6,129 7,447 8,520 2,472 2,995
Compensation and beneÑts(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,789 2,005 2,421 3,097 3,838 1,100 1,275
Other operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,240 1,110 1,102 1,336 1,761 350 532
Pre-tax earnings(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 508 $ 1,368 $ 2,606 $ 3,014 $ 2,921 $ 1,022 $ 1,188

Balance Sheet Data:

Total assets(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $95,296 $100,066 $152,046 $178,401 $217,380 Ì $230,624
Long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,418 13,358 12,376 15,667 19,906 Ì 20,405
Total liabilities(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89,981 94,686 145,753 171,864 210,996 Ì 223,633
Partners' capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,771 4,905 5,309 6,107 6,310 Ì 6,612
Pro Forma Data:(3)
Pro forma net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì $ 1,256 Ì $ 516
Pro forma diluted earnings per share(4) ÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 2.93 Ì 1.18
Pro forma diluted earnings per share as adjusted
for the oÅerings(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 2.62 Ì 1.06
Pro forma diluted shares as adjusted for the
oÅerings(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 479 Ì 488
Pro forma stockholders' equity as adjusted for
the oÅerings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì $ 7,627
Pro forma book value per share as adjusted for
the oÅerings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 16.07

34
 SELECTED CONSOLIDATED FINANCIAL DATA
As of or for
Three Months
As of or for Year Ended November Ended February
1994 1995 1996 1997 1998 1998 1999
($ in millions)
Selected Data and Ratios (unaudited):
Pre-tax return on average partners' capital(1)ÏÏÏÏ 10% 28% 51% 53% 47% Ì Ì
Ratio of compensation and beneÑts to net
revenues(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51 45 40 42 45 44% 43%
Employees:
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,822 5,356 5,818 6,879 8,349 7,008 8,244
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,176 2,803 3,159 3,743 4,684 3,891 4,634
Total employees(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,998 8,159 8,977 10,622 13,033 10,899 12,878

Assets under supervision:

Assets under management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $43,671 $ 52,358 $ 94,599 $135,929 $194,821 $151,189 $206,380
Other client assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49,061 57,716 76,892 102,033 142,018 114,928 163,315
Total assets under supervision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $92,732 $110,074 $171,491 $237,962 $336,839 $266,117 $369,695

(1) Since we have historically operated in partnership form, payments to our proÑt participating limited partners
have been accounted for as distributions of partners' capital rather than as compensation expense. As a
result, our pre-tax earnings and compensation and beneÑts expense have not reÖected any payments for
services rendered by our managing directors who were proÑt participating limited partners. Accordingly, our
historical pre-tax earnings understate the expected operating costs to be incurred by us after the oÅerings.
As a corporation, we will include payments for services rendered by our managing directors who were proÑt
participating limited partners in compensation and beneÑts expense. For Ñnancial information that reÖects pro
forma compensation and beneÑts expense as if we had been a corporation, see ""Pro Forma Consolidated
Financial Information''.
(2) Total assets and liabilities were increased by $11.64 billion as of November 27, 1998 and $8.99 billion as of
February 26, 1999 due to the adoption of the provisions of Statement of Financial Accounting Standards
No. 125 that were deferred by Statement of Financial Accounting Standards No. 127. For a discussion of
Statement of Financial Accounting Standards Nos. 125 and 127, see ""Accounting Developments'' in Note 2
to the audited consolidated Ñnancial statements.
(3) ReÖects such adjustments as are necessary, in the opinion of management, for a fair presentation of the
results of operations and stockholders' equity of Goldman Sachs on a pro forma basis. See ""Pro Forma
Consolidated Financial Information'' for more detailed information concerning these adjustments.
(4) Calculated based on weighted-average diluted shares outstanding after giving eÅect to the Pro Forma
Adjustments. See ""Pro Forma Consolidated Financial Information'' for more detailed information concerning
these adjustments and the calculation of pro forma earnings per share.
(5) Calculated based on weighted-average diluted shares outstanding after giving eÅect to the Pro Forma
Adjustments and as adjusted to reÖect the issuance of 51,000,000 shares of common stock oÅered by The
Goldman Sachs Group, Inc. at the initial public oÅering price set forth on the cover page of this prospectus.
See ""Pro Forma Consolidated Financial Information'' for more detailed information concerning these
adjustments and the calculation of pro forma earnings per share.
(6) Excludes employees of Goldman Sachs' two property management subsidiaries, The Archon Group, L.P. and
Archon Group (France) S.C.A. Substantially all of the costs of these employees are reimbursed to Goldman
Sachs by the real estate investment funds to which the two companies provide property management
services. In addition, as of February 26, 1999, we had 3,400 temporary staÅ and consultants. For more
detailed information regarding our employees, see ""Business Ì Employees''.

35
 REPORT OF INDEPENDENT ACCOUNTANTS ON MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

To the Partners,
The Goldman Sachs Group, L.P.:
We have examined Management's Discussion and Analysis of Financial Condition and
Results of Operations, except as discussed in the third paragraph below (""MD&A''), taken as a
whole, of The Goldman Sachs Group, L.P. and Subsidiaries (the ""Firm'') for the three-year
period ended November 27, 1998, included on pages 37 to 62 of this prospectus. Management is
responsible for the preparation of the Firm's MD&A pursuant to the rules and regulations
adopted by the Securities and Exchange Commission. Our responsibility is to express an opinion
on the presentation based on our examination. We have audited, in accordance with generally
accepted auditing standards, the consolidated Ñnancial statements of the Firm as of Novem-
ber 27, 1998 and November 28, 1997, and for each of the three years in the period ended
November 27, 1998, and in our report dated January 22, 1999, we expressed an unqualiÑed
opinion on those Ñnancial statements.
Our examination of MD&A was made in accordance with attestation standards established by
the American Institute of CertiÑed Public Accountants and, accordingly, included examining, on a
test basis, evidence supporting the historical amounts and disclosures in the presentation. An
examination also includes assessing the signiÑcant determinations made by management as to
the relevance of information to be included and the estimates and assumptions that aÅect
reported information. We believe that our examination provides a reasonable basis for our
opinion.
The preparation of MD&A requires management to interpret the criteria, make determinations
as to the relevance of information to be included, and make estimates and assumptions that
aÅect reported information. MD&A includes information regarding the estimated future impact of
transactions and events that have occurred or are expected to occur, expected sources of
liquidity and capital resources, operating trends, commitments, and uncertainties, including those
related to the Year 2000 readiness issue. Actual results in the future may diÅer materially from
management's present assessment of this information because events and circumstances
frequently do not occur as expected.
Our examination of MD&A of the Firm did not include (i) the information presented under
the headings ""VaR'' or ""VaR Methodology, Assumptions and Limitations'' or (ii) information for
the three months ended February 26, 1999 and February 27, 1998. Accordingly, we express no
opinion on such information.
In our opinion, the Firm's presentation of MD&A for the three-year period ended
November 27, 1998 includes, in all material respects, the required elements of the rules and
regulations adopted by the Securities and Exchange Commission; the historical Ñnancial amounts
included therein have been accurately derived, in all material respects, from the Firm's Ñnancial
statements; and the underlying information, determinations, estimates, and assumptions of the
Firm provide a reasonable basis for the disclosures contained therein.

PricewaterhouseCoopers LLP

New York, New York

March 15, 1999.

36
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Goldman Sachs is a global investment international markets. This favorable eco-
banking and securities Ñrm that provides a nomic environment provided a positive climate
wide range of services worldwide to a sub- for our investment banking activities, as well
stantial and diversiÑed client base. as for our customer-driven and proprietary
trading activities. Economic conditions were
Our activities are divided into three princi-
also favorable for wealth creation which con-
pal business lines:
tributed positively to growth in our asset
‚ Investment Banking, which includes Ñnan- management businesses.
cial advisory services and underwriting;
From mid-August to mid-October 1998,
‚ Trading and Principal Investments, which the Russian economic crisis, the turmoil in
includes Ñxed income, currency and com- Asian and Latin American emerging markets
modities (""FICC''), equities and principal and the resulting move to higher credit quality
investments (principal investments reÖect Ñxed income securities by many investors led
primarily our investments in our merchant to substantial declines in global Ñnancial mar-
banking funds); and kets. Investors broadly sold credit-sensitive
‚ Asset Management and Securities Services, products, such as corporate and high-yield
which includes asset management, securi- debt, and bought higher-rated instruments,
ties services and commissions. such as U.S. Treasury securities, which
caused credit spreads to widen dramatically.
All references to 1996, 1997 and 1998
This market turmoil also caused a widespread
refer to our Ñscal year ended, or the date, as
decline in global equity markets.
the context requires, November 29, 1996,
November 28, 1997 and November 27, 1998, As a major dealer in Ñxed income securi-
respectively, and all references to February ties, Goldman Sachs maintains substantial
1998 and February 1999 refer to our three- inventories of corporate and high-yield debt.
month Ñscal period ended, or the date, as the Goldman Sachs regularly seeks to hedge the
context requires, February 27, 1998 and Feb- interest rate risk on these positions through,
ruary 26, 1999, respectively. among other strategies, short positions in
U.S. Treasury securities. In the second half of
When we use the terms ""Goldman
1998, we suÅered losses from both the
Sachs'', ""we'' and ""our'', we mean, prior to
decline in the prices of corporate and high-
the principal incorporation transactions that
yield debt instruments that we owned and the
are described under ""Certain Relationships
increase in the prices of the U.S. Treasury
and Related Transactions Ì Incorporation
securities in which we had short positions.
and Related Transactions Ì Incorporation
Transactions'', The Goldman Sachs Group, This market turmoil also led to trading
L.P., a Delaware limited partnership, and its losses in our Ñxed income relative value
consolidated subsidiaries and, after the incor- trading positions. Relative value trading posi-
poration transactions, The Goldman Sachs tions are intended to proÑt from a perceived
Group, Inc., a Delaware corporation, and its temporary dislocation in the relationship be-
consolidated subsidiaries. tween the values of diÅerent Ñnancial instru-
ments. From mid-August to mid-October
1998, the components of these relative value
Business Environment
positions moved in directions that we did not
Economic and market conditions can sig- anticipate and the volatilities of some of our
niÑcantly aÅect our performance. For a num- positions increased to three times prior levels.
ber of years leading up to the second half of When Goldman Sachs and other market par-
1998, we operated in a generally favorable ticipants with similar positions simultaneously
macroeconomic environment characterized by sought to reduce positions and exposures,
low inÖation, low interest rates and strong this caused a substantial reduction in market
equity markets in the United States and many liquidity and a continuing decline in prices.

37
 In the second half of 1998, we also Results of Operations
experienced losses in equity arbitrage and in
Management believes that the best mea-
the value of a number of merchant banking
sure by which to assess Goldman Sachs'
investments.
historical proÑtability is pre-tax earnings be-
Later in the fourth quarter of 1998, market cause, as a partnership, we generally have
conditions improved as the U.S. Federal Re- not been subject to U.S. federal or state
serve cut interest rates, the International Mon- income taxes. See ""Ì Provision for Taxes''
etary Fund finalized a credit agreement with below and Note 2 to the audited consolidated
Brazil and a consortium of 14 financial institu- Ñnancial statements for a further discussion
tions, including Goldman Sachs, recapitalized of our provision for taxes.
Long-Term Capital Portfolio, L.P. For a further
Since historically we have operated as a
discussion of Long-Term Capital Portfolio,
partnership, payments to our proÑt participat-
L.P., see ""Ì Liquidity Ì The Balance Sheet''
ing limited partners have been accounted for
below.
as distributions of partners' capital rather
Our earnings in the second half of 1998 than as compensation expense. As a result,
were adversely aÅected by market conditions our compensation and beneÑts expense has
from mid-August to mid-October. In this diÇ- not reÖected any payments for services ren-
cult business environment, Trading and Prin- dered by managing directors who were proÑt
cipal Investments recorded net revenues of participating limited partners and has there-
$464 million in the third quarter of 1998 and fore understated the expected operating costs
net revenues of negative $663 million in the to be incurred by us after the oÅerings. As a
fourth quarter of 1998. As a result, Trading corporation, we will include these payments
and Principal Investments did not make a to managing directors who were proÑt partici-
signiÑcant contribution to pre-tax earnings in pating limited partners in compensation and
1998. beneÑts expense, as discussed under ""Pro
Forma Consolidated Financial Information''.
In the Ñrst quarter of 1999, we operated See ""Management Ì The Partner Compensa-
in a generally favorable macroeconomic envi- tion Plan'' for a further discussion of the plan
ronment characterized by low inÖation and to be adopted for the purpose of compensat-
low interest rates. Global Ñnancial markets ing our managing directors who were proÑt
recovered from the turbulent conditions of the participating limited partners.
second half of 1998, leading to narrowing Moreover, in connection with the oÅer-
credit spreads and an increase in mergers ings, we will record the eÅect of the following
and acquisitions and other corporate activity. non-recurring items in the second quarter of
The macroeconomic environment in the 1999:
Ñrst quarter of 1999 was particularly favorable ‚ the award of the restricted stock units to
in the United States, where inÖationary pres- employees based on a formula;
sures were minimal and interest rates were ‚ the initial irrevocable contribution of shares
left unchanged by the U.S. Federal Reserve. of common stock to the deÑned contribu-
Economic growth in Europe was sluggish tion plan;
despite a simultaneous cut in interest rates by
‚ the recognition of net tax assets; and
11 European central banks in December and
the successful establishment of the European ‚ the contribution to the Goldman Sachs
Economic and Monetary Union in January. Fund, a charitable foundation.
Markets in Asia and Latin America were We also expect to record additional expense
generally characterized by continuing eco- in the second quarter of 1999 equal to
nomic and Ñnancial diÇculties, particularly in (i) 50% of the estimated compensation and
Japan and Brazil. In a number of Asian beneÑts of the managing directors who were
emerging markets, however, economic and proÑt participating limited partners in 1999
market conditions stabilized in the Ñrst quar- based on the annualized results for the Ñrst
ter of 1999. half of 1999 oÅset by (ii) the eÅect of issuing

38
restricted stock units to employees, in lieu of The composition of our historical net
cash compensation, for which future service revenues has varied over time as Ñnancial
is required as a condition to the delivery of markets and the scope of our operations
the underlying shares of common stock. In have changed. The composition of net reve-
accordance with Accounting Principles Board nues can also vary over the shorter term due
Opinion No. 25, these restricted stock units to Öuctuations in economic and market condi-
will be recorded as compensation expense tions. As a result, period-to-period compari-
over the four-year vesting period following the sons may not be meaningful. See ""Risk
date of grant. Factors'' for a discussion of factors that could
aÅect our future performance.
As a result, we expect to record a
substantial pre-tax loss in the second quarter Overview
of 1999. See ""Risk Factors Ì We Expect to
Record a Substantial Pre-Tax Loss in the The following table sets forth our net
Second Quarter of Fiscal 1999''. revenues and pre-tax earnings:

Financial Overview
(in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999
(unaudited)
Net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,129 $7,447 $8,520 $2,472 $2,995
Pre-tax earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,606 3,014 2,921 1,022 1,188

February 1999 versus February 1998. higher customer balances in securities ser-
Our net revenues were $2.99 billion in the vices and increased assets under manage-
three-month period ended February 1999, an ment. Net revenues in Trading and Principal
increase of 21% compared to the same period Investments decreased 19% compared to the
in 1998. Net revenue growth was strong in prior year, due primarily to a 30% reduction of
Investment Banking, which increased 42%, net revenues in FICC. Pre-tax earnings in
primarily due to higher market levels of merg- 1998 were $2.92 billion compared to $3.01
ers and acquisitions and underwriting activity. billion in the prior year.
Net revenues in Trading and Principal Invest-
ments increased 15% as higher net revenues 1997 versus 1996. Our net revenues
in FICC and equities more than oÅset a were $7.45 billion in 1997, an increase of 22%
reduction in principal investments. Net reve- compared to 1996. Net revenue growth was
nues in Asset Management and Securities strong in Asset Management and Securities
Services increased 12% due to increased Services, which increased 46%, due to in-
assets under management and higher cus- creased commissions and asset management
tomer balances in securities services. Pre-tax fees and higher assets under management
earnings increased 16% to $1.19 billion for and customer balances in securities services.
the period. Net revenues in Investment Banking in-
1998 versus 1997. Our net revenues creased 22% due to increased levels of
were $8.52 billion in 1998, an increase of 14% mergers and acquisitions and debt underwrit-
compared to 1997. Net revenue growth was ing activity. Net revenues in Trading and
strong in Investment Banking, which in- Principal Investments increased 9% over the
creased 30%, due to higher levels of mergers prior year, due to higher net revenues in FICC
and acquisitions activity, and in Asset Man- and principal investments. Pre-tax earnings
agement and Securities Services, which in- were $3.01 billion in 1997, an increase of 16%
creased 43%, due to increased commissions, over the prior year.

39
 The following table sets forth the net
revenues of our principal business lines:

Net Revenues by Principal Business Line

(in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999
(unaudited)
Investment BankingÏÏÏÏÏÏÏÏÏÏÏÏ $2,113 $2,587 $3,368 $ 633 $ 902
Trading and Principal
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,693 2,926 2,379 1,182 1,357
Asset Management and
Securities Services ÏÏÏÏÏÏÏÏÏÏ 1,323 1,934 2,773 657 736
Total net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,129 $7,447 $8,520 $2,472 $2,995

Net revenues in our principal business banking activities are divided into two
lines represent total revenues less allocations categories:
of interest expense to speciÑc securities,
commodities and other positions in relation to
‚ Financial Advisory. Financial advisory in-
the level of Ñnancing incurred by each posi-
cludes advisory assignments with respect
tion. Interest expense is allocated to Trading
to mergers and acquisitions, divestitures,
and Principal Investments and the securities
corporate defense activities, restructurings
services component of Asset Management
and spin-oÅs; and
and Securities Services. Net revenues may
not be indicative of the relative proÑtability of
any principal business line. ‚ Underwriting. Underwriting includes public
oÅerings and private placements of equity
Investment Banking and debt securities.
Goldman Sachs provides a broad range
of investment banking services to a diverse The following table sets forth the net
group of corporations, Ñnancial institutions, revenues of our Investment Banking
governments and individuals. Our investment business:

Investment Banking Net Revenues

(in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999
(unaudited)
Financial advisoryÏÏÏÏÏÏÏÏÏÏÏ $ 931 $1,184 $1,774 $363 $522
UnderwritingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,182 1,403 1,594 270 380
Total Investment BankingÏÏÏÏ $2,113 $2,587 $3,368 $633 $902

February 1999 versus February 1998. crease of 42% compared to the same period
The Investment Banking business achieved in 1998. Net revenue growth was strong in
net revenues of $902 million in the three- both Ñnancial advisory and underwriting, par-
month period ended February 1999, an in- ticularly in the communications, media and

40
entertainment, healthcare and Ñnancial institu- Underwriting revenues increased 19% prima-
tions groups. Our Investment Banking busi- rily due to increased revenues from invest-
ness was particularly strong in Europe and ment grade and high-yield debt underwriting,
the United States. which resulted from lower interest rates. Rev-
enues from equity underwriting activities in-
Financial advisory revenues increased creased modestly over 1996 levels.
44% compared to the same period in 1998,
primarily due to higher market levels of merg- Trading and Principal Investments
ers and acquisitions activity as the trend
toward consolidation continued in various in- Our Trading and Principal Investments
dustries. Underwriting revenues increased business facilitates customer transactions and
41%, primarily due to increased levels of takes proprietary positions through market-
equity underwriting activity in Europe. making in and trading of Ñxed income and
equity products, currencies, commodities, and
1998 versus 1997. The Investment swaps and other derivatives. The Trading and
Banking business achieved net revenues of Principal Investments business includes the
$3.37 billion in 1998, an increase of 30% following:
compared to 1997. Net revenue growth was
strong in Ñnancial advisory and, to a lesser ‚ FICC. We make markets in and trade
extent, in underwriting as Goldman Sachs' Ñxed income products, currencies and com-
global presence and strong client base ena- modities, structure and enter into a wide
bled it to capitalize on higher levels of activity variety of derivative transactions and en-
in many industry groups, including communi- gage in proprietary trading and arbitrage
cations, media and entertainment, Ñnancial activities;
institutions, general industrials and retail. Net ‚ Equities. We make markets in and trade
revenue growth in our Investment Banking equities and equity-related products, struc-
business was strong in all major regions in ture and enter into equity derivative trans-
1998 compared to the prior year. actions and engage in proprietary trading
Financial advisory revenues increased and equity arbitrage; and
50% compared to 1997 due to increased ‚ Principal Investments. Principal invest-
revenues from mergers and acquisitions advi- ments primarily represents net revenues
sory assignments, which principally resulted from our investments in our merchant
from consolidation within various industries banking funds.
and generally favorable U.S. and European
stock markets. Despite a substantial decrease Net revenues from principal investments
in the number of industry-wide underwriting do not include management fees and the
transactions in August and September of increased share of the income and gains from
1998, underwriting revenues increased 14% our merchant banking funds to which
for the year, primarily due to increased reve- Goldman Sachs is entitled when the return on
nues from equity and high-yield corporate investments exceeds certain threshold returns
debt underwriting activities. to fund investors. These management fees
and increased shares of income and gains
1997 versus 1996. The Investment are included in the net revenues of Asset
Banking business achieved net revenues of Management and Securities Services.
$2.59 billion in 1997, an increase of 22%
compared to 1996. Net revenue growth was Substantially all of our inventory is
strong in both Ñnancial advisory and under- marked-to-market daily and, therefore, its
writing, particularly in the Ñnancial institutions, value and our net revenues are subject to
general industrials and real estate groups. Öuctuations based on market movements. In
addition, net revenues derived from our prin-
Financial advisory revenues increased cipal investments in privately held concerns
27% compared to 1996 primarily due to and in real estate may Öuctuate signiÑcantly
increased revenues from mergers and acqui- depending on the revaluation or sale of these
sitions activity in the market as a whole. investments in any given period.

41
 The following table sets forth the net
revenues of our Trading and Principal Invest-
ments business:

Trading and Principal Investments Net Revenues

(in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999
(unaudited)
FICC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,749 $2,055 $1,438 $ 741 $ 876
Equities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 730 573 795 365 455
Principal investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 214 298 146 76 26
Total Trading and Principal Investments ÏÏÏÏ $2,693 $2,926 $2,379 $1,182 $1,357

February 1999 versus February 1998. in Trading and Principal Investments in the
The Trading and Principal Investments busi- second half of 1998. For the full year, signiÑ-
ness achieved net revenues of $1.36 billion in cant net revenue reductions in FICC and
the three-month period ended February 1999, principal investments were partially oÅset by
an increase of 15% compared to the same increased net revenues in equities.
period in 1998. Strong performances in FICC
Net revenues in FICC decreased 30%
and equities more than oÅset a net revenue
compared to 1997 due to an extraordinarily
reduction in principal investments.
diÇcult environment in the second half of
Net revenues in FICC increased 18% 1998. The net revenue reduction in FICC was
compared to the same period in 1998, prima- concentrated in Ñxed income arbitrage and
rily due to higher net revenues from market- high-yield debt trading, which experienced
making and trading of currencies, corporate losses in 1998 due to a reduction in liquidity
bonds and mortgage-backed securities, par- and widening credit spreads in the second
tially oÅset by lower net revenues from Ñxed half of the year. An increase in net revenues
income derivatives. from market-making and trading in Ñxed in-
come derivatives, currencies and commodities
Net revenues in equities increased 25%
partially oÅset this decline.
compared to the same period in 1998, prima-
rily due to increased market-making net reve- Net revenues in equities increased 39%
nues resulting from strong over-the-counter compared to 1997 as higher net revenues in
transaction volume in Europe and the United derivatives and European shares were par-
States. tially oÅset by losses in equity arbitrage. The
derivatives business generated signiÑcantly
Net revenues from principal investments
higher net revenues due, in part, to strong
decreased 66%, due to lower gains on the
customer demand for over-the-counter prod-
disposition of investments and a reduction in
ucts, particularly in Europe. Net revenues
net revenues related to the mark-to-market of
from European shares increased as Goldman
our principal investments.
Sachs beneÑted from generally favorable eq-
1998 versus 1997. Net revenues in uity markets and increased customer demand.
Trading and Principal Investments were The equity arbitrage losses were due princi-
$2.38 billion in 1998, a decrease of 19% pally to the underperformance of various
compared to 1997. This decrease in net equity positions versus their benchmark
revenues was concentrated in the second half hedges, to widening of spreads in a variety of
of the year. See ""Ì Business Environment'' relative value trades and to lower prices for
above for a discussion of the losses suÅered event-oriented securities resulting from a re-

42
duction in announced mergers and acquisi- partially oÅset by increased net revenues
tions and other corporate activity in the from higher customer trading volume in cer-
second half of 1998. tain European over-the-counter markets.

Net revenues from principal investments Net revenues from principal investments
declined 51% compared to 1997 as invest- increased 39% in 1997 compared to 1996, as
ments in certain publicly held companies certain companies in which we invested
decreased in value during the second half of through our merchant banking funds com-
1998. This decrease was partially oÅset by an pleted initial public oÅerings and our positions
increase in gains on the disposition of invest- in other publicly held companies increased in
ments compared to the prior year. value.
1997 versus 1996. The Trading and
Principal Investments business achieved net Asset Management and Securities Services
revenues of $2.93 billion in 1997, an increase
of 9% compared to 1996. Strong perform- Asset Management and Securities Ser-
ances in FICC and principal investments more vices is comprised of the following:
than oÅset a net revenue reduction in
‚ Asset Management. Asset management
equities.
generates management fees by providing
Net revenues in FICC increased 17% investment advisory services to a diverse
compared to 1996 due principally to higher and rapidly growing client base of institu-
net revenues from market-making and trading tions and individuals;
in currencies, Ñxed income derivatives and
commodities. Fixed income arbitrage activities ‚ Securities Services. Securities services
also contributed to net revenue growth in includes prime brokerage, Ñnancing ser-
FICC. Net revenues from market-making in vices and securities lending and our
and trading of emerging market debt securi- matched book businesses, all of which
ties and corporate bonds declined in 1997 generate revenue primarily in the form of
compared to 1996. fees or interest rate spreads; and

Net revenues in equities decreased 22% ‚ Commissions. Commission-based busi-

in 1997 compared to 1996 due principally to nesses include agency transactions for cli-
reductions in net revenues from derivatives ents on major stock and futures exchanges.
and convertibles resulting from volatility in the Revenues from the increased share of the
global equity markets in October and Novem- income and gains derived from our
ber 1997 and declining asset values in Japan merchant banking funds are also included
in late November 1997. This reduction was in commissions.

43
 The following table sets forth the net
revenues of our Asset Management and Se-
curities Services business:

Asset Management and Securities Services Net Revenues

(in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999
(unaudited)
Asset management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 242 $ 458 $ 675 $139 $202
Securities services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 354 487 730 170 207
Commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 727 989 1,368 348 327
Total Asset Management and
Securities ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,323 $1,934 $2,773 $657 $736

Goldman Sachs' assets under supervi- merchant banking funds and other alternative
sion are comprised of assets under manage- investment funds. Other client assets are
ment and other client assets. Assets under comprised of assets in brokerage accounts of
management typically generate fees based on primarily high net worth individuals, on which
a percentage of their value and include our we earn commissions. The following table
mutual funds, separate accounts managed for sets forth our assets under supervision:
institutional and individual investors, our

Assets Under Supervision

(in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999
(unaudited)
Assets under
management ÏÏÏÏÏÏÏÏÏ $ 94,599 $135,929 $194,821 $151,189 $206,380
Other client assets ÏÏÏÏÏ 76,892 102,033 142,018 114,928 163,315
Total assets under
supervision ÏÏÏÏÏÏÏÏÏÏ $171,491 $237,962 $336,839 $266,117 $369,695

February 1999 versus February 1998. assets under management. In the 1999 pe-
The Asset Management and Securities Ser- riod, approximately half of the increase in
vices business achieved net revenues of $736 assets under management was attributable to
million in the three-month period ended Feb- net asset inÖows, with the balance reÖecting
ruary 1999, an increase of 12% compared to market appreciation. Net revenues from secu-
the same period in 1998. Strong perform- rities services increased 22% during the pe-
ances in asset management and securities riod, primarily due to growth in our securities
services more than oÅset a net revenue borrowing and lending businesses. Commis-
reduction in commissions. sion revenues decreased 6%, as an increase
in equity commissions was more than oÅset
Asset management revenues increased by a reduction in revenues from the increased
45% compared to the same period in 1998, share of income and gains from our merchant
primarily reÖecting a 43% increase in average

44
banking funds compared to a particularly tributed signiÑcantly to the increase in com-
strong period in the prior year. mission revenues.
1998 versus 1997. The Asset Manage-
Operating Expenses
ment and Securities Services business
achieved net revenues of $2.77 billion in In recent years, our operating expenses
1998, an increase of 43% compared to 1997. have increased as a result of numerous
All major components of the business line factors, including higher levels of compensa-
exhibited strong net revenue growth. tion, expansion of our asset management
business, increased worldwide activities,
Asset management revenues increased greater levels of business complexity and
47% during this period, reÖecting a 41% additional systems and consulting costs relat-
increase in average assets under manage- ing to various technology initiatives.
ment over 1997. In 1998, approximately 80%
of the increase in assets under management Since we have historically operated in
was attributable to net asset inÖows, with the partnership form, payments to our proÑt par-
remaining 20% reÖecting market appreciation. ticipating limited partners have been ac-
Net revenues from securities services in- counted for as distributions of partners'
creased 50%, primarily due to growth in our capital rather than as compensation expense.
securities borrowing and lending businesses. As a result, our compensation and beneÑts
Commission revenues increased 38% as gen- expense has not reÖected any payments for
erally strong and highly volatile equity mar- services rendered by our managing directors
kets resulted in increased transaction who were proÑt participating limited partners.
volumes in listed equity securities. Revenues Accordingly, our historical compensation and
from the increased share of income and gains beneÑts, the principal component of our oper-
from our merchant banking funds also con- ating expenses, will increase signiÑcantly after
tributed signiÑcantly to the increase in com- the oÅerings since, as a corporation, we will
mission revenues. include these payments to our managing
directors who were proÑt participating limited
1997 versus 1996. The Asset Manage- partners in compensation and beneÑts
ment and Securities Services business expense.
achieved net revenues of $1.93 billion in
We expect to record additional expense in
1997, an increase of 46% compared to 1996.
the second quarter of 1999 equal to (i) 50%
All major components of the business line
of the estimated compensation and benefits of
exhibited strong net revenue growth.
the managing directors who were profit partici-
Asset management revenues increased pating limited partners in 1999 based on the
89% during this period, reÖecting a 73% annualized results for the first half of 1999
increase in average assets under manage- offset by (ii) the effect of issuing restricted
ment due to strong net asset inÖows, market stock units to employees, in lieu of cash
appreciation and assets added through the compensation, for which future service is re-
acquisitions of Liberty Investment Manage- quired as a condition to the delivery of the
ment in January 1997 and Commodities Cor- underlying shares of common stock. In accor-
poration in June 1997. Net revenue growth in dance with Accounting Principles Board Opin-
securities services was 38%, principally re- ion No. 25, these restricted stock units will be
Öecting growth in our securities borrowing recorded as compensation expense over the
and lending businesses. Commission reve- four-year vesting period following the date of
nues increased 36% as customer trading grant. In addition, we expect to record non-
volumes increased signiÑcantly on many of cash compensation expense related to the
the world's principal stock exchanges, includ- amortization of the restricted stock units
ing those in the United States where industry- awarded to employees on a discretionary
wide volumes increased substantially in the basis over the five-year period following the
third and fourth quarters of 1997. Revenues consummation of the offerings. The non-cash
from the increased share of income and gains expense related to these restricted stock units
from our merchant banking funds also con- is a fixed amount that is not dependent on our

45
operating results in any given period. See ""Pro The following table sets forth our operat-
Forma Consolidated Financial Information'' for ing expenses and number of employees:
a further discussion of these items.

Operating Expenses and Employees

($ in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999
(unaudited)
Compensation and beneÑts ÏÏÏÏ $2,421 $ 3,097 $ 3,838 $ 1,100 $ 1,275
Brokerage, clearing and
exchange fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 278 357 424 93 111
Market development ÏÏÏÏÏÏÏÏÏÏ 137 206 287 54 77
Communications and
technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 173 208 265 58 78
Depreciation and amortizationÏÏ 172 178 242 42 97
Occupancy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154 168 207 44 78
Professional services and other 188 219 336 59 91
Total operating expenses ÏÏÏÏÏÏ $3,523 $ 4,433 $ 5,599 $ 1,450 $ 1,807
Employees at period end(1) ÏÏÏ 8,977 10,622 13,033 10,899 12,878

(1) Excludes employees of Goldman Sachs' two property management subsidiaries, The Archon
Group, L.P. and Archon Group (France) S.C.A. Substantially all of the costs of these employees
are reimbursed to Goldman Sachs by the real estate investment funds to which the two companies
provide property management services. In addition, as of February 1999, we had approximately
3,400 temporary staÅ and consultants. For more detailed information regarding our employees, see
""Business Ì Employees''.

February 1999 versus February 1998. Brokerage, clearing and exchange fees
Operating expenses were $1.81 billion in the increased 19%, primarily due to higher trans-
three-month period ended February 1999, an action volumes in Ñxed income derivatives
increase of 25% over the same period in and futures contracts. Market development
1998, primarily due to increased compensa- expenses increased 43% and professional
tion and beneÑts and higher other operating services and other expenses increased 54%,
expenses due to, among other things, due to higher levels of business activity.
Goldman Sachs' increased worldwide Communications and technology expenses in-
activities. creased 34%, reÖecting higher telecommuni-
cations and market data costs associated
Compensation and beneÑts decreased as with higher employment levels and additional
a percentage of net revenues to 43% from spending on technology initiatives. Deprecia-
44% in the same period in 1998. Employment tion and amortization increased signiÑcantly
levels increased 18% compared to the same due to certain Ñxed asset write-oÅs and to
period in 1998, with particularly strong growth capital expenditures on telecommunications
in investment banking and asset manage- and technology-related equipment and lease-
ment. Expenses associated with our tempo- hold improvements in support of Goldman
rary staÅ and consultants were $98 million for Sachs' increased worldwide activities. Occu-
the three-month period ended February 1999, pancy expenses increased 77%, reÖecting
an increase of 55%, reÖecting preparations additional oÇce space needed to accommo-
for the Year 2000 and greater levels of date higher employment levels.
business activity.

46
 1998 versus 1997. Operating expenses levels of market activity and our global expan-
were $5.60 billion in 1998, an increase of 26% sion into new businesses and markets. Ex-
over 1997, primarily due to increased com- penses associated with our temporary staÅ
pensation and beneÑts expense. and consultants also contributed to the in-
crease in compensation and beneÑts as a
Compensation and beneÑts increased as
percentage of net revenues. These expenses
a percentage of net revenues to 45% from
were $178 million in 1997, an increase of 55%
42% in 1997, principally as a result of in-
compared to 1996, reÖecting greater business
creases in employment levels and in ex-
activity, Goldman Sachs' global expansion
penses associated with temporary staÅ and
and consulting costs associated with various
consultants. Employment levels increased
technology initiatives.
23% during the year, with particularly strong
growth in asset management. Expenses as- Brokerage, clearing and exchange fees
sociated with our temporary staÅ and consul- increased 28%, primarily due to higher trans-
tants were $330 million in 1998, an increase action volumes in global equities, derivatives
of 85% compared to 1997, reÖecting greater and currencies. Market development ex-
business activity, Goldman Sachs' global ex- penses increased 50% and professional ser-
pansion and consulting costs associated with vices and other expenses increased 16%, due
various technology initiatives, including prepa- to higher levels of business activity and
rations for the Year 2000 and the establish- Goldman Sachs' global expansion. Communi-
ment of the European Economic and cations and technology expenses increased
Monetary Union. 20%, reÖecting higher telecommunications
Brokerage, clearing and exchange fees and market data costs associated with higher
increased 19%, primarily due to higher trans- employment levels and additional spending on
action volumes in European and U.S. equities technology initiatives. Depreciation and amor-
and futures contracts. Market development tization increased 3%. Occupancy expenses
expenses increased 39% and professional increased 9%, reÖecting additional oÇce
services and other expenses increased 53%, space needed to accommodate higher em-
due to higher levels of business activity and ployment levels.
Goldman Sachs' global expansion. Communi-
cations and technology expenses increased Provision for Taxes
27%, reÖecting higher telecommunications The Goldman Sachs Group, L.P., as a
and market data costs associated with higher partnership, generally has not been subject to
employment levels and additional spending on U.S. federal and state income taxes. The
technology initiatives. Depreciation and amor- earnings of The Goldman Sachs Group, L.P.
tization increased 36%, principally due to and certain of its subsidiaries have been
capital expenditures on telecommunications subject to the 4% New York City unincorpo-
and technology-related equipment and lease- rated business tax. In addition, certain of our
hold improvements. Occupancy expenses in- non-U.S. subsidiaries have been subject to
creased 23%, reÖecting additional oÇce income taxes in their local jurisdictions. The
space needed to accommodate higher em- amount of our provision for income and
ployment levels. unincorporated business taxes has varied
1997 versus 1996. Operating expenses signiÑcantly from year to year depending on
were $4.43 billion in 1997, an increase of 26% the mix of earnings among our subsidiaries.
over 1996, primarily due to increased com- For information on the pro forma eÅective tax
pensation and beneÑts expense. rate of Goldman Sachs under corporate form,
see ""Pro Forma Consolidated Financial
Compensation and beneÑts increased as Information''.
a percentage of net revenues to 42% from
40% in 1996. This increase primarily reÖected Geographic Data
higher compensation due to higher proÑt
levels and an 18% increase in employment For a summary of the total revenues, net
levels across Goldman Sachs due to higher revenues, pre-tax earnings and identiÑable

47
assets of Goldman Sachs by geographic fund higher net trading assets due to in-
region, see Note 9 to the audited consoli- creased levels of business activity. Cash of
dated Ñnancial statements. $218 million was used for investing activities,
primarily for the purchase of technology-
Cash Flows related equipment and leasehold improve-
ments. Financing activities provided $16.10
Our cash Öows are primarily related to
billion of cash, reÖecting an increase in net
the operating and Ñnancing activities under-
repurchase agreements and the net issuance
taken in connection with our trading and
of long-term borrowings, partially oÅset by
market-making transactions.
distributions to partners and cash outÖows
related to partners' capital allocated for in-
Year Ended November 1998
come taxes and potential withdrawals.
Cash and cash equivalents increased to
$2.84 billion in 1998. Cash of $62 million was Liquidity
provided by operating activities. Cash of $656 Management Oversight of Liquidity
million was used for investing activities, pri-
marily for leasehold improvements and the Management believes that one of the
purchase of telecommunications and technol- most important issues for a company in the
ogy-related equipment and certain Ñnancial Ñnancial services sector is access to liquidity.
instruments. Financing activities provided Accordingly, Goldman Sachs has established
$2.10 billion of cash, reÖecting an increase in a comprehensive structure to oversee its
the net issuance of long-term and short-term liquidity and funding policies.
borrowings, partially oÅset by a decrease in The Finance Committee has responsibility
net repurchase agreements, distributions to for establishing and assuring compliance with
partners, cash outÖows related to partners' our asset and liability management policies
capital allocated for income taxes and poten- and has oversight responsibility for managing
tial withdrawals and the termination of our liquidity risk, the size and composition of our
proÑt participation plans. See Note 8 to the balance sheet and our credit ratings. See
audited consolidated Ñnancial statements for ""Ì Risk Management Ì Risk Management
a discussion of the termination of the proÑt Structure'' below for a further description of
participation plans. the committees that participate in our risk
management process. The Finance Commit-
Year Ended November 1997 tee meets monthly, and more often when
Cash and cash equivalents decreased to necessary, to evaluate our liquidity position
$1.33 billion in 1997. Operating activities pro- and funding requirements.
vided cash of $70 million. Cash of $693 Our Treasury Department manages the
million was used for investing activities, pri- capital structure, funding, liquidity and rela-
marily for the purchase of certain Ñnancial tionships with creditors and rating agencies
instruments and technology-related equip- on a global basis. The Treasury Department
ment. Cash of $258 million was used for works jointly with our global funding desk in
Ñnancing activities, principally due to a de- managing our borrowings. The global funding
crease in net repurchase agreements, distri- desk is primarily responsible for our transac-
butions to partners and cash outÖows related tional short-term funding activity.
to partners' capital allocated for income taxes
and potential withdrawals, partially oÅset by
Liquidity Policies
the net issuance of long-term and short-term
borrowings. In order to maintain an appropriate level
of liquidity, management has implemented
Year Ended November 1996 several liquidity policies as outlined below.
Cash and cash equivalents increased to DiversiÑcation of Funding Sources and
$2.21 billion in 1996. Cash of $14.63 billion Liquidity Planning. Goldman Sachs main-
was used for operating activities, primarily to tains diversiÑed funding sources with both

48
banks and non-bank lenders globally. Man- capital substantially in excess of our less
agement believes that Goldman Sachs' rela- liquid assets.
tionships with its lenders are critical to its
Dynamic Liquidity Management.
liquidity. We maintain close contact with our
Goldman Sachs seeks to manage the compo-
primary lenders to keep them advised of
sition of its asset base and the maturity
signiÑcant developments that aÅect us.
proÑle of its funding to ensure that it can
liquidate its assets prior to its liabilities com-
Goldman Sachs also has access to diver-
ing due, even in times of liquidity stress. We
siÑed funding sources with over 800 creditors,
have traditionally been able to fund our liquid-
including banks, insurance companies, mutual
ity needs through collateralized funding, such
funds, bank trust departments and other as-
as repurchase transactions and securities
set managers. We monitor our creditors to
lending, as well as short-term and long-term
maintain broad and diversiÑed credit, and no
borrowings and partners' capital. To further
single creditor represented more than 5% of
evaluate the adequacy of our liquidity man-
our uncollateralized funding sources as of
agement policies and guidelines, we perform
November 1998. Uncollateralized funding
weekly ""stress funding'' simulations of dis-
sources principally include our short-term and
ruptions to our access to unsecured credit.
long-term borrowings and letters of credit.
Excess Liquidity. In addition to main-
We access liquidity in a variety of mar- taining a highly liquid balance sheet and a
kets in the United States as well as in Europe signiÑcant portion of longer-term liabilities to
and Asia. In addition, we make extensive use assure liquidity even during adverse condi-
of the repurchase agreement market and tions, we seek to maintain a liquidity cushion
have raised debt in the private placement, the that consists principally of unencumbered
SEC's Rule 144A and the commercial paper U.S. government and agency obligations to
markets, as well as through Eurobonds, ensure the availability of immediate liquidity.
money broker loans, commodity-based This pool of highly liquid assets averaged
Ñnancings, letters of credit and promissory $14.17 billion during 1998 and $12.54 billion
notes. After the oÅerings and subject to during 1997.
market conditions, we intend to raise addi-
Liquidity Ratio Maintenance. It is
tional funds in the public debt securities
Goldman Sachs' policy to further manage its
market, including through an anticipated
liquidity by maintaining a ""liquidity ratio'' of at
$1 billion oÅering of long-term debt securities
least 100%. This ratio measures the relation-
and an anticipated 01 billion oÅering of long-
ship between the loan value of our unencum-
term debt securities payable in euros. We
bered assets and our short-term unsecured
seek to structure our liabilities to avoid signiÑ-
liabilities. The maintenance of this liquidity
cant amounts of debt coming due on any one
ratio is intended to ensure that we could fund
day or during any single week or year. In
our positions on a fully secured basis in the
addition, we maintain and update annually a
event that we were unable to replace our
liquidity crisis plan that provides guidance in
unsecured debt maturing within one year.
the event of a liquidity crisis. The annual
Under this policy, we seek to maintain unen-
update of this plan is reviewed and approved
cumbered assets in an amount that, if
by our Finance Committee.
pledged or sold, would provide the funds
necessary to replace unsecured obligations
Asset Liquidity. Goldman Sachs main-
that are scheduled to mature (or where
tains a highly liquid balance sheet. Many of
holders have the option to redeem) within the
our assets are readily funded in the repur-
coming year.
chase agreement markets, which generally
have proven to be a consistent source of Intercompany Funding. Most of the li-
funding, even in periods of market stress. quidity of Goldman Sachs is raised by The
Substantially all of our inventory turns over Goldman Sachs Group, L.P., which then lends
rapidly and is marked-to-market daily. We the necessary funds to its subsidiaries and
maintain long-term borrowings and partners' aÇliates. We carefully manage our intercom-

49
pany exposure by generally requiring in- holdings of these assets by industry and by
tercompany loans to have maturities equal to geographic location.
or shorter than the maturities of the aggre-
As of February 1999 and November 1998,
gate borrowings of The Goldman Sachs
we held approximately $1.04 billion and $1.17
Group, L.P. This policy ensures that the
billion, respectively, of emerging market secu-
subsidiaries' obligations to The Goldman
rities, and $103 million and $109 million,
Sachs Group, L.P. will generally mature in
respectively, in emerging market loans, all of
advance of The Goldman Sachs Group, L.P.'s
which are valued on a mark-to-market basis.
third-party long-term borrowings. In addition,
Of the $1.14 billion and $1.28 billion in
many of the advances made to our subsidiar-
emerging market securities and loans, as of
ies and aÇliates are secured by marketable
February 1999 and November 1998, respec-
securities or other liquid collateral. We gener-
tively, approximately $778 million and $968
ally fund our equity investments in subsidiar-
million were sovereign obligations, many of
ies with partners' capital.
which are collateralized as to principal at
stated maturity.
The Balance Sheet
In September 1998, a consortium of 14
Goldman Sachs maintains a highly liquid banks and brokerage Ñrms, including
balance sheet that Öuctuates signiÑcantly be- Goldman Sachs, made an equity investment
tween Ñnancial statement dates. In the fourth in Long-Term Capital Portfolio, L.P., a major
quarter of 1998, we temporarily decreased market participant. The objectives of this
our total assets to reduce risk and increase investment were to provide suÇcient capital
liquidity in response to diÇcult conditions in to permit Long-Term Capital Portfolio, L.P. to
the global Ñnancial markets. continue active management of its positions
and, over time, to reduce risk exposures and
Our total assets were $230.62 billion as leverage, to return capital to the participants
of February 1999 and $217.38 billion as of in the consortium and ultimately to realize the
November 1998. potential value of the portfolio. We invested
$300 million in Long-Term Capital
Our balance sheet size as of February Portfolio, L.P.
1999 and November 1998 increased by $8.99
billion and $11.64 billion, respectively, due to Credit Ratings
the adoption of the provisions of Statement of Goldman Sachs relies upon the debt
Financial Accounting Standards No. 125 that capital markets to fund a signiÑcant portion of
were deferred by Statement of Financial Ac- its day-to-day operations. The cost and avail-
counting Standards No. 127. For a discussion ability of debt Ñnancing is inÖuenced by our
of Statement of Financial Accounting Stan- credit ratings. Credit ratings are also impor-
dards Nos. 125 and 127, see ""Ì Accounting tant to us when competing in certain markets
Developments'' below and Note 2 to the and when seeking to engage in longer-term
audited consolidated Ñnancial statements. transactions, including over-the-counter deriv-
atives. A reduction in our credit ratings could
As of February 1999 and November 1998,
increase our borrowing costs and limit our
we held approximately $999 million and $1.04
access to the capital markets. This, in turn,
billion, respectively, in high-yield debt securi-
could reduce our earnings and adversely
ties and $1.39 billion and $1.49 billion, re-
aÅect our liquidity.
spectively, in bank loans, all of which are
valued on a mark-to-market basis. These
assets may be relatively illiquid during times
of market stress. We seek to diversify our

50
 The following table sets forth our credit
ratings as of November 1998:

Short-term debt Long-term debt

Moody's Investors Service, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ P-1 A1

Standard & Poor's Ratings Services(1) ÏÏÏÏÏÏÏÏ A-1° A°
Fitch IBCA, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F1° AA¿
CBRS Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A-1(High) A°

(1) On September 25, 1998, Standard & Poor's Ratings Services aÇrmed Goldman
Sachs' credit ratings but revised its outlook to ""negative''. On April 16, 1999,
Standard & Poor's Ratings Services revised its outlook to ""stable''.

Long-Term Debt sory, banking and other regulators and au-

thorities around the world. Compliance with
As of November 1998, our consolidated the rules of these regulators may prevent us
long-term borrowings were $19.91 billion. Sub- from receiving distributions, advances or re-
stantially all of these borrowings were un- payment of liabilities from these subsidiaries.
secured and consisted principally of senior See Note 8 to the audited consolidated Ñnan-
borrowings with maturities extending to 2024. cial statements and Note 5 to the unaudited
The weighted average maturity of our long-term condensed consolidated Ñnancial statements
borrowings as of November 1998 was approxi- for further information regarding our regulated
mately four years. Substantially all of our long- subsidiaries.
term borrowings are swapped into U.S. dollar
obligations with short-term Öoating rates of
interest in order to minimize our exposure to Risk Management
interest rates and foreign exchange move- Goldman Sachs has a comprehensive
ments. See Note 5 to the audited consoli- risk management process to monitor, evalu-
dated Ñnancial statements for further ate and manage the principal risks assumed
information regarding our long-term in conducting its activities. These risks include
borrowings. market, credit, liquidity, operational, legal and
reputational exposures.
Regulated Subsidiaries
Risk Management Structure
Many of our principal subsidiaries are
subject to extensive regulation in the United Goldman Sachs seeks to monitor and
States and elsewhere. Goldman, Sachs & Co., control its risk exposure through a variety of
a registered U.S. broker-dealer, is regulated separate but complementary Ñnancial, credit,
by the SEC, the Commodity Futures Trading operational and legal reporting systems. We
Commission, the Chicago Board of Trade, the believe that we have eÅective procedures for
NYSE and the NASD. Goldman Sachs Inter- evaluating and managing the market, credit
national, a registered United Kingdom broker- and other risks to which we are exposed.
dealer, is subject to regulation by the Securi- Nonetheless, the eÅectiveness of our policies
ties and Futures Authority Limited and the and procedures for managing risk exposure
Financial Services Authority. Goldman Sachs can never be completely or accurately pre-
(Japan) Ltd., a Tokyo-based broker-dealer, dicted or fully assured. For example, unex-
is subject to regulation by the Japanese pectedly large or rapid movements or
Ministry of Finance, the Financial Supervisory disruptions in one or more markets or other
Agency, the Tokyo Stock Exchange, the To- unforeseen developments can have a material
kyo International Financial Futures Exchange adverse eÅect on our results of operations
and the Japan Securities Dealers Association. and Ñnancial condition. The consequences of
Several other subsidiaries of Goldman Sachs these developments can include losses due to
are regulated by securities, investment advi- adverse changes in inventory values, de-

51
creases in the liquidity of trading positions, the organization. Trading desk managers
higher volatility in our earnings, increases in have the Ñrst line of responsibility for manag-
our credit risk to customers and counterpar- ing risk within prescribed limits. These man-
ties and increases in general systemic risk. agers have in-depth knowledge of the primary
See ""Risk Factors Ì Market Fluctuations sources of risk in their individual markets and
Could Adversely AÅect Our Businesses in the instruments available to hedge our expo-
Many Ways'' for a discussion of the eÅect sures. In addition, a number of committees
that market Öuctuations can have on our described in the following table are responsi-
businesses. ble for establishing trading limits, monitoring
adherence to these limits and for general
Goldman Sachs has established risk con-
oversight of our risk management process.
trol procedures at several levels throughout

52
Committee Function

Management Committee All risk control functions ultimately report to the Management
Committee. Through both direct and delegated authority, the
Management Committee approves all of Goldman Sachs':
‚ operating activities;
‚ trading risk parameters; and
‚ customer review guidelines.

Risk Committees The Firmwide Risk Committee:

‚ periodically reviews the activities of existing businesses;
‚ approves new businesses and products;
‚ approves divisional market risk limits and reviews business
unit market risk limits;
‚ approves inventory position limits for selected country
exposures and business units;
‚ approves sovereign credit risk limits and credit risk limits
by ratings group; and
‚ reviews scenario analyses based on abnormal or
""catastrophic'' market movements.
The FICC Risk Committee sets market risk limits for individual
business units and sets issuer-speciÑc net inventory position
limits.
The Equities Risk Committee sets market risk limits for
individual business units that consist of gross and net
inventory position limits and, for equity derivatives, limits
based on market move scenario analysis.
The Asset Management Control Oversight Committee and
Asset Management Risk Committee oversee various
operational, credit, pricing and business practices issues.

Global Compliance and The Global Compliance and Control Committee provides
Control Committee oversight of our compliance and control functions, including
internal audit, reviews our legal, reputational, operational and
control risks, and periodically reviews the activities of existing
businesses.

Commitments Committee The Commitments Committee approves:

‚ equity and non-investment grade debt underwriting
commitments;
‚ loans extended by Goldman Sachs; and
‚ unusual Ñnancing structures and transactions that involve
signiÑcant capital exposure.
The Commitments Committee has delegated to the Credit
Department the authority to approve underwriting commitments
for investment grade debt and certain other products.

Credit Policy Committee The Credit Policy Committee establishes and reviews broad
credit policies and parameters that are implemented by the
Credit Department.

Finance Committee The Finance Committee is responsible for oversight of our

capital, liquidity and funding needs and for setting certain
inventory position limits.

53
 Segregation of duties and management tween the security and related hedge
oversight are fundamental elements of our instrument.
risk management process. Accordingly, de- In addition to applying business judg-
partments that are independent of the reve- ment, senior management uses a number of
nue producing units, such as the Firmwide quantitative tools to manage our exposure to
Risk, Credit, Controllers, Global Operations, market risk. These tools include:
Central Compliance, Management Controls
and Legal Departments, in part perform risk ‚ risk limits based on a summary measure of
market risk exposure referred to as Value-
management functions, which include moni-
at-Risk or ""VaR'';
toring, analyzing and evaluating risk.
‚ risk limits based on a scenario analysis that
Market Risk measures the potential eÅect of a signiÑ-
cant widening of credit spreads on our
The potential for changes in the market trading net revenues;
value of our trading positions is referred to as
""market risk''. Our trading positions result ‚ inventory position limits for selected busi-
from underwriting, market-making and propri- ness units and country exposures; and
etary trading activities. ‚ scenario analyses which measure the po-
tential eÅect on our trading net revenues of
The broadly deÑned categories of market
abnormal market movements.
risk include exposures to interest rates, cur-
rency rates, equity prices and commodity We also estimate the broader potential
prices. impact of a sustained market downturn on
our investment banking and merchant banking
‚ Interest rate risks primarily result from
activities.
exposures to changes in the level, slope
and curvature of the yield curve, the volatil- VaR. VaR is the potential loss in value
ity of interest rates, mortgage prepayment of Goldman Sachs' trading positions due to
speeds and credit spreads. adverse movements in markets over a de-
Ñned time horizon with a speciÑed conÑdence
‚ Currency rate risks result from exposures
level.
to changes in spot prices, forward prices
and volatilities of currency rates. For the VaR numbers reported below, a
one-day time horizon and a 95% conÑdence
‚ Equity price risks result from exposures to
level were used. This means that there is a
changes in prices and volatilities of individ-
one in 20 chance that daily trading net
ual equities, equity baskets and equity
revenues will fall below the expected daily
indices.
trading net revenues by an amount at least as
‚ Commodity price risks result from expo- large as the reported VaR. Thus, shortfalls
sures to changes in spot prices, forward from expected trading net revenues on a
prices and volatilities of commodities, such single trading day greater than the reported
as electricity, natural gas, crude oil, petro- VaR would be anticipated to occur, on aver-
leum products and precious and base age, about once a month. Shortfalls on a
metals. single day can exceed reported VaR by
We seek to manage these risk exposures signiÑcant amounts. Shortfalls can also accu-
through diversifying exposures, controlling mulate over a longer time horizon such as a
position sizes and establishing hedges in number of consecutive trading days. For a
related securities or derivatives. For example, discussion of the limitations of our risk mea-
we may hedge a portfolio of common stock sures, see ""Risk Factors Ì Our Risk Man-
by taking an oÅsetting position in a related agement Policies and Procedures May Leave
equity-index futures contract. The ability to Us Exposed to UnidentiÑed or Unanticipated
manage an exposure may, however, be lim- Risk''.
ited by adverse changes in the liquidity of the The VaR numbers below are shown sep-
security or the related hedge instrument and arately for interest rate, currency, equity and
in the correlation of price movements be-

54
commodity products, as well as for our over- there are no sudden fundamental changes
all trading positions. or shifts in market conditions. An inherent
limitation of VaR is that past changes in
These VaR numbers include the underly- market risk factors, even when weighted
ing product positions and related hedges, toward more recent observations, may not
which may include positions in other product produce accurate predictions of future market
areas. For example, the hedge of a foreign risk. For example, the asset volatilities to
exchange forward may include an interest which we were exposed in the second half of
rate futures position and the hedge of a long 1998 were substantially larger than those
corporate bond position may include a short reÖected in the historical data used during
position in the related equity. that time period to estimate our VaR. Moreo-
ver, VaR calculated for a one-day time hori-
VaR Methodology, Assumptions and Lim- zon does not fully capture the market risk of
itations. The modeling of the risk character- positions that cannot be liquidated or oÅset
istics of our trading positions involves a with hedges within one day.
number of assumptions and approximations.
While management believes that these as- VaR also should be evaluated in light of
sumptions and approximations are reasona- the methodology's other limitations. For ex-
ble, there is no uniform industry methodology ample, when calculating the VaR numbers
for estimating VaR, and diÅerent assumptions shown below, we assume that asset returns
and/or approximations could produce materi- are normally distributed. Non-linear risk expo-
ally diÅerent VaR estimates. sures on options and the potentially mitigating
impact of intra-day changes in related hedges
We use historical data to estimate our would likely produce non-normal asset re-
VaR and, to better reÖect asset volatilities and turns. DiÅerent distributional assumptions
correlations, these historical data are could produce a materially diÅerent VaR.
weighted to give greater importance to more
recent observations. Given its reliance on The following table sets forth our daily
historical data, VaR is most eÅective in esti- VaR for substantially all of our trading
mating risk exposures in markets in which positions:

Daily VaR
(in millions)
As of
November
Risk Categories 1998

Interest ratesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 27.3

Currency rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.0
Equity prices ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.3
Commodity prices ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.0
DiversiÑcation eÅect(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25.7)
FirmwideÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 42.9

(1) Equals the diÅerence between Ñrmwide daily VaR and the sum of the daily VaRs for the four risk
categories. This eÅect arises because the four market risk categories are not perfectly correlated.

The daily VaR for substantially all of our For a discussion of what our daily VaR
trading positions as of February 1999 was not would have been as of November 1998 had
materially diÅerent from our daily VaR as of we used our volatility and correlation data as
November 1998. of May 29, 1998, see ""Business Ì Trading
and Principal Investments Ì Trading Risk
Management Ì Risk Reduction''.

55
Non-Trading Risk stantial in both number and size, and are
The market risk associated with our non- subject to signiÑcant market risk. In addition,
trading Ñnancial instruments, including invest- management may choose to increase
ments in our merchant banking funds, is Goldman Sachs' risk levels in the future. See
measured using a sensitivity analysis that ""Risk Factors Ì Market Fluctuations Could
estimates the potential reduction in our net Adversely AÅect Our Businesses in Many
revenues associated with hypothetical market Ways'' and ""Ì Our Risk Management Poli-
movements. As of February 1999 and Novem- cies and Procedures May Leave Us Exposed
ber 1998, non-trading market risk was not to UnidentiÑed or Unanticipated Risk'' for a
material. discussion of the risks associated with our
trading positions.
Recent Enhancements to Risk Management
Valuation of Trading Inventory
While VaR continues to be a core tool in
our risk management process, management Substantially all of our inventory positions
has increased its emphasis on the supple- are marked-to-market on a daily basis and
mental measures described below: changes are recorded in net revenues. The
individual business units are responsible for
‚ Credit Spread Limits. In addition to VaR, pricing the positions they manage. The Con-
the Firmwide Risk Committee now sets mar- trollers Department, in conjunction with the
ket risk limits based on a scenario analysis Firmwide Risk Department, regularly performs
of widening credit spreads similar to those pricing reviews.
experienced in the second half of 1998; and
‚ Scenario Analyses. Management is using Trading Net Revenues Distribution
scenario analyses that reÖect more extreme
The following chart sets forth the fre-
market conditions, such as large increases
quency distribution for substantially all of our
in market volatility as well as substantial
daily trading net revenues for the year ended
and sustained adverse movements in the
November 1998:
volatility and correlation of our relative
value positions.
Notwithstanding these measures, we con-
tinue to hold trading positions that are sub-

Daily Trading Net Revenues

100

90

80

70

60
Number
of 50
Days
40

30

20

10

0
>60
0-20
<(60)

20-40

40-60
(20)-0
(60)-(40)

(40)-(20)

Daily Trading Net Revenues (in millions of dollars)

56
Credit Risk Derivative Contracts
Credit risk represents the loss that we Derivative contracts are Ñnancial instru-
would incur if a counterparty or issuer of ments, such as futures, forwards, swaps or
securities or other instruments we hold fails option contracts, that derive their value from
to perform its contractual obligations to us. underlying assets, indices, reference rates or
To reduce our credit exposures, we seek to a combination of these factors. Derivative
enter into netting agreements with counter- instruments may be entered into by Goldman
parties that permit us to oÅset receivables Sachs in privately negotiated contracts, which
and payables with such counterparties. We do are often referred to as over-the-counter
not take into account any such agreements derivatives, or they may be listed and traded
when calculating credit risk, however, unless on an exchange.
management believes a legal right of setoÅ
exists under an enforceable master netting Most of our derivative transactions are
agreement. entered into for trading purposes. We use
derivatives in our trading activities to facilitate
For most businesses, counterparty credit customer transactions, to take proprietary
limits are established by the Credit Depart- positions and as a means of risk manage-
ment, which is independent of the revenue- ment. We also enter into non-trading deriva-
producing departments, based on guidelines tive contracts to manage the interest rate and
set by the Firmwide Risk and Credit Policy currency exposure on our long-term
Committees. Our global credit management borrowings.
systems monitor current and potential credit
exposure to individual counterparties and on Derivatives are used in many of our
an aggregate basis to counterparties and businesses, and we believe that the associ-
their aÇliates. The systems also provide man- ated market risk can only be understood
agement with information regarding overall relative to the underlying assets or risks being
credit risk by product, industry sector, country hedged, or as part of a broader trading
and region. strategy. Accordingly, the market risk of de-
rivative positions is managed with all of our
Risk Limits other non-derivative risk.
Business unit risk limits are established
Derivative contracts are reported on a
by the risk committees and may be further
net-by-counterparty basis on our consolidated
segmented by the business unit managers to
statements of Ñnancial condition where man-
individual trading desks.
agement believes a legal right of setoÅ exists
Market risk limits are monitored on a under an enforceable master netting
daily basis by the Firmwide Risk Department agreement.
and are reviewed regularly by the appropriate
risk committee. Limit violations are reported For an over-the-counter derivative, our
to the appropriate risk committee and the credit exposure is directly with our
appropriate business unit managers. counterparty and continues until the maturity
or termination of such contract.
Inventory position limits are monitored by
the Controllers Department and position limit The following table sets forth the distribu-
violations are reported to the appropriate tion, by credit rating, of substantially all of our
business unit managers and the Finance exposure with respect to over-the-counter
Committee. When inventory position limits are derivatives as of November 1998, after taking
used to monitor market risk, they are also into consideration the eÅect of netting agree-
monitored by the Firmwide Risk Department ments. The categories shown reÖect our in-
and violations are reported to the appropriate ternally determined public rating agency
risk committee. equivalents.

57
 Over-the-Counter Derivative Credit Exposures
($ in millions)
Credit Rating Equivalent Amount Percentage

AAA/Aaa ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,170 12%

AA/Aa2ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,571 30
A/A2 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,876 26
BBB/Baa2 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,133 17
BB/Ba2 or lower ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,970 11
Unrated(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 730 4
$18,450 100%

(1) In lieu of making an individual assessment of such counterparties' credit, we make a determination that
the collateral held in respect of such obligations is suÇcient to cover our exposure. In making this
determination, we take into account various factors, including legal uncertainties and market volatility.

As of November 1998, we held approxi- enter a trade properly into our records may
mately $2.97 billion in collateral against these result in an inability to settle transactions in a
over-the-counter derivative exposures. This timely manner or a breach of regulatory
collateral consists predominantly of cash and requirements. Settlement errors or delays
U.S. government and agency securities and is may cause losses due to damages owed to
usually received by us under agreements counterparties or movements in prices. These
entitling us to require additional collateral operational and systems risks may arise in
upon speciÑed increases in exposure or the connection with our own systems or as a
occurrence of negative credit events. result of the failure of an agent acting on our
behalf.
In addition to obtaining collateral and
seeking netting agreements, we attempt to The Global Operations Department is re-
mitigate default risk on derivatives by entering sponsible for establishing, maintaining and
into agreements that enable us to terminate approving policies and controls with respect
or reset the terms of transactions after speci- to the accurate inputting and processing of
Ñed time periods or upon the occurrence of transactions, clearance and settlement of
credit-related events, and by seeking third- transactions, the custody of securities and
party guarantees of the obligations of some other instruments and the detection and pre-
counterparties. vention of employee errors or improper or
fraudulent activities. Its personnel work
Derivatives transactions may also involve
closely with the Information Technology De-
the legal risk that they are not authorized or
partment in creating systems to enable appro-
appropriate for a counterparty, that documen-
priate supervision and management of its
tation has not been properly executed or that
policies. The Global Operations Department is
executed agreements may not be enforceable
also responsible, together with other areas of
against the counterparty. We attempt to mini-
Goldman Sachs, including the Legal and
mize these risks by obtaining advice of coun-
Compliance Departments, for ensuring com-
sel on the enforceability of agreements as
pliance with applicable regulations with re-
well as on the authority of a counterparty to
spect to the clearance and settlement of
eÅect the derivative transaction.
transactions and the margining of positions.
The Network Management Department over-
Operational and Year 2000 Risks
sees our relationships with our clearance and
Operational Risk. Goldman Sachs may settlement agents, regularly reviews agents'
face reputational damage, Ñnancial loss or performance and meets with these agents to
regulatory risk in the event of an operational review operational issues.
failure or error. A systems failure or failure to

58
 Year 2000 Readiness Disclosure. Gold- completed in September 1997. We also com-
man Sachs has determined that it will be pleted the inventory, assessment and plan-
required to modify or replace portions of its ning phase for our systems in September
information technology systems, both hard- 1997. By the end of March 1999, we com-
ware and software, and its non-information pleted the remediation, testing and implemen-
technology systems so that they will properly tation phases for 99% of our mission-critical
recognize and utilize dates beyond Decem- systems, and we plan to complete these three
ber 31, 1999. We presently believe that with phases for the remaining 1% by the end of
modiÑcations to existing software, conver- June 1999. In March 1999, we completed the
sions to new software and replacement of Ñrst cycle of our internal integration testing
some hardware, the Year 2000 issue will be with respect to critical securities and transac-
satisfactorily resolved in our own systems tion Öows. This cycle, which related to U.S.
worldwide. However, if such modiÑcations products, was completed successfully with no
and conversions are not made or are not material problem. The remaining cycle, which
completed on a timely basis, the Year 2000 will relate primarily to non-U.S. products, is to
issue would have a material adverse eÅect on be completed in June 1999. This testing is
Goldman Sachs. Moreover, even if these intended to validate that our systems can
changes are successful, failure of third parties successfully perform critical business func-
to which we are Ñnancially or operationally tions beginning in January 2000. With respect
linked to address their own Year 2000 to our non-mission-critical systems, we ex-
problems would also have a material adverse pect to complete our Year 2000 eÅorts during
eÅect on Goldman Sachs. For a description of calendar 1999.
the Year 2000 issue and some of the related
For technology products that are supplied
risks, including possible problems that could
by third-party vendors, we have completed an
arise, see ""Risk Factors Ì Our Computer
inventory, ranked products according to their
Systems and Those of Third Parties May Not
importance and developed a strategy for
Achieve Year 2000 Readiness Ì Year 2000
achieving Year 2000 readiness for substan-
Readiness Disclosure''.
tially all non-compliant versions of software
Recognizing the broad scope and com- and hardware. While this process included
plexity of the Year 2000 problem, we have collecting information from vendors, we are
established a Year 2000 Oversight Committee not relying solely on vendors' veriÑcations
to promote awareness and ensure the active that their products are Year 2000 compliant or
participation of senior management. This ready. As of March 31, 1999, we had sub-
Committee, together with numerous sub- stantially completed testing and implementa-
committees chaired by senior managers tion of vendor-supplied technology products
throughout Goldman Sachs and our Global that we consider mission-critical. With respect
Year 2000 Project OÇce, is responsible for to telecommunications carriers, we are relying
planning, managing and monitoring our Year on information provided by these vendors as
2000 eÅorts on a global basis. Our Manage- to whether they are Year 2000 compliant
ment Controls Department assesses the because these vendors have indicated that
scope and suÇciency of our Year 2000 pro- they will not test with individual companies.
gram and veriÑes that the principal aspects of
We are also addressing Year 2000 issues
our Year 2000 program are being imple-
that may exist outside our own technology
mented according to plan.
activities, including our facilities, external ser-
Our Year 2000 plans are based on a Ñve- vice providers and other third parties with
phase approach, which includes awareness; which we interface. We have inventoried and
inventory, assessment and planning; remedia- ranked our customers, business and trading
tion; testing; and implementation. The aware- partners, utilities, exchanges, depositories,
ness phase (in which we deÑned the scope clearing and custodial banks and other third
and components of the problem, our method- parties with which we have important Ñnancial
ology and approach and obtained senior man- and operational relationships. We are continu-
agement support and funding) was ing to assess the Year 2000 preparedness of

59
these customers, business and trading part- period. We expect to reduce trading activity in
ners and other third parties. the period leading up to January 2000 to
minimize the impact of potential Year 2000-
By the end of March 1999, we had related failures. A reduction in trading activity
participated in approximately 115 ""external'', by us or by other market participants in
i.e., industry-wide or point-to-point, tests with anticipation of possible Year 2000 problems
exchanges, clearing houses and other indus- could adversely aÅect our results of opera-
try utilities, as well as the ""Beta'' test spon- tions, as discussed under ""Risk Factors Ì
sored by the Securities Industry Association Our Computer Systems and Those of Third
for its U.S. members in July 1998. We suc- Parties May Not Achieve Year 2000 Readi-
cessfully completed all of these tests with no ness Ì Year 2000 Readiness Disclosure''.
material problems. By the end of June 1999,
we expect to have participated in approxi- We have incurred and expect to continue
mately 60 additional external tests, including to incur expenses allocable to internal staÅ,
the Securities Industry Association as well as costs for outside consultants, to
""Streetwide'' test scheduled to be completed complete the remediation and testing of inter-
in April 1999 and other major industry tests in nally developed systems and the replacement
those global markets where we conduct sig- and testing of third-party products and ser-
niÑcant business. vices, including non-technology products and
services, in order to achieve Year 2000 com-
Acknowledging that a Year 2000 failure, pliance. We currently estimate that these
whether internal or external, could have an costs will total approximately $150 million, a
adverse eÅect on the ability to conduct day- substantial majority of which has been spent
to-day business, we are employing a compre- to date. These estimates include the cost of
hensive and global approach to contingency technology personnel but do not include the
planning. Our contingency planning objective cost of most non-technology personnel in-
is to identify potential system failure points volved in our Year 2000 eÅort. The remaining
that support processes that are critical to our cost of our Year 2000 program is expected to
mission and to develop contingency plans for be incurred in 1999 and early 2000. The Year
those failures that may reasonably be ex- 2000 program costs will continue to be
pected to occur, with the general goal of funded through operating cash Öow. These
ensuring, to the maximum extent practical, costs are expensed as incurred. We do not
that minimum acceptable levels of service can expect that the costs associated with imple-
be maintained by us. In the event of system menting our Year 2000 program will have a
failures, our contingency plans will not guar- material adverse eÅect on our results of
antee that existing levels of service will be operations, Ñnancial condition, liquidity or
fully maintained, especially if these failures capital resources.
involve external systems or processes over
which we have little or no direct control or The costs of the Year 2000 program and
involve multiple failures across a variety of the date on which we plan to complete the
systems. Year 2000 modiÑcations are based on current
estimates, which reÖect numerous assump-
We anticipate that contingency plans for tions about future events, including the con-
our core business units will be substantially tinued availability of resources, the timing and
completed during June 1999, and by Septem- eÅectiveness of third-party remediation plans
ber 30, 1999 for the rest of our businesses. In and other factors. We can give no assurance
addition, we are developing contingency plans that these estimates will be achieved, and
for funding and balance sheet management actual results could diÅer materially from our
and other related activities. We expect our plans. SpeciÑc factors that might cause mate-
contingency plans to include establishing ad- rial diÅerences include, but are not limited to,
ditional sources of liquidity that could be the availability and cost of personnel trained
drawn upon in the event of systems disrup- in this area, the ability to locate and correct
tion. We are also developing a crisis manage- relevant computer source codes and embed-
ment group to guide us through the transition ded chip technology, the results of internal

60
and external testing and the timeliness and ""Earnings Per Share'', eÅective for periods
eÅectiveness of remediation eÅorts of third ending after December 15, 1997, with restate-
parties. ment required for all prior periods. Statement
of Financial Accounting Standards No. 128
In order to focus attention on the Year establishes new standards for computing and
2000 problem, management has deferred sev- presenting earnings per share. This State-
eral technology projects that address other ment replaces primary and fully diluted earn-
issues. However, we do not believe that this ings per share with ""basic earnings per
deferral will have a material adverse eÅect on share'', which excludes dilution, and ""diluted
our results of operations or Ñnancial earnings per share'', which includes the eÅect
condition. of all potentially dilutive common shares and
other dilutive securities. Because we have not
Accounting Developments historically reported earnings per share, this
Statement will have no impact on our histori-
In June 1996, the Financial Accounting
cal Ñnancial statements. This Statement will,
Standards Board issued Statement of Finan-
however, apply to our Ñnancial statements
cial Accounting Standards No. 125, ""Account-
that are prepared after the oÅerings. See
ing for Transfers and Servicing of Financial
""Pro Forma Consolidated Financial Informa-
Assets and Extinguishments of Liabilities'',
tion'' for a calculation of pro forma earnings
eÅective for transactions occurring after De-
per share.
cember 31, 1996. Statement of Financial Ac-
counting Standards No. 125 establishes
In June 1997, the Financial Accounting
standards for distinguishing transfers of Ñnan-
Standards Board issued Statement of Finan-
cial assets that are accounted for as sales
cial Accounting Standards No. 131, ""Disclo-
from transfers that are accounted for as
sures about Segments of an Enterprise and
secured borrowings.
Related Information'', eÅective for Ñscal years
The provisions of Statement of Financial beginning after December 15, 1997, with
Accounting Standards No. 125 relating to reclassiÑcation of earlier periods required for
repurchase agreements, securities lending comparative purposes. Statement of Financial
transactions and other similar transactions Accounting Standards No. 131 establishes the
were deferred by the provisions of Statement criteria for determining an operating segment
of Financial Accounting Standards No. 127, and establishes the disclosure requirements
""Deferral of the EÅective Date of Certain for reporting information about operating seg-
Provisions of FASB Statement No. 125'', and ments. We intend to adopt this standard at
became eÅective for transactions entered into the end of Ñscal 1999. This Statement is
after December 31, 1997. This Statement limited to issues of reporting and presentation
requires that the collateral obtained in certain and, therefore, will not aÅect our results of
types of secured lending transactions be operations or Ñnancial condition.
recorded on the balance sheet with a corre-
sponding liability reÖecting the obligation to In February 1998, the Financial Account-
return such collateral to its owner. EÅective ing Standards Board issued Statement of
January 1, 1998, we adopted the provisions Financial Accounting Standards No. 132,
of Statement of Financial Accounting Stan- ""Employers' Disclosures about Pensions and
dards No. 125 that were deferred by State- Other Postretirement BeneÑts'', eÅective for
ment of Financial Accounting Standards No. Ñscal years beginning after December 15,
127. The adoption of this standard increased 1997, with restatement of disclosures for
our total assets and liabilities by $8.99 billion earlier periods required for comparative pur-
and $11.64 billion as of February 1999 and poses. Statement of Financial Accounting
November 1998, respectively. Standards No. 132 revises certain employers'
disclosures about pension and other post-
In February 1997, the Financial Account- retirement beneÑt plans. We intend to adopt
ing Standards Board issued Statement of this standard at the end of Ñscal 1999. This
Financial Accounting Standards No. 128, Statement is limited to issues of reporting and

61
presentation and, therefore, will not aÅect our cial Accounting Standards No. 133, ""Account-
results of operations or Ñnancial condition. ing for Derivative Instruments and Hedging
Activities'', eÅective for Ñscal years beginning
In March 1998, the Accounting Standards
after June 15, 1999. Statement of Financial
Executive Committee of the American Institute
Accounting Standards No. 133 establishes
of CertiÑed Public Accountants issued State-
accounting and reporting standards for deriv-
ment of Position No. 98-1, ""Accounting for
ative instruments, including certain derivative
the Costs of Computer Software Developed
instruments embedded in other contracts
or Obtained for Internal Use'', eÅective for
(collectively referred to as derivatives), and
Ñscal years beginning after December 15,
for hedging activities. This Statement requires
1998. Statement of Position No. 98-1 requires
that an entity recognize all derivatives as
that certain costs of computer software devel-
either assets or liabilities in the statement of
oped or obtained for internal use be capital-
Ñnancial condition and measure those instru-
ized and amortized over the useful life of the
ments at fair value. The accounting for
related software. We currently expense the
changes in the fair value of a derivative
cost of all software development in the period
instrument depends on its intended use and
in which it is incurred. We intend to adopt this
the resulting designation. We intend to adopt
Statement in Ñscal 2000 and are currently
this standard in Ñscal 2000 and are currently
assessing its eÅect.
assessing its eÅect.
In June 1998, the Financial Accounting
Standards Board issued Statement of Finan-

62
 INDUSTRY AND ECONOMIC OUTLOOK

As a global provider of Ñnancial services, tives, yielding additional Ñnancial advisory

Goldman Sachs is aÅected by overall and capital-raising opportunities;
macroeconomic and market conditions in vari-
ous regions around the world. For a number ‚ Consolidation. Moderate growth, limited
of years, we have operated in a generally pricing Öexibility and the need for econo-
favorable macroeconomic environment char- mies of scale have substantially increased
acterized by low inÖation, low and declining consolidation opportunities in certain indus-
interest rates and strong equity markets. In tries, and record levels of proÑt have pro-
particular, the U.S. economy, the largest in vided companies with the resources to
the world and an important inÖuence on pursue strategic combinations, creating
overall world economic activity, has been substantial demand for mergers and acqui-
undergoing one of the longest periods of sitions advisory services and subsequent
post-war economic expansion. As of March capital raising;
1999, the current U.S. expansion had lasted
96 months compared to a post-war average ‚ Demographics. Changing demographics in
period of expansion of 46 months. the United States and other developed
economies have increased the pool of sav-
Recognizing that the favorable macro- ings available for private investment and
economic and market environments will be the need for increased funding of pension
subject to periodic reversals, which may sig- plans due to the aging of the population,
niÑcantly and adversely aÅect our businesses, creating substantial demand for investment
we believe that signiÑcant growth and proÑt products and services; and
opportunities exist for Ñnancial intermediaries
in the United States and abroad. These ‚ Financial Product Innovation. Technology
opportunities derive from several long-term and Ñnancial expertise have led to the
trends, including the following: development of new Ñnancial products bet-
ter tailored to the risk/reward requirements
‚ Deregulation. Financial market deregula- of investors, increasing trading Öows and
tion, including the elimination of bank de- proprietary investment opportunities.
posit interest rate ceilings and the
expansion of commercial banks and other We believe that over the last 15 years
Ñnancial institutions into securities under- these trends, coupled with generally declining
writing activities, has resulted in the crea- interest rates and favorable market condi-
tion of new and broader sources of credit, tions, have contributed to a substantially
which have reduced the variability and the higher rate of growth in activity in the Ñnancial
cyclicality in the supply of credit. This, in services industry than the growth in overall
turn, has in the past reduced volatility in economic activity. The future economic envi-
economic activity, leading to longer eco- ronment may not be as favorable as that
nomic expansions with increased invest- experienced in the last 15 years and, in
ment spending, resulting in higher levels of particular, the period of declining interest
capital raising; rates in the United States may not continue.
There may also be periods of adverse eco-
‚ Globalization. Heightened global competi- nomic and market conditions. Nonetheless,
tion has created a need for cross-border we believe that these trends should continue
capabilities and economies of scale, result- to aÅect the Ñnancial services industry posi-
ing in increased joint venture and mergers tively over the long term. However, see ""Risk
and acquisitions activity; Factors Ì Market Fluctuations Could Ad-
versely AÅect Our Businesses in Many Ways''
‚ Focus on Shareholder Value. Increasing for a discussion of the eÅect that adverse
focus on shareholder value has fueled an economic conditions and market Öuctuations
increase in restructuring and strategic initia- can have on our businesses.

63
 The following table sets forth selected
key industry indicators:

Key Industry Indicators

($ in billions, except gross domestic product)
(volume in millions of shares)
As of or for Year Ended December 31, CAGR(8)
1983 1988 1993 1998 '83-'98

General Economic Activity:

(in trillions)
Worldwide gross domestic product(1) ÏÏÏ $ 10 $ 18 $ 24 $ 29(9) 8%(9)
U.S. gross domestic product(2)ÏÏÏÏÏÏÏÏÏ 4 5 7 9 6
Advisory Activities/Financing:
Worldwide mergers and acquisitions(3) 96 527 460 2,522 24
Worldwide equity issued(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 51 172 269 12
Worldwide debt issued(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146 631 1,546 2,932 22
World Equity Markets:
Worldwide equity market
capitalization(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,384 9,728 14,016 27,459 15
U.S. market capitalization(4) ÏÏÏÏÏÏÏÏÏÏÏ 1,898 2,794 5,136 13,451 14
FT/S&P Actuaries World IndicesTM Ì The
World Index(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NA 129 178 359 11
Dow Jones Industrial AverageÏÏÏÏÏÏÏÏÏÏÏ 1,259 2,169 3,754 9,181 14
S&P 500 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 165 278 466 1,229 14
NYSE average daily volume ÏÏÏÏÏÏÏÏÏÏÏÏÏ 85 162 265 674 15
Invested Funds:
Worldwide pension assets(6) ÏÏÏÏÏÏÏÏÏÏÏ $1,900 $3,752 $ 6,560 $10,975 12
Number of U.S. mutual funds(7) ÏÏÏÏÏÏÏÏ 1,026 2,715 4,558 7,343 14
U.S. mutual fund assets(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 293 $ 810 $ 2,075 $ 5,530 22

(1) Source: The Economist Intelligence Unit, January 1999.

(2) Source: U.S. Department of Commerce, Bureau of Economic Analysis.
(3) Source: Securities Data Company.
(4) Source: International Finance Corporation.
(5) Index is calculated on a local currency basis based on total returns. CAGR is based on 1988-1998 data.
The FT/S&P Actuaries World Indices are owned by FTSE International Limited, Goldman, Sachs & Co.
and Standard & Poor's Ratings Services. The Indices are compiled by FTSE International and Standard
& Poor's Ratings Services in conjunction with the Faculty of Actuaries and the Institute of Actuaries.
(6) Source: InterSec Research Corp.
(7) Source: Investment Company Institute.
(8) Compound annual growth rate.
(9) Data as of December 31, 1997; CAGR 1983-1997.

64
 We believe scale, global resources and Asia
leading market positions are important com-
petitive advantages for Ñnancial intermediaries Since 1997, the currency weakness and
in this environment. In addition, we believe disruptions, the deterioration in certain of the
that circumstances in certain regions should region's banking systems, the weakness in
provide opportunities for Ñnancial the property sector in many of the region's
intermediaries. countries, as well as slowing consumer in-
come growth, have led to a signiÑcant and
continuing weakening of these economies and
Europe their stock markets. These developments
have adversely aÅected the economic and
market conditions in the region and at times
The European Economic and Monetary have aÅected economic and market condi-
Union commenced on January 1, 1999 and tions elsewhere. We believe, however, that
created a monetary union in Europe with a Ñnancial intermediaries could have signiÑcant
single currency. As a result, we believe that opportunities in this region if stability im-
over time a pan-European capital market will proves and the economies, which represent
develop that is likely to rival that of the United approximately 60% of the world's population,
States in size and liquidity. We believe that resume their growth. In the near term, these
Ñnancial intermediaries generally are expected potential opportunities could include:
to beneÑt from a number of anticipated devel-
opments, including: ‚ an increase in mergers and acquisitions
and other Ñnancial advisory services in
connection with corporate restructurings;
‚ pan-European consolidation and Ñnancial
restructuring yielding an increase in merg- ‚ an increase in trading opportunities as
ers and acquisitions activity; Ñnancial intermediaries meet the liquidity
needs of their clients; and
‚ an increase in third-party assets under ‚ an increase in capital raising as Asian
management and a major shift towards corporations and governments access the
investments in equity securities due to an international capital markets rather than
expected move to private pension fund the regional banking system to reÑnance
systems, changing demographics and the and to fund future growth.
elimination of intra-European Economic and
In the longer term, these potential opportuni-
Monetary Union currency risk;
ties could include:
‚ a reallocation of equity portfolios to reÖect ‚ the emergence of corporate and real es-
pan-European indices; tate principal investment opportunities as
a result of corporate and government
‚ the establishment of a European high-yield restructurings; and
market to fund the growth of emerging ‚ an increase in third-party assets under
high-growth industries and to satisfy inves- management and a major shift towards
tors' demands for higher yield; and investments in equity securities due to an
anticipated move to private pension fund
‚ increased equity issuance and higher equity systems, changing demographics and the
trading volumes. relaxation of foreign exchange restrictions.

65
 BUSINESS

Overview In 1989, The Goldman Sachs Group, L.P.

Goldman Sachs is a leading global invest- was formed to serve as the parent company
ment banking and securities Ñrm with three of the Goldman Sachs organization. As of
principal business lines: November 30, 1996, The Goldman Sachs
Group, L.P. was restructured. On that date,
‚ Investment Banking; the non-retiring former general partners of
‚ Trading and Principal Investments; and The Goldman Sachs Group, L.P. converted
‚ Asset Management and Securities Services. their general partner interests into limited
Our goal is to be the advisor of choice for our partner interests and became proÑt participat-
clients and a leading participant in global ing limited partners of The Goldman Sachs
Ñnancial markets. We provide services world- Group, L.P. Concurrently, The Goldman
wide to a substantial and diversiÑed client Sachs Corporation was admitted as The
base, which includes corporations, Ñnancial Goldman Sachs Group, L.P.'s sole general
institutions, governments and high net worth partner. The common stock of The Goldman
individuals. Sachs Corporation is owned by our managing
Because we believe that the needs of our directors who are proÑt participating limited
clients are global and that international mar- partners, all of whom are active in our
kets have high growth potential, we have built businesses.
upon our strength in the United States to The Goldman Sachs Group, Inc. was
achieve leading positions in other parts of the formed to succeed to the business of The
world. Today, we have a strong global pres- Goldman Sachs Group, L.P. Simultaneously
ence as evidenced by the geographic breadth with the oÅerings, we will complete a number
of our transactions, leadership in our core of transactions in order to convert from
products and the size of our international partnership to corporate form. See ""Certain
operations. As of February 1999, we operated Relationships and Related Transactions Ì In-
oÇces in 23 countries and 36% of our 13,000 corporation and Related Transactions'' for
employees were based outside the United additional information concerning these
States. transactions.
We are committed to a distinctive culture Market Share Data
and set of core values. These values are
Except as otherwise indicated, all
reÖected in our Business Principles, which
amounts with respect to the volume, number
emphasize placing our clients' interests Ñrst,
and market share of mergers and acquisitions
integrity, commitment to excellence and inno-
and underwriting transactions and related
vation, and teamwork.
ranking information have been derived from
Goldman Sachs is managed by its princi- information compiled and classiÑed by Securi-
pal owners. Simultaneously with the oÅerings, ties Data Company. Securities Data Company
we will grant restricted stock units, stock obtains and gathers its information from
options or interests in a deÑned contribution sources it considers reliable, but Securities
plan to substantially all of our employees. Data Company does not guarantee the accu-
Following the oÅerings, our employees, in- racy or completeness of the information. In
cluding former partners, will own approxi- the case of mergers and acquisitions, data
mately 65% of Goldman Sachs. None of our are based upon the dollar value of announced
employees are selling shares in the oÅerings. transactions for the period indicated, taken as
Goldman Sachs is the successor to a a whole, with full credit to each of the
commercial paper business founded in 1869 advisors to each party in a transaction. In the
by Marcus Goldman. Since then, we have case of underwritings, data are based upon
grown our business as a participant and the dollar value of total proceeds raised
intermediary in securities and other Ñnancial (exclusive of any option to purchase addi-
activities to become one of the leading Ñrms tional shares) with equal credit to each
in the industry. bookrunner for the period indicated, taken as

66
a whole. As a result of this method of remain committed to these businesses irre-
compiling data, percentages may add to more spective of their volatility. Managing wealth is
than 100%. one of the fastest growing segments of the
Ñnancial services industry and we are posi-
Strategy and Principal Business Lines tioning our asset management and securities
services businesses to take advantage of that
Our strategy is to grow our three core
growth. Our assets under supervision, for
businesses Ì Investment Banking, Trading
example, have grown from $92.7 billion as of
and Principal Investments, and Asset Man-
November 1994 to $369.7 billion as of Febru-
agement and Securities Services Ì in mar-
ary 1999, representing a compound annual
kets throughout the world. Our leadership
growth rate of 38%.
position in investment banking provides us
with access to governments, Ñnancial institu- Our business lines are comprised of
tions and corporate clients globally. Trading various product and service oÅerings that are
and principal investing has been an important set forth in the following chart:
part of our culture and earnings, and we

Primary Products and Activities by Business Line

Trading and Principal Asset Management and
Investment Banking Investments Securities Services

Ì Equity and debt Ì Bank loans Ì Commissions

underwriting Ì Commodities Ì Institutional and high net
Ì Financial restructuring Ì Currencies worth asset management
advisory services Ì Equity and Ñxed income Ì Margin lending
Ì Mergers and acquisitions derivatives Ì Matched book
advisory services Ì Equity and Ñxed income Ì Merchant banking fees
Ì Real estate advisory securities Ì Increased shares of
services Ì Principal investments merchant banking fund
Ì Proprietary arbitrage income and gains
Ì Mutual funds
Ì Prime brokerage
Ì Securities lending

Investment Banking equity and Ñxed income products, currencies

and commodities; enter into swaps and other
Investment Banking represented 39% of derivative transactions; engage in proprietary
1998 net revenues and 35% of 1997 net trading and arbitrage; and make principal
revenues. We are a market leader in both the investments. In trading, we focus on building
Ñnancial advisory and underwriting busi- lasting relationships with our most active
nesses, serving over 3,000 clients worldwide. clients while maintaining leadership positions
For the period January 1, 1994 to Decem- in our key markets. We believe our research,
ber 31, 1998, we had the industry-leading market-making and proprietary activities en-
market share of 25.3% in worldwide mergers hance our understanding of markets and
and acquisitions advisory services, having ability to serve our clients.
advised on over $1.7 trillion of transactions.
Over the same period, we also achieved Asset Management and Securities Services
number one market shares of 15.2% in under-
writing worldwide initial public oÅerings and Asset Management and Securities Ser-
14.4% in underwriting worldwide common vices represented 33% of 1998 net revenues
stock issues. and 26% of 1997 net revenues. We provide
global investment management and advisory
Trading and Principal Investments services; earn commissions on agency trans-
actions; manage merchant banking funds; and
Trading and Principal Investments repre- provide prime brokerage, securities lending
sented 28% of 1998 net revenues and 39% of and Ñnancing services. Our asset manage-
1997 net revenues. We make markets in ment business has grown rapidly, with assets

67
under supervision increasing from $92.7 bil- market rivaling the U.S. capital markets in
lion as of November 25, 1994 to $369.7 billion size and liquidity. We believe this will gener-
as of February 26, 1999, representing a ate increased activity across our businesses
compound annual growth rate of 38%. As of in the region. In Asia, we believe that an
February 26, 1999, we had $206.4 billion of increase in corporate restructurings and in the
assets under management. We manage need for liquidity will increase our mergers
merchant banking funds that had $15.5 billion and acquisitions and trading opportunities. In
of capital commitments as of the end of 1998. the longer term, we anticipate additional op-
portunities in asset management activities due
We pursue our strategy to grow our three
to a shift we anticipate toward the privatiza-
core businesses through an emphasis on:
tion of pension systems and in demographics.
Expanding High Value-Added Businesses
Leveraging the Franchise
To achieve strong growth and high re-
We believe our various businesses are
turns, we seek to build leadership positions in
generally stronger and more successful be-
high value-added services for our clients. For
cause they are part of the Goldman Sachs
example, we have substantially increased the
franchise. Our culture of teamwork fosters
number of professionals in investment bank-
cooperation among our businesses, which
ing to improve and expand our ability to
allows us to provide our clients with a full
execute mergers and acquisitions, initial pub-
range of products and services on a coordi-
lic oÅerings and high-yield Ñnancings. In trad-
nated basis. Our investment bankers, for
ing, we structure and execute large and
example, refer clients who are selling their
complex transactions for institutional inves-
businesses to those in Goldman Sachs who
tors, pension funds and corporate clients
manage wealth. In addition, our merchant
around the world. In asset management, we
banking investments in companies lead to
emphasize equity and alternative investment
future clients for investment banking.
products and use our established interna-
tional presence to build a global asset man-
agement franchise. Competitive Strengths
Strong Client Relationships
Increasing the Stability of Our Earnings
We focus on building long-term client
We seek to balance the stability of our relationships. In 1998, over 75% of our Invest-
earnings with return on equity and long-term ment Banking revenues represented business
earnings growth. We believe our trading busi- from existing clients. We also aggressively
nesses are key ingredients to our success. pursue new client relationships as evidenced
While we plan to continue to grow our trading by the over 400 investment banking transac-
businesses, the Ñnancial market shocks of tions we completed for Ñrst-time clients in
the past year underscored the importance of 1998. In our trading businesses, we structure
our strategy of emphasizing growth in our and execute transactions across a wide array
investment banking, asset management and of markets and countries to meet our clients'
securities services businesses. Through a needs. In our asset management business,
greater relative emphasis on these busi- we managed assets for three of the Ñve
nesses, our goal is to gradually increase the largest pension pools in the United States as
stability of our earnings. ranked as of September 30, 1998 by Pen-
sions & Investments and maintain accounts for
Pursuing International Opportunities 41% of the 1998 ""Forbes 400 List of the
Richest Americans''.
We believe that our global reach will
allow us to take advantage of growth in
Distinctive People and Culture
international markets. In Europe, for example,
we anticipate that the recent establishment of Our most important asset is our people.
the European Economic and Monetary Union We seek to reinforce our employees' commit-
will, over time, create a large pan-European ment to our culture and values through

68
recruiting, training, a comprehensive 360-de- positions in major international markets by
gree review system and a compensation phi- capitalizing on our product knowledge and
losophy that rewards teamwork. We were global research, as well as by building a local
ranked number seven in Fortune magazine's presence where appropriate. In doing so, we
""The 100 Best Companies to Work for in have become one of the few truly global
America'' in January 1999 and were ranked investment banking and securities Ñrms with
number three in Fortune magazine's 1999 the ability to execute large and complex
""The Top 50 MBA Dream Companies'', the cross-border transactions. We had the num-
highest-ranked investment banking and secu- ber one market share of 23.2% in cross-
rities Ñrm in each case. border mergers and acquisitions for the
period January 1, 1994 to December 31,
1998. In addition, in Japan, we were the
Global Reach
largest non-Japanese mutual fund manager
as of the end of February 1999, according to
Over the past decade, we have made a
The Investment Trusts Association.
signiÑcant commitment to building a world-
wide business. We have achieved leading

Summary Financial Data

(in millions)
Three Months Ended
Year Ended November February
1996 1997 1998 1998 1999

Net revenues:
Investment BankingÏÏÏÏÏÏ $2,113 $2,587 $3,368 $ 633 $ 902
Trading and Principal
Investments ÏÏÏÏÏÏÏÏÏÏÏ 2,693 2,926 2,379 1,182 1,357
Asset Management and
Securities Services ÏÏÏÏ 1,323 1,934 2,773 657 736
Total net revenuesÏÏÏÏÏÏÏÏÏ $6,129 $7,447 $8,520 $2,472 $2,995

Investment Banking to mergers and acquisitions, divestitures,

corporate defense activities, restructurings
Goldman Sachs provides a broad range and spin-oÅs; and
of investment banking services to a diverse
‚ Underwriting. Underwriting includes public
group of over 3,000 clients worldwide, includ-
oÅerings and private placements of equity
ing corporations, Ñnancial institutions, govern-
and debt securities.
ments and individuals. Our investment
banking activities are divided into two
categories:

‚ Financial Advisory. Financial advisory in-

cludes advisory assignments with respect

69
 The following table sets forth the net
revenues of our Investment Banking
business:

Investment Banking Net Revenues

(in millions)
Three
Months Ended
Year Ended November February
1996 1997 1998 1998 1999
Financial advisoryÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 931 $1,184 $1,774 $363 $522
UnderwritingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,182 1,403 1,594 270 380
Total Investment Banking ÏÏÏÏÏÏ $2,113 $2,587 $3,368 $633 $902

In Investment Banking, we provide our appropriate resources of Goldman Sachs to

clients with quality advice and execution as satisfy those objectives.
part of our eÅort to develop and maintain
long-term relationships as their lead invest- Our Corporate Finance, Debt and Equity
ment bank. Capital Markets, Leveraged Finance and
Mergers and Acquisitions groups bring prod-
Organization uct expertise and innovation to clients in a
variety of industries. These groups are re-
We have continuously adapted our orga- sponsible for the execution of speciÑc client
nizational structure to meet changing market transactions as well as the building of strong
dynamics and our clients' needs. Our current client relationships.
structure, which is organized along regional,
execution and industry groups, seeks to com- In an eÅort to serve our clients' needs in
bine client-focused investment bankers with targeted industries, we have established sev-
execution and industry expertise. Because eral industry focus groups. These include:
our businesses are global, we have adapted Chemicals; Communications, Media and En-
our organization to meet the demands of our tertainment; Energy and Power; Financial In-
clients in each geographic region. Through stitutions; Healthcare; High Technology;
our commitment to teamwork, we believe that Hotels and Gaming; Real Estate; Retailing;
we provide services in an integrated fashion and Transportation. Drawing on specialized
for the beneÑt of our clients. knowledge of industry-speciÑc trends, these
groups provide the full range of investment
We believe an important competitive ad- banking products and services to our clients.
vantage in our marketing eÅort is Investment
Banking Services, a core group of profession- ReÖecting our commitment to innovation,
als who focus on developing and maintaining Investment Banking has established a New
strong client relationships. These bankers, Products group whose professionals focus on
who are organized regionally and/or by in- creating new Ñnancial products. These pro-
dustry group, work with senior executives of fessionals have particular expertise in inte-
our clients to identify areas where Goldman grating Ñnance with accounting, tax and
Sachs can provide capital-raising, Ñnancial securities laws and work closely with other
advisory or other products and services. The investment banking teams to provide innova-
broad base of experience and knowledge of tive solutions to diÇcult client problems. Our
our Investment Banking Services profession- structuring expertise has proven to be partic-
als enables them to analyze our clients' ularly valuable in addressing client needs in
objectives eÇciently and to bring to bear the areas such as complex cross-border mergers

70
and acquisitions and convertible and other where we provide multiple services, including
hybrid equity Ñnancings. ""one-stop'' acquisition Ñnancing, currency
hedging and cross-border structuring
Financial Advisory
expertise. Goldman Sachs advised on seven
Financial advisory includes a broad range of the ten largest mergers and acquisitions
of advisory assignments with respect to transactions through December 31, 1998. We
mergers and acquisitions, divestitures, corpo- have also been successful in Europe,
rate defense activities, restructurings and including in intra-country transactions, and we
spin-oÅs. Goldman Sachs is a leading invest- are a leading mergers and acquisitions
ment bank in worldwide mergers and acquisi- advisor in France, Germany and Spain.
tions. During calendar 1998, we advised on
340 mergers and acquisitions transactions The following table illustrates our leader-
with a combined value of $957 billion. ship in the mergers and acquisitions advisory
market for the indicated period taken as a
Our mergers and acquisitions capabilities whole:
are evidenced by our signiÑcant share of
assignments in large, complex transactions

Goldman Sachs' Mergers and Acquisitions Market Data

For the period January 1, 1994 through December 31, 1998
($ in billions)
Market Number of
Category Rank(1) Share Volume Transactions

Worldwide ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 25.3% $1,715 1,334

Worldwide, transactions over $500 million ÏÏÏÏÏÏÏÏÏÏ 1 34.8 1,593 470
Worldwide, transactions over $1 billion ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 38.4 1,470 297
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 32.8 1,316 907
United States, transactions over $500 million ÏÏÏÏÏÏÏ 1 41.3 1,228 339
United States, transactions over $1 billion ÏÏÏÏÏÏÏÏÏÏ 1 44.3 1,142 221
(1) Rank in any one year during the period presented may vary from the rank for the period taken as a
whole.

Mergers and acquisitions is an example Underwriting

of how one activity can generate cross-selling
opportunities for other areas of Goldman From January 1, 1994 through March 31,
Sachs. For example, a client we are advising 1999, Goldman Sachs has served as lead
in a purchase transaction may seek our manager in transactions that have raised
assistance in obtaining Ñnancing and in hedg- more than $1 trillion of capital for clients
ing interest rate or foreign currency risks worldwide. We underwrite a wide range of
associated with the acquisition. In the case of securities and other instruments, including
dispositions, owners and senior executives of common and preferred stock, convertible se-
the acquired company often will seek asset curities, investment grade debt, high-yield
management services. In these cases, our debt, sovereign and emerging markets debt,
high net worth relationship managers provide municipal debt, bank loans, asset-backed se-
comprehensive advice on investment alterna- curities and real estate-related securities,
tives and execute the client's desired such as mortgage-backed securities and the
strategy. securities of real estate investment trusts.

71
 Equity Underwriting. Equity underwriting our leadership position in equity underwriting
has been a long-term core strength of for the indicated period taken as a whole:
Goldman Sachs. The following table illustrates

Goldman Sachs' Equity Underwriting Market Data

For the period January 1, 1994 through December 31, 1998
($ in billions)
Total
Market Proceeds Number of
Category Rank(1) Share Raised Issues(2)

Worldwide initial public oÅeringsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 15.2% $ 44 300

Worldwide initial public oÅerings, proceeds over $500
million ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 23.3 25 59
Worldwide public common stock oÅerings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 14.4 101 634
U.S. initial public oÅerings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 15.3 31 179
U.S. initial public oÅerings, proceeds over $500 million ÏÏÏÏÏ 1 30.1 16 29
U.S. public common stock oÅeringsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 14.3 71 381

(1) Rank in any one year during the period presented may vary from the rank for the period taken as a whole.
(2) The number of issues reÖects the number of tranches; an oÅering by a single issuer could have
multiple tranches.

As with mergers and acquisitions, we have Global Investment Research is critical to our
been particularly successful in winning man- ability to succeed in the equity underwriting
dates for large, complex equity underwritings. business. We believe that high quality equity
As evidenced in the chart above, our market research is a significant competitive advantage
share of initial public offerings with total pro- in the market for new equity issues. In this
ceeds over $500 million is substantially higher regard, Goldman Sachs' research has been
than our market share of all initial public consistently ranked among the industry's global
offerings. We believe our leadership in large leaders. See ""Ì Global Investment Research''
initial public offerings reflects our expertise in for detailed information regarding our Global
complex transactions, research strengths, track Investment Research Department.
record and distribution capabilities. In the inter-
Debt Underwriting. We engage in the
national arena, we have also acted as lead
underwriting and origination of various types
manager on many of the largest initial public
of debt instruments that we broadly catego-
offerings. We were named the Asian Equity
rize as follows: investment grade debt for
House of the Year by International Financing
corporations, governments, municipalities and
Review in 1998.
agencies; leveraged Ñnance, which includes
high-yield debt and bank loans for non-
We believe that a key factor in our equity
investment grade issuers; emerging market
underwriting success is the close working
debt, which includes corporate and sovereign
relationship between the investment bankers,
issues; and asset-backed securities. We have
research analysts and sales force as coordi-
employed a focused approach in debt under-
nated by our Equity Capital Markets group.
writing, emphasizing high value-added areas
Goldman Sachs' equities sales force is one of
in servicing our clients.
the most experienced and eÅective sales
organizations in the industry. With 350 institu- We believe that the leveraged Ñnance
tional sales professionals and 420 high net market is a key growth opportunity for our
worth relationship managers located in every debt underwriting business. Over the last
major market around the world, Goldman three years, we have more than doubled the
Sachs has relationships with a large and number of debt underwriting professionals
diverse group of investors. dedicated to this area.

72
 The table below sets forth our rank, have acted as underwriter in the following
market position, our total proceeds raised and areas for the indicated period taken as a
the number of debt transactions in which we whole:

Goldman Sachs' Debt Underwriting Market Data

For the period January 1, 1994 through December 31, 1998
($ in billions)

Total
Market Proceeds Number of
Category(1) Rank(5) Share Raised Issues(6)

Worldwide debt(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 8.4% $695 4,684

Worldwide straight debt(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 8.9 559 4,165
U.S. investment grade straight debt(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 12.0 419 3,590
U.S. investment grade industrial straight debt(3) ÏÏÏÏ 1 19.5 81 517
U.S. high-yield debt(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 8.0 33 184
(1) All categories include publicly registered and Rule 144A issues.
(2) Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and
taxable municipal debt.
(3) ""Straight debt'' excludes non-convertible preferred stock, mortgage-backed securities, asset-backed
securities and municipal debt.
(4) Excludes issues with both investment grade and non-investment grade ratings, often referred to as
""split-rated issues''.
(5) Rank in any one year during the period presented may vary from the rank for the period taken as a
whole.
(6) The number of issues reÖects the number of tranches; an oÅering by a single issuer could have
multiple tranches.

Trading and Principal Investments ‚ Fixed Income, Currency and Commodities.

Goldman Sachs makes markets in and
Our Trading and Principal Investments
trades Ñxed income products, currencies
business facilitates customer transactions and
and commodities, structures and enters into
takes proprietary positions through market-
a wide variety of derivative transactions and
making in and trading of Ñxed income and
equity products, currencies, commodities, and engages in proprietary trading and arbi-
swaps and other derivatives. In order to meet trage activities;
the needs of our clients, our Trading and
Principal Investments business is diversiÑed ‚ Equities. Goldman Sachs makes markets
across a wide range of products. For exam- in and trades equities and equity-related
ple, we make markets in traditional invest- products, structures and enters into equity
ment grade debt securities, structure complex derivative transactions and engages in pro-
derivatives and securitize mortgages and in- prietary trading and equity arbitrage; and
surance risk. A fundamental tenet of our
approach is that we believe our willingness
and ability to take risk distinguishes us and ‚ Principal Investments. Principal invest-
substantially enhances our client relation- ments primarily represents Goldman Sachs'
ships. Our Trading and Principal Investments net revenues from its investments in its
business includes the following: merchant banking funds.

73
 The following table sets forth the net
revenues of our Trading and Principal Invest-
ments business:
Trading and Principal Investments Net Revenues
(in millions)
Three
Months Ended
Year Ended November February
1996 1997 1998 1998 1999

FICC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,749 $2,055 $1,438 $ 741 $ 876

EquitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 730 573 795 365 455
Principal investments ÏÏÏÏÏÏ 214 298 146 76 26
Total Trading and Principal
Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,693 $2,926 $2,379 $1,182 $1,357

Fixed Income, Currency and Commodities We seek to beneÑt from perceived disparities
FICC is a large and diversiÑed operation in the value of assets in the trading markets
through which we engage in a variety of and from macroeconomic and company-spe-
customer-driven market-making and proprie- ciÑc trends.
tary trading and arbitrage activities. FICC's FICC has established itself as a leading
principal products are: market participant by using a three-part ap-
proach to deliver high quality service to its
‚ Bank loans
‚ Commodities clients. First, we oÅer broad market-making,
‚ Currencies research and market knowledge to our clients
‚ Derivatives on a global basis. Second, we create innova-
‚ Emerging market debt tive solutions to complex client problems by
‚ Global government securities drawing upon our structuring and trading
‚ High-yield securities expertise. Third, we use our expertise to take
‚ Investment grade corporate securities positions in markets when we believe the
‚ Money market instruments return is at least commensurate with the risk.
‚ Mortgage securities and loans
‚ Municipal securities A core activity in FICC is market-making
in a broad array of securities and products.
We generate trading net revenues from For example, we are a primary dealer in many
our customer-driven business in three ways. of the largest government bond markets
First, in large, highly liquid markets we under- around the world, including the United States,
take a high volume of transactions for modest Japan, the United Kingdom and Canada; we
spreads. Second, by capitalizing on our are a member of the major futures ex-
strong market relationships and capital posi- changes; and we have interbank dealer status
tion, we also undertake transactions in less in the currency markets in New York, London,
liquid markets where spreads are generally Tokyo and Hong Kong. Our willingness to
larger. Finally, we generate net revenues from make markets in a broad range of Ñxed
structuring and executing transactions that income, currency and commodity products
address complex client needs. and their derivatives is crucial both to our
In our proprietary activities, we assume a client relationships and to support our under-
variety of risks and devote substantial re- writing business by providing secondary mar-
sources to identify, analyze and beneÑt from ket liquidity. Our clients value counterparties
these exposures. We leverage our strong that are active in the marketplace and are
research capabilities and capitalize on our willing to provide liquidity and research-based
proprietary analytical models to analyze infor- points of view. In addition, we believe that our
mation and make informed trading judgments. signiÑcant investment in research capabilities

74
and proprietary analytical models are critical maker, by aggregate volume, among the top
to our ability to provide advice to our clients. 100 most actively traded stocks in calendar
Our research capabilities include quantitative 1998. Second, by capitalizing on our strong
and qualitative analyses of global economic, market relationships and capital position, we
currency and Ñnancial market trends, as well also undertake large transactions, such as
as credit analyses of corporate and sovereign block trades and positions in securities, in
Ñxed income securities. which we beneÑt from spreads that are
generally larger. Finally, we also beneÑt from
Our clients often confront complex
structuring complex transactions.
problems that require creative approaches.
We assist our clients who seek to hedge or Goldman Sachs was a pioneer and is a
reallocate their risks and proÑt from expected leader in the execution of large block trades
price movements. To do this we bring to bear (trades of 50,000 or more shares) in the
the ability of our experienced professionals to United States and abroad. In calendar 1998,
understand the needs of our clients and our we executed over 50 block trades of at least
ability to manage the risks associated with $100 million each. We have been able to
complex solutions to problems. In recognition capitalize on our expertise in block trading,
of our ability to meet these client needs, we our global distribution network and our will-
were ranked by Institutional Investor in Febru- ingness to commit capital to eÅect increas-
ary 1999 as the number two derivatives ingly large and complex customer
dealer for the second straight year. In addi- transactions. We expect corporate consolida-
tion, we were named by Euroweek in January tion and restructuring and increased demand
1999 as the ""Best provider of swaps and for certainty and speed of execution by
other derivatives''. sellers and issuers of securities to increase
both the frequency and size of sales of large
Equities blocks of equity securities. We believe that
we are well positioned to beneÑt from this
Goldman Sachs engages in a variety of
trend. Block transactions, however, expose
market-making, proprietary trading and arbi-
us to increased risks, including those arising
trage activities in equity securities and equity-
from holding large and concentrated positions
related products (such as convertible securi-
and decreasing spreads. See ""Risk Fac-
ties and equity derivative instruments) on a
tors Ì Market Fluctuations Could Adversely
global basis. Goldman Sachs makes markets
AÅect Our Businesses in Many Ways Ì Hold-
and positions blocks of stock to facilitate
ing Large and Concentrated Positions May
customers' transactions and to provide liquid-
Expose Us to Large Losses'' for a discussion
ity in the marketplace. Goldman Sachs is a
of the risks associated with holding a large
member of most of the major stock ex-
position in a single issuer and ""Risk
changes, including New York, London, Frank-
Factors Ì The Financial Services Industry
furt, Tokyo and Hong Kong.
Is Intensely Competitive and Rapidly Consoli-
As agent, we execute brokerage transac- dating'' for a discussion of the competitive
tions in equity securities for institutional and risks that we face.
individual customers that generate commis-
We are active in the listed options and
sion revenues. Commissions earned on
futures markets, and we structure, distribute
agency transactions are recorded in Asset
and execute over-the-counter derivatives on
Management and Securities Services.
market indices, industry groups and individual
In equity trading, as in FICC, we generate company stocks to facilitate customer trans-
net revenues from our customer-driven busi- actions and our proprietary activities. We
ness in three ways. First, in large, highly develop quantitative strategies and render
liquid principal markets, such as the over-the- advice with respect to portfolio hedging and
counter market for equity securities, we un- restructuring and asset allocation transac-
dertake a high volume of transactions for tions. We also create specially tailored instru-
modest spreads. In the Nasdaq National Mar- ments to enable sophisticated investors to
ket, we were the second largest market undertake hedging strategies and establish or

75
liquidate investment positions. We are one of 1998 Experience. From mid-August to
the leading participants in the trading and mid-October 1998, the Russian economic cri-
development of equity derivative instruments. sis, the turmoil in Asian and Latin American
We are an active participant in the trading of emerging markets and the resulting move to
futures and options on most of the major higher quality Ñxed income securities by many
exchanges in the United States, Europe and investors led to substantial declines in global
Asia. Ñnancial markets. Investors broadly sold
credit-sensitive products, such as corporate
Equity arbitrage has long been an impor- and high-yield debt, and bought higher-rated
tant part of our equity franchise. Our strategy instruments, such as U.S. Treasury securities,
is based on making investments on a global which caused credit spreads to widen dramat-
basis through a diversiÑed portfolio across ically. This market turmoil also caused a
diÅerent markets and event categories. This widespread decline in global equity markets.
business focuses on event-oriented special As a major dealer in Ñxed income securi-
situations where we are not acting as an ties, we maintain substantial inventories of
advisor and on relative value trades. These corporate and high-yield debt. We regularly
special situations include mergers and acqui- seek to hedge the interest rate risk on these
sitions, corporate restructurings, recapitaliza- positions through, among other strategies,
tions and legal and regulatory events. Equity short positions in U.S. Treasury securities. In
arbitrage leverages our global infrastructure the second half of 1998, we suÅered losses
and network of research analysts to analyze from both the decline in the prices of corpo-
carefully a broad range of trading and invest- rate and high-yield debt instruments that we
ment strategies across a wide variety of owned and the increase in the prices of the
markets. Investment decisions are the product U.S. Treasury securities in which we had
of rigorous fundamental, situational and, fre- short positions.
quently, regulatory and legal analysis. Al-
though market conditions led us to decrease These market shocks also led to trading
the number and size of positions maintained losses in our Ñxed income relative value
by our equity arbitrage business during 1998, trading positions. Relative value trading posi-
we believe that over time, as opportunities tions are intended to proÑt from a perceived
present themselves, our equity arbitrage busi- temporary dislocation in the relationship be-
ness will likely increase its activity. tween the values of diÅerent Ñnancial instru-
ments. From mid-August to mid-October
1998, the components of these relative value
Trading Risk Management positions moved in directions that we did not
anticipate and the volatilities of certain posi-
We believe that our trading and market- tions increased to three times prior levels.
making capabilities are key ingredients to our When we and other market participants with
success. While these businesses have gener- similar positions simultaneously sought to
ally earned attractive returns, we have in the reduce positions and exposures, this caused
past incurred signiÑcant trading losses in a substantial reduction in market liquidity and
periods of market turbulence, such as in 1994 a continuing decline in prices.
and 1998. Our trading risk management pro-
In the second half of 1998, we also
cess seeks to balance our ability to proÑt
experienced losses in equity arbitrage and in
from trading positions with our exposure to
the value of a number of merchant banking
potential losses. Risk management includes
investments.
input from all levels of Goldman Sachs, from
the trading desks to the Firmwide Risk Com- Risk Reduction. Over the course of this
mittee. See ""Management's Discussion and period, we actively reduced our positions and
Analysis of Financial Condition and Results of exposure to severe market disruptions of the
Operations Ì Risk Management'' for a fur- type described above. Our current scenario
ther discussion of our risk management poli- models estimate our exposure to a substan-
cies and procedures. tial widening in credit spreads and adverse

76
movements in relative value trades of the type Principal Investments
experienced in mid-August to mid-October
1998. These models indicate that, as of In connection with our merchant banking
November 1998, our exposure to a potential activities, we invest with our clients by making
reduction in net trading revenues as a result principal investments in funds that we raise
of these events was over 40% lower than in and manage. As of November 1998, we had
August 1998. In addition, the daily VaR of committed $2.8 billion, of which $1.7 billion
substantially all of our trading positions de- had been funded, of the $15.5 billion total
clined from $47 million as of May 29, 1998 to equity capital committed for our merchant
$43 million as of November 1998. The No- banking funds. The funds' investments gener-
vember 1998 daily VaR reÖects the reduction ate capital appreciation or depreciation and,
in positions discussed above, oÅset by the upon disposition, realized gains or losses.
higher market volatility, changes in correlation See ""Ì Asset Management and Securities
and other market conditions experienced in Services Ì Merchant Banking'' for a discus-
the second half of 1998. If the daily VaR as of sion of our merchant banking funds. As of
November 1998 had been determined using November 1998, our aggregate carrying value
the volatility and correlation data as of of principal investments held directly or
May 29, 1998, the daily VaR would have been through our merchant banking funds was
$31 million. See ""Management's Discussion approximately $1.4 billion, which was com-
and Analysis of Financial Condition and Re- prised of corporate principal investments with
sults of Operations Ì Risk Management'' for an aggregate carrying value of approximately
a discussion of VaR and its limitations. $609 million and real estate investments with
an aggregate carrying value of approximately
As part of the continuous eÅort to reÑne $753 million.
our risk management policies and proce-
dures, we have recently made a number of Asset Management and Securities Services
adjustments to the way that we evaluate risk
and set risk limits. See ""Management's Dis- Asset Management and Securities Ser-
cussion and Analysis of Financial Condition vices is comprised of the following:
and Results of Operations Ì Risk Manage-
ment Ì Market Risk'' for a further discussion ‚ Asset Management. Asset management
of our policies and procedures for evaluating generates management fees by providing
market risk and setting related limits. investment advisory services to a diverse
and rapidly growing client base of institu-
Notwithstanding these actions, we con-
tions and individuals;
tinue to hold trading positions that are sub-
stantial in both number and size, and are ‚ Securities Services. Securities services
subject to signiÑcant market risk. In addition, includes prime brokerage, Ñnancing ser-
management may choose to increase our risk vices and securities lending and our
levels in the future. See ""Risk Factors Ì matched book businesses, all of which
Market Fluctuations Could Adversely AÅect generate revenue primarily in the form of
Our Businesses in Many Ways'' and ""Ì Our fees or interest rate spreads; and
Risk Management Policies and Procedures
May Leave Us Exposed to UnidentiÑed or ‚ Commissions. Commission-based busi-
Unanticipated Risk'' for a discussion of the nesses include agency transactions for cli-
risks associated with our trading positions. ents on major stock and futures exchanges.
Revenues from the increased share of
income and gains derived from our
merchant banking funds are also included
in commissions.

77
 The following table sets forth the net
revenues of our Asset Management and Se-
curities Services business:

Asset Management and Securities Services Net Revenues

(in millions)
Three Months
Ended
Year Ended November February
1996 1997 1998 1998 1999

Asset management ÏÏÏÏÏÏÏÏÏÏÏ $ 242 $ 458 $ 675 $139 $202

Securities services ÏÏÏÏÏÏÏÏÏÏÏÏ 354 487 730 170 207
Commissions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 727 989 1,368 348 327
Total Asset Management and
Securities ServicesÏÏÏÏÏÏÏÏÏÏ $1,323 $1,934 $2,773 $657 $736

Asset Management agement typically generate fees based on a

percentage of their value and include our
Goldman Sachs is seeking to build a mutual funds, separate accounts managed for
premier global asset management business. institutional and individual investors, our
We oÅer a broad array of investment strate- merchant banking funds and other alternative
gies and advice across all major asset clas- investment funds. Other client assets are
ses: global equity; Ñxed income, including comprised of assets in brokerage accounts of
money markets; currency; and alternative in- primarily high net worth individuals, on which
vestment products (i.e., investment vehicles we earn commissions.
with non-traditional investment objectives
and/or strategies). Assets under supervision Over the last Ñve years, we have rapidly
are comprised of assets under management grown our assets under supervision, as set
and other client assets. Assets under man- forth in the graph below:

Assets Under Supervision

(in billions)
$400
$370

350 $337

Other client assets

300 163
Assets under management
142
250 $238

200 102
$171

150
77
$110
$93 207
100 195
58
49 136
50 94
44 52
0
1994 1995 1996 1997 1998 February 1999

78
 As of February 1999, equities and alter- The following table sets forth the amount
native investments represented 51% of our of assets under management by asset class:
total assets under management. Since 1996,
these two asset classes have been the pri-
mary drivers of our growth in assets under
management.

Assets Under Management by Asset Class

(in billions)
As of
As of November February
1994 1995 1996 1997 1998 1999

Asset Class
EquityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6 $ 9 $34 $ 52 $ 69 $ 73
Fixed income and currency 17 19 26 36 50 53
Money markets ÏÏÏÏÏÏÏÏÏÏÏÏ 18 20 27 31 46 48
Alternative investment(1) ÏÏÏ 3 4 8 17 30 32
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $44 $52 $95 $136 $195 $206

(1) Includes private equity, real estate, quantitative asset allocation and other funds that we
manage.

Since the beginning of 1996, we have 1990s. Over the last three years, we have
increased the resources devoted to our asset built a signiÑcant asset management business
management business, including adding over in Japan, and, as of February 1999, we
850 employees. In addition, over the past managed $23 billion of assets sourced from
three years, Goldman Sachs has made three Japan. In Japan, as of the end of February
asset management acquisitions in order to 1999, we were the largest non-Japanese
expand its geographic reach and broaden its investment trust manager, according to The
global equity and alternative investment port- Investment Trusts Association, and we man-
folio management capabilities. aged four of the top 15 open-ended mutual
funds ranked by mutual fund assets, accord-
Our global reach has been important in
ing to IFIS Inc. We believe that substantial
growing assets under management. From
opportunities exist to grow our asset man-
November 1996 to February 1999, our assets
agement business in Japan, by increasing our
under management, excluding our merchant
institutional client base and expanding the
banking funds, sourced from outside the
third-party distribution network through which
United States grew by over $35 billion. As of
we oÅer our mutual funds.
February 1999, we managed approximately
$46 billion sourced from Europe.
Clients. Our primary clients are institu-
In Japan, deregulation, high individual tions, high net worth individuals and retail
savings rates and low local rates of return investors. We access clients through both
have been important drivers of growth for our direct and third-party channels.
asset management business during the

79
 The table below sets forth the amount of
assets under supervision by distribution chan-
nel and client category as of November 1998:

Assets Under Supervision by Distribution Channel

(in billions)
Assets Under
Supervision(1) Primary Investment Vehicles

‚ Directly distributed
Ì Institutional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 121 Separate managed accounts
Commingled vehicles
Ì High net worth individualsÏÏ 156 Brokerage accounts
Limited partnerships
Separate managed accounts
‚ Third-party distributed
Ì Institutional and retailÏÏÏÏÏÏ 48 Mutual funds
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 325

(1) Excludes $12 billion in our merchant banking funds.

Our institutional clients include corpora- basis through banks, brokerage Ñrms, insur-
tions, insurance companies, pension funds, ance companies and other Ñnancial in-
foundations and endowments. We managed termediaries. As of December 31, 1998, we
assets for three of the Ñve largest pension were the third largest manager in the U.S.
pools in the United States as ranked as of institutional money market sector according to
September 30, 1998 by Pensions & Invest- information compiled by Strategic Insight. In
ments, and we have 18 clients for whom we Japan, we also utilize a third-party distribution
manage at least $1 billion each. network consisting principally of the largest
In the individual high net worth area, we Japanese brokerage Ñrms.
have established approximately 10,000 high
net worth accounts worldwide, including ac- Merchant Banking
counts with 41% of the 1998 ""Forbes 400 List
of the Richest Americans''. We believe this is Goldman Sachs has an established suc-
a high growth opportunity because this mar- cessful record in the corporate and real
ket (deÑned as the market for individual estate merchant banking business, having
investors with a net worth in excess of $5 raised $15.5 billion of committed capital for 15
million) is highly fragmented and growing private investment funds, as of November
rapidly and accounts for approximately 1998, of which $9.0 billion had been funded.
$10 trillion of investable assets according to a We have committed $2.8 billion and funded
study by McKinsey & Co. At the center of our $1.7 billion of these amounts; our clients,
eÅort is a team of over 420 relationship including pension plans, endowments, charita-
managers, located in 12 U.S. and six interna- ble institutions and high net worth individuals,
tional oÇces. These professionals have an have provided the remainder. Some of these
average of over seven years of experience at investment funds pursue, on a global basis,
Goldman Sachs and have exhibited low turno- long-term investments in equity and debt
ver and superior productivity relative to the securities in privately negotiated transactions,
industry average. leveraged buyouts and acquisitions. As of
November 1998, these funds had total com-
In the third-party distribution channel, we mitted capital of $7.7 billion, which includes
distribute our mutual funds on a worldwide two funds with $1.0 billion of committed

80
capital that are in the process of being wound the funds' unrealized appreciation or depreci-
down. Other funds, with total committed capi- ation arising from changes in fair value as
tal of $7.8 billion as of November 1998, invest well as gains and losses upon realization.
in real estate operating companies and debt These items are included in Trading and
and equity interests in real estate assets. Principal Investments.

Our strategy with respect to each Securities Services

merchant banking fund is to invest oppor-
tunistically to build a portfolio of investments Securities services consists predomi-
that is diversiÑed by industry, product type, nantly of Global Securities Services, which
geographic region and transaction structure provides prime brokerage, Ñnancing services
and type. Our merchant banking funds lever- and securities lending to a diversiÑed U.S.
age our long-standing relationships with com- and international customer base, including
panies, investors, entrepreneurs and Ñnancial hedge funds, pension funds and high net
intermediaries around the world to source worth individuals. Securities services also in-
potential investment opportunities. In addition, cludes our matched book businesses.
our merchant banking funds and their portfo- We oÅer prime brokerage services to our
lio companies have generated business for clients, allowing them the Öexibility to trade
other areas of Goldman Sachs, including with most brokers while maintaining a single
equity underwriting, leveraged and other Ñ- source for Ñnancing and portfolio reports. Our
nancing fees and merger advisory fees. prime brokerage activities provide multi-prod-
Located in eight oÇces around the world, uct clearing and custody in 50 markets,
our investment professionals identify, manage consolidated multi-currency accounting and
and sell investments on behalf of our reporting and oÅshore fund administration
merchant banking funds. Goldman Sachs has and servicing for our most active clients.
two subsidiaries that manage real estate Additionally, we provide Ñnancing to our cli-
assets, The Archon Group, L.P. and Archon ents through margin loans collateralized by
Group (France) S.C.A. In addition, our securities held in the client's account. In
merchant banking professionals work closely recent years, we have signiÑcantly increased
with other departments and beneÑt from the our prime brokerage client base.
expertise of specialists in debt and equity Securities lending activities principally in-
research, investment banking, leveraged and volve the borrowing and lending of equity
mortgage Ñnance and equity capital markets. securities to cover customer and Goldman
Sachs' short sales and to Ñnance Goldman
Merchant banking activities generate
Sachs' long positions. In addition, we are an
three revenue streams. First, we receive a
active participant in the securities lending
management fee that is generally a percent-
broker-to-broker business and the third-party
age of a fund's committed capital, invested
agency lending business. Trading desks in
capital, total gross acquisition cost or asset
New York, Boston, London, Tokyo and Hong
value. These annual management fees, which
Kong provide 24-hour coverage in equity
are included in our asset management reve-
markets worldwide. We believe the rapidly
nues, have historically been a recurring
developing international stock lending market
source of revenue. Second, we receive from
presents a signiÑcant growth opportunity for
each fund, after that fund has achieved a
us.
minimum return for fund investors, an in-
creased share of the fund's income and gains Lenders of securities include pension
that is a percentage, typically 20%, of the plan sponsors, mutual funds, insurance com-
capital appreciation and gains from the fund's panies, investment advisors, endowments,
investments. Revenues from the increased bank trust departments and individuals. We
share of the funds' income and gains are have entered into exclusive relationships with
included in commissions. Third, Goldman certain lenders that have given us access to
Sachs, as a substantial investor in these large pools of securities, some of which are
funds, is allocated its proportionate share of often hard to locate in the general lender

81
market, providing us with a competitive ad- scale to develop an industry-leading position
vantage. We believe that a signiÑcant cause for our investment research products. We
of the growth in short sales, which require the believe that investment research is a signiÑ-
borrowing of securities, has been the rapid cant factor in our strong competitive position
increase in complex trading strategies, such in debt and equity underwritings and in our
as index arbitrage, convertible bond and war- generation of commission revenues.
rant arbitrage, option strategies, and sector
and market neutral strategies where shares Major investors worldwide recognize
are sold short to hedge exposure from deriv- Goldman Sachs for its value-added research
ative instruments. products, which are highly rated in client polls
across the Americas, Europe and Asia. Our
Research Department is the only one to rank
Commissions
in the top three in each of the last 15
Goldman Sachs generates commissions calendar years in Institutional Investor's ""All-
by executing agency transactions on major America Research Team'' survey. In Decem-
stock and futures exchanges worldwide. We ber 1998, the Research Department also
eÅect agency transactions for clients located achieved top honors for global investment
throughout the world. In recent years, aggre- research from Institutional Investor. In Europe,
gate commissions have increased as a result based on the Institutional Investor ""1999 All-
of growth in transaction volume on the major Europe Research Team'' survey, the Re-
exchanges. As discussed above, commis- search Department ranked number one for
sions also include the increased share of coverage of pan-European sectors and num-
income and gains from merchant banking ber three in European Strategy and
funds as well as commissions earned from Economics.
brokerage transactions for high net worth
individuals. For a discussion regarding our Global Investment Research employs a
increased share of the income and gains from team approach that provides equity research
our merchant banking funds, see coverage of approximately 2,300 companies
""Ì Merchant Banking'' above, and for a worldwide, 53 economies and 26 stock mar-
discussion regarding high net worth individu- kets. This is accomplished through four
als, see ""Ì Asset Management Ì Clients'' groups:
above. ‚ the Economic Research group, which for-
mulates macroeconomic forecasts for eco-
In anticipation of continued growth in
nomic activity, foreign exchange, and
electronic connectivity and online trading,
interest rates based on the globally coordi-
Goldman Sachs has made strategic invest-
nated views of its regional economists;
ments in alternative trading systems to gain
experience and participate in the development ‚ the Portfolio Strategy group, which fore-
of this market. See ""Risk Factors Ì The casts equity market returns and provides
Financial Services Industry Is Intensely Com- recommendations on both asset allocation
petitive and Rapidly Consolidating Ì Our and industry representation;
Revenues May Decline Due to Competition ‚ the Company/Industry group, which pro-
from Alternative Trading Systems'' for a dis- vides fundamental analysis, forecasts and
cussion of the competitive risks posed by investment recommendations for compa-
alternative trading systems generally. nies and industries worldwide. Equity re-
search analysts are organized regionally by
Global Investment Research sector and globally into more than 20
industry teams, which allows for extensive
Our Global Investment Research Depart-
collaboration and knowledge sharing on
ment provides fundamental research on econ-
important investment themes; and
omies, debt and equity markets, commodities
markets, industries and companies on a ‚ the Commodities Research group, which
worldwide basis. For over two decades, we provides research on the global commodity
have committed the resources on a global markets.

82
 Internet Strategy and use of technology throughout the organi-
zation, with expenditures, including employee
We believe that Internet technology and costs, of approximately $970 million in 1998
electronic commerce will, over time, change and a budget of $1.2 billion in 1999. We have
the ways that securities are traded and dis- developed signiÑcant software and systems
tributed, creating both opportunities and chal- over the past several years. Our technology
lenges for our businesses. In response, we initiatives can be broadly categorized into
have a program of internal development and three eÅorts:
external investment.
‚ enhancing client service through increased
Internally, we are extending our global connectivity and the provision of high
electronic trading and information distribution value-added, tailored services;
capabilities to our clients via the Internet.
These capabilities cover many of our Ñxed ‚ risk management; and
income, equities and mutual fund products in ‚ overall eÇciency and control.
markets around the world. We are also using
the Internet to improve the ease and quality We have tailored our services to our
of communication with our institutional and clients by providing them with electronic
high net worth clients. For example, investors access to our products and services. For
have on-line access to our investment re- example, we developed the GS Financial
search, mutual fund data and valuation mod- WorkbenchSM, an Internet web site that clients
els and our high net worth clients are and employees can use to download research
increasingly accessing their portfolio informa- reports, access earnings and valuation mod-
tion over the Internet. We have also recently els, submit trades, monitor accounts, build
established GS-OnlineSM, which, in conjunc- and view presentations, calculate derivative
tion with Goldman, Sachs & Co., will act as prices and view market data. First made
an underwriter of securities oÅerings via the available in early 1995, the GS Financial
Internet and other electronic means. GS- WorkbenchSM represents a joint eÅort among
OnlineSM will deal initially only with other all of our business areas to create one
underwriters and syndicate members and not comprehensive site for clients and employees
with members of the public. to access our products and services.

Externally, we have invested in electronic We have also developed software that

commerce concerns such as Bridge Informa- enables us to monitor and analyze our market
tion Systems, Inc., TradeWeb LLC, Archipel- and credit risks. This risk management
ago, L.L.C., The BRASS Utility, L.L.C., software not only analyzes market risk on
OptiMark Technologies, Inc. and, most re- Ñrmwide, divisional and trading desk levels,
cently, Wit Capital Group, Inc. Through these but also breaks down our risk into its underly-
investments, we gain an increased under- ing exposures, permitting management to
standing of business developments and op- evaluate exposures on the basis of speciÑc
portunities in this emerging sector. For a interest rate, currency rate, equity price or
discussion of how Goldman Sachs could be commodity price changes. To assist further in
adversely aÅected by these developments, the management of our credit exposures,
see ""Risk Factors Ì The Financial Services data from many sources are aggregated daily
Industry Is Intensely Competitive and Rapidly into credit management systems that give
Consolidating Ì Our Revenues May Decline senior management and professionals in the
Due to Competition from Alternative Trading Credit and Controllers Departments the ability
Systems''. to receive timely information with respect to
credit exposures worldwide, including netting
Information Technology information, and the ability to analyze com-
plex risk situations eÅectively. Our software
Technology is fundamental to our overall accesses these data, allows for quick analysis
business strategy. Goldman Sachs is commit- at the level of individual trades and interacts
ted to the ongoing development, maintenance with other Goldman Sachs systems.

83
 Technology has been a signiÑcant factor ployees they supervise in a 360-degree re-
in improving the overall eÇciency of many view process that is integral to our team
areas of Goldman Sachs. By automating approach. In 1998, over 140,000 reviews were
many trading procedures, we have substan- completed, evidencing the comprehensive na-
tially increased our eÇciency and accuracy. ture of this process.
We currently have projects under way to We also believe that good citizenship is
ensure that our technology is Year 2000 an important part of being a member of the
compliant. See ""Risk Factors Ì Our Com- Goldman Sachs team. To that end, we estab-
puter Systems and Those of Third Parties lished our Community TeamWorks initiative in
May Not Achieve Year 2000 Readiness Ì 1997. As part of Community TeamWorks, all
Year 2000 Readiness Disclosure'' and ""Man- employees are oÅered the opportunity to
agement's Discussion and Analysis of Finan- spend a day working at a charitable organiza-
cial Condition and Results of Operations Ì tion of their choice while continuing to receive
Risk Management Ì Operational and Year their full salary for that day. In 1998, approxi-
2000 Risks Ì Year 2000 Readiness Disclo- mately two-thirds of our employees partici-
sure'' for a further discussion of the risks we pated in Community TeamWorks. The
face in achieving Year 2000 readiness and commitment of our partners to the community
our progress to date. is also demonstrated by their having given
over $90 million in each of the last two years
Employees to charities, including private foundations.
Management believes that one of the As of February 1999, we had approxi-
strengths and principal reasons for the suc- mately 13,000 employees. In addition, The
cess of Goldman Sachs is the quality and Archon Group, L.P. and Archon Group
dedication of its people and the shared sense (France) S.C.A., subsidiaries of Goldman
of being part of a team. Goldman Sachs was Sachs that provide real estate services for
ranked number seven in Fortune magazine's our real estate investment funds, had a total
""The 100 Best Companies to Work for in of approximately 1,260 employees as of Feb-
America'' in January 1999 and was ranked ruary 1999. Goldman Sachs is reimbursed for
number three in Fortune magazine's 1999 substantially all of the costs of these employ-
""The Top 50 MBA Dream Companies'', the ees by these funds.
highest ranking investment banking and secu-
See ""Management Ì The Employee Ini-
rities Ñrm in each case. We strive to maintain
tial Public OÅering Awards'' for a discussion
a work environment that fosters professional-
of the steps taken by Goldman Sachs to
ism, excellence, diversity and cooperation
encourage the continued service of its em-
among our employees worldwide.
ployees after the oÅerings and see ""Risk
Instilling the Goldman Sachs culture in all Factors Ì Our Conversion to Corporate Form
employees is a continuous process, of which May Adversely AÅect Our Ability to Recruit,
training is an essential part. We recently Retain and Motivate Key Employees'' for a
opened a 34,000 square foot training center discussion of the factors that may have an
in New York City, near our world headquar- adverse impact on the eÅectiveness of these
ters. All employees are oÅered the opportu- eÅorts.
nity to participate in education and periodic
seminars that we sponsor at various locations Competition
throughout the world. We also sponsor oÅ-
The Ñnancial services industry Ì and all
site meetings for the various business units
of our businesses Ì are intensely competi-
that are designed to promote collaboration
tive, and we expect them to remain so. Our
among co-workers.
competitors are other brokers and dealers,
Another important part of instilling the investment banking Ñrms, insurance compa-
Goldman Sachs culture in all employees is nies, investment advisors, mutual funds,
our employee review process. Employees are hedge funds, commercial banks and merchant
reviewed by supervisors, co-workers and em- banks. We compete with some of our com-

84
petitors globally and with some others on a have a stronger local presence and a longer
regional, product or niche basis. We compete operating history in these markets.
on the basis of a number of factors, including
transaction execution, our products and ser- We have experienced intense price com-
vices, innovation, reputation and price. petition in some of our businesses in recent
years. For example, equity and debt under-
Competition is also intense for the attrac- writing discounts have been under pressure
tion and retention of qualiÑed employees. Our for a number of years and the ability to
ability to continue to compete eÅectively in execute trades electronically, through the In-
our businesses will depend upon our ability to ternet and other alternative trading systems
attract new employees and retain and moti- may increase the pressure on trading com-
vate our existing employees. See ""Ì Employ- missions. It appears that this trend toward
ees'' for a discussion of our eÅorts in this alternative trading systems will continue and
regard. perhaps accelerate. Similarly, underwriting
In recent years there has been substan- spreads in Latin American and other priva-
tial consolidation and convergence among tizations have been subject to considerable
companies in the Ñnancial services industry. pressure in the last year. We believe that we
In particular, a number of large commercial may experience pricing pressures in these
banks, insurance companies and other broad- and other areas in the future as some of our
based Ñnancial services Ñrms have estab- competitors seek to obtain market share by
lished or acquired broker-dealers or have reducing prices.
merged with other Ñnancial institutions. Many See ""Risk Factors Ì The Financial Ser-
of these Ñrms have the ability to oÅer a wide vices Industry Is Intensely Competitive and
range of products, from loans, deposit-taking Rapidly Consolidating'' for a discussion of the
and insurance to brokerage, asset manage- competitive risks we face in our businesses.
ment and investment banking services, which
may enhance their competitive position. They Regulation
also have the ability to support investment
banking and securities products with commer- Goldman Sachs' business is, and the
cial banking, insurance and other Ñnancial securities and commodity futures and options
services revenues in an eÅort to gain market industries generally are, subject to extensive
share, which could result in pricing pressure regulation in the United States and elsewhere.
in our businesses. As a matter of public policy, regulatory bodies
in the United States and the rest of the world
This trend toward consolidation and con-
are charged with safeguarding the integrity of
vergence has signiÑcantly increased the capi-
the securities and other Ñnancial markets and
tal base and geographic reach of our
with protecting the interests of customers
competitors. This trend has also hastened the
participating in those markets, not with pro-
globalization of the securities and other Ñnan-
tecting the interests of Goldman Sachs'
cial services markets. As a result, we have
shareholders or creditors. In the United
had to commit capital to support our interna-
States, the SEC is the federal agency respon-
tional operations and to execute large global
sible for the administration of the federal
transactions.
securities laws. Goldman, Sachs & Co. is
We believe that some of our most signiÑ- registered as a broker-dealer and as an
cant challenges and opportunities will arise investment adviser with the SEC and as a
outside the United States. See ""Industry and broker-dealer in all 50 states and the District
Economic Outlook'' for a discussion of these of Columbia. Self-regulatory organizations,
challenges and opportunities. In order to take such as the NYSE, adopt rules and examine
advantage of these opportunities, we will broker-dealers, such as Goldman, Sachs &
have to compete successfully with Ñnancial Co. In addition, state securities and other
institutions based in important non-U.S. mar- regulators also have regulatory or oversight
kets, particularly in Europe. Some of these authority over Goldman, Sachs & Co. Simi-
institutions are larger, better capitalized and larly, our businesses are also subject to

85
regulation by various non-U.S. governmental kept in relatively liquid form. Goldman, Sachs
and regulatory bodies and self-regulatory au- & Co. is also subject to the net capital
thorities in virtually all countries where we requirements of the Commodity Futures Trad-
have oÇces. ing Commission and various securities and
commodity exchanges. See Note 8 to the
Broker-dealers are subject to regulations
audited consolidated Ñnancial statements and
that cover all aspects of the securities busi-
Note 5 to the unaudited condensed consoli-
ness, including sales methods, trade practices
dated Ñnancial statements for a discussion of
among broker-dealers, use and safekeeping
our net capital.
of customers' funds and securities, capital
structure, record-keeping, the Ñnancing of The SEC and various self-regulatory or-
customers' purchases and the conduct of ganizations impose rules that require notiÑca-
directors, oÇcers and employees. Additional tion when net capital falls below certain
legislation, changes in rules promulgated by predeÑned criteria, dictate the ratio of subor-
self-regulatory organizations or changes in dinated debt to equity in the regulatory capital
the interpretation or enforcement of existing composition of a broker-dealer and constrain
laws and rules, either in the United States or the ability of a broker-dealer to expand its
elsewhere, may directly aÅect the mode of business under certain circumstances. Addi-
operation and proÑtability of Goldman Sachs. tionally, the SEC's uniform net capital rule
The U.S. and non-U.S. government agen- imposes certain requirements that may have
cies and self-regulatory organizations, as well the eÅect of prohibiting a broker-dealer from
as state securities commissions in the United distributing or withdrawing capital and requir-
States, are empowered to conduct adminis- ing prior notice to the SEC for certain with-
trative proceedings that can result in censure, drawals of capital.
Ñne, the issuance of cease-and-desist orders In January 1999, the SEC adopted revi-
or the suspension or expulsion of a broker- sions to its uniform net capital rule and
dealer or its directors, oÇcers or employees. related regulations that permit the registration
Occasionally, our subsidiaries have been sub- of over-the-counter derivatives dealers as
ject to investigations and proceedings, and broker-dealers. An over-the-counter deriva-
sanctions have been imposed for infractions tives dealer can, upon adoption of a risk
of various regulations relating to our activities, management framework in accordance with
none of which has had a material adverse the new rules, utilize a capital requirement
eÅect on us or our businesses. based upon proprietary models for estimating
The commodity futures and options in- market risk exposures. We have established
dustry in the United States is subject to Goldman Sachs Financial Markets, L.P. and
regulation under the Commodity Exchange are in the process of registering this company
Act, as amended. The Commodity Futures with the SEC as an over-the-counter deriva-
Trading Commission is the federal agency tives dealer to conduct in a more capital
charged with the administration of the Com- eÇcient manner certain over-the-counter de-
modity Exchange Act and the regulations rivative businesses now conducted in other
thereunder. Goldman, Sachs & Co. is regis- aÇliates.
tered with the Commodity Futures Trading
Goldman Sachs is an active participant in
Commission as a futures commission
the international Ñxed income and equity
merchant, commodity pool operator and com-
markets. Many of our aÇliates that participate
modity trading advisor.
in those markets are subject to comprehen-
As a registered broker-dealer and mem- sive regulations that include some form of
ber of various self-regulatory organizations, capital adequacy rule and other customer
Goldman, Sachs & Co. is subject to the SEC's protection rules. For example, Goldman
uniform net capital rule, Rule 15c3-1. This rule Sachs provides investment services in and
speciÑes the minimum level of net capital a from the United Kingdom under a regulatory
broker-dealer must maintain and also requires regime that is undergoing comprehensive re-
that at least a minimum part of its assets be structuring aimed at implementing the Finan-

86
cial Services Authority as the United and trading activities and the Ñnancing of
Kingdom's uniÑed regulator. The relevant customer account balances, and also could
Goldman Sachs entities in London are at restrict our ability to withdraw capital from our
present regulated by the Securities and Fu- regulated subsidiaries, which in turn could
tures Authority Limited in respect of their limit our ability to repay debt or pay dividends
investment banking, individual asset manage- on our common stock.
ment, brokerage and principal trading activi-
ties, and the Investment Management Legal Matters
Regulatory Organization in respect of their
We are involved in a number of judicial,
institutional asset management and fund man-
regulatory and arbitration proceedings (in-
agement activities. Some of these Goldman
cluding those described below) concerning
Sachs entities are also regulated by the
matters arising in connection with the conduct
London Stock Exchange and other United
of our businesses. We believe, based on
Kingdom securities and commodities ex-
currently available information, that the results
changes of which they are members. It is
of such proceedings, in the aggregate, will
expected, however, that commencing in 2000
not have a material adverse eÅect on our
the responsibilities of the Securities and Fu-
Ñnancial condition, but might be material to
tures Authority Limited and Investment Man-
our operating results for any particular period,
agement Regulatory Organization will be
depending, in part, upon the operating results
taken over by the Financial Services Author-
for such period.
ity. The investment services that are subject
to oversight by United Kingdom regulators are
MobileMedia Securities Litigation
regulated in accordance with European Union
directives requiring, among other things, com- Goldman, Sachs & Co. has been named
pliance with certain capital adequacy stan- as a defendant in a purported class action
dards, customer protection requirements and lawsuit commenced on December 6, 1996 and
conduct of business rules. These standards, pending in the U.S. District Court for the
requirements and rules are similarly imple- District of New Jersey. This lawsuit was
mented, under the same directives, through- brought on behalf of purchasers of common
out the European Union and are broadly stock of MobileMedia Corporation in an un-
comparable in scope and purpose to the derwritten oÅering in 1995 and purchasers of
regulatory capital and customer protection senior subordinated notes of MobileMedia
requirements imposed under the SEC and Communications Inc. in a concurrent under-
Commodity Futures Trading Commission written oÅering. Defendants are MobileMedia
rules. European Union directives also permit Corporation, certain of its oÇcers and direc-
local regulation in each jurisdiction, including tors, and the lead underwriters, including
those in which we operate, to be more Goldman, Sachs & Co. MobileMedia Corpora-
restrictive than the requirements of such tion is currently reorganizing in bankruptcy.
directives and these local requirements can
Goldman, Sachs & Co. underwrote
result in certain competitive disadvantages to
2,242,500 shares of common stock, for a total
Goldman Sachs. In addition, the Japanese
price of approximately $53 million, and
Ministry of Finance and the Financial Supervi-
Goldman Sachs International underwrote
sory Agency in Japan as well as German,
718,750 shares, for a total price of approxi-
French and Swiss banking authorities, among
mately $17 million. Goldman, Sachs & Co.
others, regulate various of our subsidiaries
underwrote approximately $38 million in prin-
and also have capital standards and other
cipal amount of the senior subordinated
requirements comparable to the rules of the
notes.
SEC.
The consolidated class action complaint
Compliance with net capital requirements alleges violations of the disclosure require-
of these and other regulators could limit those ments of the federal securities laws and
operations of our subsidiaries that require the seeks compensatory and/or rescissory dam-
intensive use of capital, such as underwriting ages. In light of MobileMedia Corporation's

87
bankruptcy, the action against it has been Partnership V, a fund advised by Goldman,
stayed. Defendants' motion to dismiss was Sachs & Co., a Goldman, Sachs & Co.
denied in October 1998. managing director and other members of the
investor group. The federal court actions,
Antitrust Matters Relating to Underwritings which have since been consolidated, were
Ñled beginning on November 15, 1996, and
Goldman, Sachs & Co. is one of numer- the state court action was Ñled on May 29,
ous Ñnancial services companies that have 1998.
been named as defendants in certain pur-
ported class actions brought in the U.S. The complaints generally allege that the
District Court for the Southern District of New proxy statement disseminated to former
York by purchasers of securities in public Rockefeller Center Properties, Inc. stockhold-
oÅerings, who claim that the defendants en- ers in connection with the transaction was
gaged in conspiracies in violation of federal deÑcient, in violation of the disclosure require-
antitrust laws in connection with these oÅer- ments of the federal securities laws. The
ings. The plaintiÅs in each instance seek plaintiÅs are seeking, among other things,
treble damages as well as injunctive relief. unspeciÑed damages, rescission of the acqui-
One of the actions, which was commenced on sition, and/or disgorgement.
August 21, 1998, alleges that the defendants In a series of decisions, the federal court
have conspired to discourage or restrict the has granted summary judgment dismissing all
resale of securities for a period after the the claims in the federal action. The plaintiÅs
oÅerings, including by imposing ""penalty have appealed those rulings.
bids''. Defendants moved to dismiss the com-
plaint in November 1998. The plaintiÅs The state action has been stayed pending
amended their complaint in February 1999, disposition of the federal action.
modifying their claims in various ways, includ-
ing limiting the proposed class to retail pur- Reichhold Chemicals Litigation
chasers of public oÅerings. Several other Reichhold Chemicals, Inc. and Reichhold
actions were commenced, beginning on Norway ASA brought a claim in March 30,
November 3, 1998, that allege that the de- 1998 in the Commercial Court in London
fendants, many of whom are also named in against Goldman Sachs International in rela-
the other action discussed above, have con- tion to the plaintiÅs' 1997 purchase of the
spired to Ñx at 7% the discount that under- polymer division of one of Goldman Sachs
writing syndicates receive from issuers of International's Norwegian clients, Jotun A/S.
shares in certain oÅerings. The plaintiÅs claim that they overpaid by $40
Goldman, Sachs & Co. received a Civil million based upon misrepresentations con-
Investigative Demand on April 29, 1999 from cerning the Ñnancial performance of the poly-
the U.S. Department of Justice requesting mer division.
information with respect to its investigation of In November 1998, the Commercial Court
an alleged conspiracy among securities un- granted Goldman Sachs International's appli-
derwriters to Ñx underwriting fees. cation for a stay of the action pending the
outcome of arbitration proceedings between
Rockefeller Center Properties, Inc. Litigation Reichhold Chemicals, Inc. and Reichhold Nor-
way ASA, on the one hand, and Jotun A/S in
Several former shareholders of Rockefel-
Norway, on the other. The stay order is
ler Center Properties, Inc. brought purported
currently being reviewed by an appellate
class actions in the U.S. District Court for the
court.
District of Delaware and the Delaware Chan-
cery Court arising from the acquisition of
Matters Relating to Municipal Securities
Rockefeller Center Properties, Inc. by an
investor group in July 1996. The defendants Goldman, Sachs & Co., together with a
in the actions include, among others, number of other Ñrms active in the municipal
Goldman, Sachs & Co., Whitehall Real Estate securities area, has received requests begin-

88
ning in June 1995 for information from the mon stock in November 1997 at a price of
SEC and certain other federal and state $19.50 per share. Defendants are AMF Bow-
agencies and authorities with respect to the ling, Inc., certain oÇcers and directors of
pricing of escrow securities sold by Goldman, AMF Bowling, Inc. (including the Goldman,
Sachs & Co. to certain municipal bond issuers Sachs & Co. managing director), and the lead
in connection with the advanced refunding of underwriters of the oÅering (including
municipal securities. Goldman, Sachs & Co. Goldman, Sachs & Co.). The complaint al-
understands that certain municipal bond issu- leges violations of the disclosure require-
ers to which Goldman, Sachs & Co. sold ments of the federal securities laws and
escrow securities have also received such seeks compensatory damages and/or rescis-
inquiries. sion. The complaint asserts that The Goldman
Sachs Group, L.P. and the Goldman, Sachs &
There have been published reports that Co. managing director are liable as controlling
an action under the Federal False Claims Act persons under the federal securities laws
was Ñled in February 1995 alleging unlawful because certain funds managed by Goldman
and undisclosed overcharges in certain ad- Sachs owned a majority of the outstanding
vance refunding transactions by a private common stock of AMF Bowling, Inc. and the
plaintiÅ on behalf of the United States and managing director served as its chairman at
that Goldman, Sachs & Co., together with a the time of the oÅering.
number of other Ñrms, is a named defendant
in that action. The complaint was reportedly Properties
Ñled under seal while the government deter-
mines whether it will pursue the claims Our principal executive oÇces are located
directly. at 85 Broad Street, New York, New York, and
comprise approximately 969,000 square feet
Goldman, Sachs & Co. is also one of of leased space, pursuant to a lease agree-
many municipal underwriting Ñrms that have ment expiring in June 2008 (with an option to
been named as defendants in a purported renew for up to 20 additional years). We also
class action brought on November 24, 1998 in occupy over 500,000 square feet at each of
the U.S. District Court for the Middle District 1 New York Plaza and 10 Hanover Square in
of Florida by the Clerk of Collier County, New York, New York, pursuant to lease
Florida on behalf of municipal issuers which agreements expiring in September 2004 (with
purchased escrow securities since October an option to renew for ten years) and
1986 in connection with advance refundings. June 2018, respectively. We also have a 15-
The amended complaint alleges that the secu- year lease for approximately 590,000 square
rities were excessively ""marked up'' in viola- feet at 180 Maiden Lane in New York, New
tion of the Investment Advisers Act and York, that expires in March 2014. In total, we
Florida law, and seeks to recover the diÅer- lease over 3.1 million square feet in the New
ence between the actual and alleged ""fair'' York area, having more than doubled our
prices. The defendants moved to dismiss the space since November 1996. We have addi-
complaint on April 30, 1999. tional oÇces in the United States and else-
where in the Americas. Together, these
AMF Securities Litigation oÇces comprise approximately 650,000
square feet of leased space.
The Goldman Sachs Group, L.P.,
Goldman, Sachs & Co. and a Goldman, Consistent with Goldman Sachs' global
Sachs & Co. managing director have been approach to its business, we also have of-
named as defendants in a purported class Ñces in Europe, Asia, Africa and Australia. In
action lawsuit commenced on April 27, 1999 Europe, we have oÇces that total approxi-
in the U.S. District Court for the Southern mately 790,000 square feet. Our largest pres-
District of New York. This lawsuit was ence in Europe is in London, where we lease
brought on behalf of purchasers of stock of approximately 639,000 square feet through
AMF Bowling, Inc. in an underwritten initial various leases, with the principal one, for
public oÅering of 15,525,000 shares of com- Peterborough Court, expiring in 2016. An

89
additional 396,000 square feet of leased Kong for approximately 190,000 square feet.
space in London is expected to be occupied There are also signiÑcant expansion eÅorts
during 2001. underway in Tokyo and Singapore.
In Asia, we have oÇces that total approx- Our space requirements have increased
imately 360,000 square feet. Our largest of- signiÑcantly over the last several years. Cur-
Ñces in these regions are in Tokyo and Hong rently, Goldman Sachs is at or near capacity
Kong. In Tokyo, we currently lease approxi- at most of its locations. As a result, we have
mately 175,000 square feet under leases that been actively leasing additional space to sup-
expire between November 1999 and port our anticipated growth. Based on our
June 2005. In Hong Kong, we currently lease progress to date, we believe that we will be
approximately 103,000 square feet under a able to acquire additional space to meet our
lease that expires in May 2000. We recently anticipated needs.
entered into a new 12-year lease in Hong

90
 MANAGEMENT

Directors and Executive OÇcers

Set forth below is information concerning anticipate appointing additional directors over
the persons who will be the directors and time who are not employees of Goldman
executive oÇcers of Goldman Sachs as of the Sachs or aÇliated with management.
date of the completion of the oÅerings. We
Name Age Position

Henry M. Paulson, Jr. 53 Director, Chairman and Chief Executive OÇcer

Robert J. Hurst 53 Director and Vice Chairman
John A. Thain 43 Director, President and Co-Chief Operating OÇcer
John L. Thornton 45 Director, President and Co-Chief Operating OÇcer
Sir John Browne 51 Director
James A. Johnson 55 Director
John L. Weinberg 74 Director
Robert J. Katz 51 General Counsel
Gregory K. Palm 50 General Counsel
Robin Neustein 45 Chief of StaÅ
Leslie M. Tortora 42 Chief Information OÇcer
David A. Viniar 43 Chief Financial OÇcer
Barry L. Zubrow 46 Chief Administrative OÇcer

Executive oÇcers are appointed by and from FICC to Operations, Technology and
serve at the pleasure of our board of direc- Finance to assume responsibility for Control-
tors. A brief biography of each director and lers and Treasury. From 1985 to 1990,
executive oÇcer follows. Mr. Thain was in FICC where he established
and served as Co-Head of the Mortgage
Mr. Paulson has been Co-Chairman and Securities Department. Mr. Thain is a director
Chief Executive OÇcer or Co-Chief Executive of The Depository Trust Company.
OÇcer of The Goldman Sachs Group, L.P.
since June 1998 and served as Chief Operat- Mr. Thornton has been President of The
ing OÇcer from December 1994 to June Goldman Sachs Group, L.P. since March 1999
1998. From 1990 to November 1994, he was and Co-Chief Operating Officer of The Goldman
Co-Head of Investment Banking. Sachs Group, L.P. since January 1999. From
August 1998 until January 1999, he had over-
Mr. Hurst has been Vice Chairman of The sight responsibility for International Operations.
Goldman Sachs Group, L.P. since February From September 1996 until August 1998, he
1997 and has served as Head or Co-Head of was Chairman, Goldman Sachs Ì Asia, in ad-
Investment Banking since 1990. He is also a dition to his senior strategic responsibilities in
director of VF Corporation and IDB Holding Europe. From July 1995 to September 1997, he
Corporation Ltd. was Co-Chief Executive Officer for European
Operations. From 1994 to 1995, he was Co-
Mr. Thain has been President of The
Head of Investment Banking in Europe and
Goldman Sachs Group, L.P. since March
from 1992 to 1994 was Head of European
1999 and Co-Chief Operating OÇcer since
Investment Banking Services. Mr. Thornton is
January 1999. From December 1994 to March
also a director of the Ford Motor Company,
1999, he served as Chief Financial OÇcer and
BSkyB PLC, Laura Ashley PLC and the Pacific
Head of Operations, Technology and Finance.
Century Group.
From July 1995 to September 1997, he was
also Co-Chief Executive OÇcer for European Sir John Browne has been Group Chief
Operations. In 1990, Mr. Thain transferred Executive of BP Amoco p.l.c. since January

91
1999. He was Group Chief Executive of The March 1999. She has headed Goldman
British Petroleum Company from 1995 to Sachs' global technology eÅorts since 1994.
1999, having served as a Managing Director
Mr. Viniar has been Chief Financial Of-
since 1991. Sir John is also a director of
Ñcer of The Goldman Sachs Group, L.P. and
SmithKline Beecham p.l.c. and the Intel Cor-
Co-Head of Operations, Finance and Re-
poration, a member of the supervisory board
sources since March 1999. From July 1998
of DaimlerChrysler AG and a trustee of the
until then, he was Deputy Chief Financial
British Museum.
OÇcer and from 1994 until then, he was Head
Mr. Johnson has been Chairman of the of Finance, with responsibility for Controllers
Executive Committee of the Board of Direc- and Treasury. From 1992 to 1994, Mr. Viniar
tors of Fannie Mae since January 1999. He was Head of Treasury and immediately prior
was Chairman and Chief Executive OÇcer of to then was in the Structured Finance Depart-
Fannie Mae from February 1991 through ment of Investment Banking.
December 1998. Mr. Johnson is also a direc-
Mr. Zubrow has been Chief Administra-
tor of the Cummins Engine Company, Dayton
tive OÇcer of The Goldman Sachs Group,
Hudson Corporation, UnitedHealth Group and
L.P. and Co-Head of Operations, Finance and
Kaufman and Broad Home Corporation,
Resources since March 1999. From 1994 until
Chairman of the John F. Kennedy Center for
then he was chief credit oÇcer and Head of
the Performing Arts and Chairman of the
the Credit Department. From 1992 to 1994,
Board of Trustees of The Brookings
Mr. Zubrow was Head of the Midwest Group
Institution.
in the Corporate Finance Department of In-
Mr. Weinberg has been Senior Chairman vestment Banking.
of The Goldman Sachs Group, L.P. since In addition, Jon S. Corzine, 52, currently
1990. From 1984 to 1990, he was Senior is a Director and Co-Chairman of Goldman
Partner and Chairman and, from 1976 to Sachs, but will resign both positions immedi-
1984, he served both as Senior Partner and ately prior to the date of the oÅerings. After
Co-Chairman. Mr. Weinberg is also a director seeing through the completion of the oÅer-
of Knight-Ridder, Inc., Providian Financial ings, a project Mr. Corzine believes is of
Corp. and Tricon Global Restaurants, Inc. great importance to Goldman Sachs, he is
Mr. Katz has been General Counsel of leaving Goldman Sachs to pursue other inter-
The Goldman Sachs Group, L.P. or its prede- ests. Mr. Corzine has been Co-Chairman of
cessor since 1988. From 1980 to 1988, The Goldman Sachs Group, L.P. since June
Mr. Katz was a partner in Sullivan & Cromwell. 1998 and served as Chairman and Chief
Executive OÇcer of The Goldman Sachs
Mr. Palm has been General Counsel of Group, L.P. from December 1994 to June
The Goldman Sachs Group, L.P. since 1992. 1998 and Co-Chief Executive OÇcer from
He also has senior oversight responsibility for June 1998 to January 1999. Mr. Corzine is a
Compliance and Management Controls, and is member of the NASD's Board of Governors.
Co-Chairman of the Global Compliance and
Control Committee. From 1982 to 1992, Mr. There are no family relationships between
Palm was a partner in Sullivan & Cromwell. any of the executive oÇcers or directors of
Goldman Sachs.
Ms. Neustein has been Chief of StaÅ to
the senior partners of The Goldman Sachs The Management and Partnership
Group, L.P. since 1992. From 1991 to 1992, Committees
Ms. Neustein managed strategic projects for
the senior partners. Prior to then, she was in In January 1999, the Management and
Investment Banking. Partnership Committees were constituted as
part of Goldman Sachs' overall governance
Ms. Tortora has been Chief Information structure. The Management Committee, which
OÇcer of The Goldman Sachs Group, L.P. is chaired by Mr. Paulson, has responsibility
and the Head of Information Technology since for policy, strategy and management of our

92
businesses. In addition to Messrs. Paulson, The term of the initial Class I directors will
Thain, Thornton and Hurst, Ms. Neustein and terminate on the date of the 2000 annual
Ms. Tortora, the members of this committee meeting of shareholders, the term of the initial
and their principal positions within Goldman Class II directors will terminate on the date of
Sachs are: Lloyd C. Blankfein (Co-Head, the 2001 annual meeting of shareholders and
FICC), Richard A. Friedman (Co-Head, the term of the initial Class III directors will
Merchant Banking), Steven ""Mac'' M. Heller terminate on the date of the 2002 annual
(Co-Chief Operating OÇcer, Investment meeting of shareholders. Messrs. Thain and
Banking), Robert S. Kaplan (Co-Chief Oper- Thornton will be members of Class I, Sir John
ating OÇcer, Investment Banking), John P. Browne and Messrs. Johnson and Weinberg
McNulty (Co-Head, Asset Management), will be members of Class II and Messrs.
Michael P. Mortara (Co-Head, FICC), Hurst and Paulson will be members of
Daniel M. Neidich (Co-Head, Merchant Bank- Class III. Beginning in 2000, at each annual
ing), Mark Schwartz (President, Goldman meeting of shareholders, successors to the
Sachs Ì Japan), Robert K. Steel (Co-Head, class of directors whose term expires at that
Equities) and Patrick J. Ward (Co-Head, annual meeting will be elected for a three-
Equities and Deputy Chairman Ì Europe). year term and until their respective succes-
Mr. Katz is counsel to the Management sors have been elected and qualiÑed. A
Committee. director may be removed only for cause by
the aÇrmative vote of the holders of not less
The Partnership Committee, which is than 80% of the outstanding shares of capital
chaired by Messrs. Thain and Thornton, over- stock entitled to vote in the election of
sees personnel development and career man- directors.
agement issues. It focuses on such matters
as recruiting, training, performance evalua- It is anticipated that our board of direc-
tion, diversity, mobility and succession plan- tors will meet at least quarterly. Members of
ning and, together with the Management our board of directors who are employees of
Committee, is expected to become integral in Goldman Sachs or any of its subsidiaries will
the process of selecting and compensating not be compensated for service on the board
managing directors. In addition to of directors or any committee thereof.
Messrs. Thain and Thornton and Ms. Neu- Upon completion of the oÅerings,
stein, the members of this committee and Mr. Weinberg will continue in his role as
their principal positions within Goldman Sachs Senior Chairman under an agreement pursu-
are: David W. Blood (Head, Asset Manage- ant to which he will provide senior advisory
ment Ì Europe), Gary D. Cohn (Head, FICC services to Goldman Sachs, receive annual
Commodities and Emerging Markets), compensation of $2 million and participate in
W. Mark Evans (Co-Head, Investment Re- various employee beneÑt plans. The agree-
search), Jacob D. GoldÑeld (Head, FICC Ì ment expires November 24, 2000, unless
Europe), David B. Heller (Head, Equities De- earlier terminated by either party on 90 days'
rivatives Trading), Philip D. Murphy (Presi- notice. Mr. Weinberg has had similar arrange-
dent, Goldman Sachs Ì Asia), Simon M. ments with Goldman Sachs since 1990.
Robertson (President, Goldman Sachs Ì Eu-
rope), Esta E. Stecher (Head, Tax), John S. Committees of the Board of Directors
Weinberg (Co-Head, Investment Banking Ser- Our board of directors will have an Audit
vices), Peter A. Weinberg (Co-Chief Operat- Committee, composed of directors who are
ing OÇcer, Investment Banking and Deputy not employed by Goldman Sachs or aÇliated
Chairman Ì Europe) and Jon Winkelried with management. The Audit Committee will
(Head, Leveraged Finance). Mr. Palm is review the results and scope of the audit and
counsel to the Partnership Committee. other services provided by our independent
auditors as well as review our accounting and
Information Regarding the Board of Directors control procedures and policies.
Our charter will provide for a classiÑed Our board of directors will also have a
board of directors consisting of three classes. Compensation Committee. The Compensation

93
Committee will oversee the compensation and ble for periods prior to the oÅerings. How-
beneÑts of the management and employees ever, Goldman Sachs does not believe that
of Goldman Sachs and will consist entirely of the aggregate compensation that will be paid
non-employee directors. in Ñscal 1999 to the continuing named execu-
tive oÇcers referred to below will exceed
Our board of directors may from time to levels that are customary for similarly-situated
time establish other committees to facilitate executives in the investment banking industry.
the management of Goldman Sachs.
The following table sets forth compensa-
tion information for our Chief Executive Of-
Executive Compensation
Ñcer, three of our continuing executive
Prior to the oÅerings of our common oÇcers named under ""Ì Directors and Exec-
stock, our business was carried on in partner- utive OÇcers'' and two former executive
ship form. As a result, meaningful individual oÇcers of The Goldman Sachs Group, L.P.
compensation information for directors and (the ""named executive oÇcers'').
executive oÇcers of Goldman Sachs based
on operating in corporate form is not availa-

Fiscal 1998 Compensation Information(1)

Name and Principal Position

Henry M. Paulson, Jr., ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,700,000

1998: Co-Chairman and Co-Chief Executive OÇcer
(1999: Director, Chairman and Chief Executive OÇcer)
Robert J. Hurst, ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,300,000
1998: Vice Chairman
(1999: Director and Vice Chairman)
John A. Thain, ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,200,000
1998: Chief Financial OÇcer
(1999: Director, President and Co-Chief Operating OÇcer)
John L. Thornton, ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,900,000
1998: Chairman of International Operations
(1999: Director, President and Co-Chief Operating OÇcer)
Jon S. Corzine(2), ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,800,000
1998: Co-Chairman and Co-Chief Executive OÇcer
Roy J. Zuckerberg(3),ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,000,000
1998: Vice Chairman

(1) The amounts in the table represent compensation for Ñscal 1998 only and do not include
that portion of each named executive oÇcer's total partnership return from The Goldman
Sachs Group, L.P. in 1998 attributable to a return on his invested capital or to his share of
the income from investments made by Goldman Sachs in prior years that was allocated to
the individuals who were partners in those years. The return on invested capital for each
named executive oÇcer was determined using a rate of 12%, the actual Ñxed rate of return
that was paid in 1998 to our retired limited partners on their long-term capital.
(2) Mr. Corzine is leaving Goldman Sachs after the completion of the oÅerings.
(3) Mr. Zuckerberg retired in November 1998.

Aggregate compensation paid to key em- beneÑts upon retirement at age 65 of

ployees who are not named executive oÇcers $10,533, $10,533, $7,074, $11,801, $9,942
may exceed that paid to the named executive and $7,721, respectively. These beneÑts had
oÇcers. Each of Messrs. Paulson, Hurst, accrued prior to November 1992 and none of
Thain, Thornton, Corzine and Zuckerberg these executive oÇcers has earned additional
have accrued beneÑts under the employees' beneÑts under the pension plan since Novem-
pension plan entitling them to receive annual ber 1992.

94
 Employment, Noncompetition and Noncompetition. During the period end-
Pledge Agreements ing 12 months after the date a managing
director who was a proÑt participating limited
Goldman Sachs is entering into employ- partner ceases to be employed by Goldman
ment agreements with each proÑt participat- Sachs, that managing director may not:
ing limited partner who continues as a
‚ form, or acquire a 5% or greater ownership,
managing director and pledge agreements
voting or proÑt participation interest in, any
and agreements relating to noncompetition
competitive enterprise; or
and other covenants with all of the managing
directors who are proÑt participating limited ‚ associate with any competitive enterprise
partners, whether or not they retire, including, and in connection with such association
in both cases, each managing director who is engage in, or directly or indirectly manage
a member of our board of directors or is an or supervise personnel engaged in, any
executive oÇcer. activity that had a relationship to that
managing director's activities at Goldman
The following are descriptions of the Sachs.
material terms of the employment, noncompe-
tition and pledge agreements with the manag- When we refer to a ""competitive enterprise'',
ing directors who were proÑt participating we are referring to any business enterprise
limited partners. You should, however, refer that engages in any activity, or owns a
to the exhibits that are a part of the registra- signiÑcant interest in any entity that engages
tion statement for a copy of the form of each in any activity, that competes with any activity
agreement. See ""Available Information''. in which we are engaged.
Nonsolicitation. During the period end-
Employment Agreements ing 18 months after the date a managing
director who was a proÑt participating limited
Each employment agreement has an ini- partner ceases to be employed by Goldman
tial term extending through November 24, Sachs, that managing director may not, di-
2000 (thereafter no set term), requires each rectly or indirectly, in any manner:
continuing managing director who was a
proÑt participating limited partner to devote ‚ solicit any client with whom that managing
his or her entire working time to the business director worked, or whose identity became
and aÅairs of Goldman Sachs and generally known to him or her in connection with his
may be terminated at any time by either that or her employment with Goldman Sachs, to
managing director or Goldman Sachs on transact business with a competitive enter-
90 days' prior written notice. prise or reduce or refrain from doing any
business with Goldman Sachs;
Goldman Sachs has entered into similar
employment agreements with all other man- ‚ interfere with or damage any relationship
aging directors, except that they have no set between Goldman Sachs and any client or
term. prospective client; or
‚ solicit any employee of Goldman Sachs to
Noncompetition Agreements apply for, or accept employment with, any
competitive enterprise.
Each noncompetition agreement provides
as follows: Transfer of Client Relationships. Each
managing director who was a proÑt participat-
ConÑdentiality. Each managing director ing limited partner is required, upon termina-
who was a proÑt participating limited partner tion of his or her employment, to take all
is required to protect and use ""conÑdential actions and do all things reasonably re-
information'' in accordance with the restric- quested by Goldman Sachs during a 90-day
tions placed by Goldman Sachs on its use cooperation period to maintain for Goldman
and disclosure. Sachs the business, goodwill and business

95
relationships with Goldman Sachs' clients with The Employee Initial Public OÅering Awards
which he or she worked.
On the date of the consummation of the
Liquidated Damages. In the case of any oÅerings, we intend to provide awards to our
breach of the noncompetition or nonsolicita- employees and a limited number of consul-
tion provisions prior to the Ñfth anniversary of tants and advisors, other than managing di-
the date of the consummation of the oÅer- rectors who were proÑt participating limited
ings, the breaching managing director will be partners, in one or more of the following
liable for liquidated damages. The amount of forms:
liquidated damages for each managing director
who initially serves on the board of directors, ‚ substantially all employees will receive a
the Management Committee or the Partnership grant of restricted stock units awarded
Committee of Goldman Sachs is $15 million, based on a formula, with respect to which
and the amount of liquidated damages for up to an aggregate of 30,025,946 shares of
each other managing director who was a profit common stock will be deliverable;
participating limited partner is $10 million.
‚ certain senior employees, principally man-
These liquidated damages are in addition to
aging directors who were not proÑt partici-
the forfeiture of any future equity-based
pating limited partners, will be selected to
awards that may occur as a result of the
participate in the deÑned contribution plan
breach of any noncompetition or nonsolicita-
described below, to which Goldman Sachs
tion provisions contained in those awards.
will make an initial irrevocable contribution
of 12,555,866 shares of common stock;
Pledge Agreement
The liquidated damages provisions of ‚ certain employees will receive a grant of
each noncompetition agreement will be se- restricted stock units awarded on a discre-
cured by a pledge of stock or other assets tionary basis, with respect to which up to
with an initial value equal to 100% of the an aggregate of 33,292,869 shares of com-
applicable liquidated damages amount. mon stock will be deliverable; and

Each pledge agreement will terminate on ‚ certain employees will receive a grant of
the earliest to occur of: options to purchase shares of common
stock awarded on a discretionary basis,
‚ the death of the relevant managing director; with respect to which up to an aggregate of
‚ the expiration of the 24-month period fol- 40,127,592 shares of common stock will be
lowing the termination of the employment of deliverable.
the relevant managing director; or
The restricted stock units awarded to
‚ the Ñfth anniversary of the date of the employees based on a formula, the restricted
consummation of the oÅerings. stock units awarded to employees on a
discretionary basis and the options to
Nonexclusivity and Arbitration purchase shares of common stock awarded
to employees on a discretionary basis will be
The liquidated damages and pledge ar-
granted under the stock incentive plan de-
rangements discussed above are not exclu-
scribed below. The restricted stock units
sive of any injunctive relief that Goldman
awarded to employees on a discretionary and
Sachs may be entitled to for a breach of a
a formula basis described below will confer
noncompetition agreement and, after the ter-
only the rights of a general unsecured credi-
mination of the pledge agreement, Goldman
tor of Goldman Sachs and no rights as a
Sachs will be entitled to all available remedies
shareholder of Goldman Sachs until the com-
for a breach of a noncompetition agreement.
mon stock underlying such award is deliv-
The employment, noncompetition and ered. Any shares of common stock acquired
pledge agreements generally provide that any by a managing director pursuant to the
disputes thereunder will be resolved by bind- awards will be subject to the shareholders'
ing arbitration. agreement described in ""Certain Relation-

96
ships and Related Transactions Ì Sharehold- on a formula are included in common stock
ers' Agreement''. outstanding for the reason described above.

Discretionary Awards
Formula Awards
Restricted Stock Units Awarded on a
The common stock underlying the re- Discretionary Basis. The restricted stock
stricted stock units awarded based on a units awarded on a discretionary basis will
formula generally will be deliverable in equal vest, and the underlying common stock will
installments on or about the Ñrst, second and be delivered, in equal installments on or about
third anniversaries of the date of the consum- the third, fourth and Ñfth anniversaries of the
mation of the oÅerings, although the common date of consummation of the oÅerings if the
stock may be deliverable earlier in the event grantee has satisÑed certain conditions and
of certain terminations of employment follow- the grantee's employment with Goldman
ing a change in control. While no additional Sachs has not been terminated, with certain
service will be required to obtain delivery of exceptions for terminations of employment
the underlying common stock (i.e., the award due to death, retirement, extended absence
is ""vested''), delivery of the common stock or following a change in control. While these
will be conditioned on the grantee's satisfying restricted stock units are outstanding,
certain requirements, including not being ter- amounts equal to regular cash dividends that
minated under the circumstances described in would have been paid on the common stock
the award agreement prior to delivery of the underlying these units if the common stock
common stock and not violating any policy of had been actually issued will be paid in cash
Goldman Sachs (including in respect of conÑ- at about the same time that the dividends are
dentiality and hedging) or otherwise acting in paid generally to the shareholders. These
a manner detrimental to Goldman Sachs (in- amounts will be recorded as compensation
cluding violating noncompetition or nonsolici- expense since the underlying shares of com-
tation provisions of the award). While these mon stock will not have been issued.
restricted stock units are outstanding,
Pursuant to Accounting Principles Board
amounts equal to regular cash dividends that
Opinion No. 25, we will record non-cash
would have been paid on the common stock
compensation expense of $1,765 million re-
underlying these units if the common stock
lated to the restricted stock units awarded on
had been actually issued will be paid in cash
a discretionary basis over the related service
at about the same time that the dividends are
period. For purposes of calculating both basic
paid generally to the shareholders. These
earnings per share (pursuant to Statement of
amounts will be recorded as compensation
Financial Accounting Standards No. 128) and
expense since the underlying shares of com-
book value per share, the shares of common
mon stock will not have been issued.
stock underlying these restricted stock units
are excluded from common stock outstanding
Pursuant to Accounting Principles Board
since future service is required as a condition
Opinion No. 25, we will record non-cash
to the delivery of the underlying shares of
compensation expense of $1,591 million re-
common stock. The dilutive eÅect of these
lated to the restricted stock units awarded
restricted stock units is, however, included in
based on a formula on the date of grant,
diluted shares outstanding using the treasury
since future service is not required as a
stock method.
condition to the delivery of the underlying
shares of common stock. For purposes of Discretionary Options. The options to
calculating both basic earnings per share purchase shares of common stock awarded
(pursuant to Statement of Financial Account- on a discretionary basis will be granted with
ing Standards No. 128) and book value per an exercise price generally equal to the initial
share, the shares of common stock underly- public oÅering price per share set forth on the
ing the restricted stock units awarded based cover page of this prospectus, although in

97
certain non-U.S. jurisdictions certain employ- irrevocable contribution of shares of common
ees may be granted discretionary options with stock to the deÑned contribution plan. This
a lower exercise price. These discretionary non-cash expense will be recognized on the
options will generally be exercisable in equal date it is funded in accordance with State-
installments commencing on or about the ment of Financial Accounting Standards
third, fourth and Ñfth anniversaries of the date No. 87.
of the consummation of the oÅerings if the
grantee has satisÑed certain conditions and Change in Control
the grantee's employment with Goldman
The restricted stock units awarded based
Sachs has not been terminated, with certain
on a formula, the restricted stock units
exceptions for terminations of employment
awarded on a discretionary basis, the options
due to death, retirement, extended absence
to purchase shares of common stock
or following a change in control. These dis-
awarded on a discretionary basis and the
cretionary options will thereafter generally
deÑned contribution plan provide that (i) if a
remain exercisable, subject to satisfaction of
change in control occurs and (ii) within
certain conditions, until the tenth anniversary
18 months thereafter a grantee's or partici-
of the date of the consummation of the
pant's employment is terminated by Goldman
oÅerings or, if earlier, upon expiration of a
Sachs other than for cause or the grantee or
period, as speciÑed in the award agreement,
participant terminates employment for good
following termination of employment.
reason, in each case, as determined by
These discretionary options will be ac- Goldman Sachs:
counted for pursuant to Accounting Principles ‚ the common stock underlying any outstand-
Board Opinion No. 25, as permitted by para- ing restricted stock units awarded based on
graph 5 of Statement of Financial Accounting a formula will be delivered;
Standards No. 123. Since these options will
have no intrinsic value on the date of grant, ‚ any outstanding restricted stock units
no compensation expense will be recognized. awarded on a discretionary basis will vest
and the common stock underlying these
Contribution to the DeÑned Contribution restricted stock units will be delivered;
Plan. On the date of the consummation of
the oÅerings, Goldman Sachs will make an ‚ any outstanding unexercised options to
initial irrevocable contribution of 12,555,866 purchase shares of common stock awarded
shares of common stock to the deÑned on a discretionary basis will become exer-
contribution plan. Certain senior employees, cisable and will be exercisable for a period
principally managing directors who are not of one year following such termination of
proÑt participating limited partners, will be employment (but in no event later than the
selected to participate in the deÑned contribu- tenth anniversary of the date of the con-
tion plan. The right to receive shares will vest, summation of the oÅerings) and thereafter
and the underlying common stock will be terminate; and
distributable to participants in the deÑned ‚ under the deÑned contribution plan, any
contribution plan, in equal installments on or unvested portion of the common stock
about the third, fourth and Ñfth anniversaries attributable to the initial contribution by
of the initial contribution if the participant has Goldman Sachs to the deÑned contribution
satisÑed certain conditions and the partici- plan will vest and be distributed.
pant's employment with Goldman Sachs has
not been terminated, with certain exceptions ""Change in control'' means the consum-
for terminations of employment due to death mation of a merger, consolidation, statutory
or following a change in control. Dividends share exchange or similar form of corporate
paid on shares allocated to participants will transaction involving The Goldman Sachs
be distributed currently. Group, Inc. or sale or other disposition of all
or substantially all of the assets of The
We will record non-cash compensation Goldman Sachs Group, Inc. to an entity that
expense of $666 million related to the initial is not an aÇliate of The Goldman Sachs

98
Group, Inc. that, in each case, requires share- restricted stock, restricted stock units and
holder approval under the law of The other awards. The stock incentive plan also
Goldman Sachs Group, Inc.'s jurisdiction of permits the making of loans to purchase
organization, unless immediately following shares of common stock.
such transaction, either:
Shares Subject to the Stock Incentive
‚ at least 50% of the total voting power of the Plan; Other Limitations on Awards. Subject
surviving entity or its parent entity, if appli- to adjustment as described below, the total
cable, is represented by securities of The number of shares of common stock of The
Goldman Sachs Group, Inc. that were out- Goldman Sachs Group, Inc. that may be
standing immediately prior to the transac- issued under the stock incentive plan through
tion; or its Ñscal year ending in 2002 may not exceed
300,000,000 shares and, in each Ñscal year
‚ at least 50% of the members of the board
thereafter, may not exceed Ñve percent (5%)
of directors of the surviving entity, or its
of the issued and outstanding shares of
parent entity, if applicable, following the
common stock, determined as of the last day
transaction were incumbent directors (in-
of the immediately preceding Ñscal year, in-
cluding directors whose election or nomina-
creased by the number of shares available for
tion was approved by the incumbent
awards in previous Ñscal years but not cov-
directors) of The Goldman Sachs Group,
ered by awards granted in such years. These
Inc. at the time of the board of directors'
shares may be authorized but unissued com-
approval of the execution of the initial
mon stock or authorized and issued common
agreement providing for the transaction.
stock held in Goldman Sachs' treasury or
""Cause'' includes, among other things, otherwise acquired for the purposes of the
the grantee's or participant's conviction of stock incentive plan. If any award is forfeited
certain misdemeanors or felonies, violation of or is otherwise terminated or canceled with-
applicable laws and violation of any policy of out the delivery of shares of common stock, if
Goldman Sachs, including policies with re- shares of common stock are surrendered or
spect to hedging and conÑdentiality. withheld from any award to satisfy a
grantee's income tax or other withholding
""Good reason'' means a materially ad-
obligations, or if shares of common stock
verse alteration in the grantee's or partici-
owned by a grantee are tendered to pay the
pant's position or in the nature or status of
exercise price of awards, then such shares
the grantee's or participant's responsibilities
will again become available under the stock
from those in eÅect immediately prior to the
incentive plan. No more than 200,000,000
change in control, as determined by Goldman
shares of common stock may be available for
Sachs, or certain relocations by Goldman
delivery in connection with the exercise of
Sachs of a grantee's or participant's principal
incentive stock options. The maximum num-
place of employment.
ber of shares of common stock with respect
to which options or stock appreciation rights
The Stock Incentive Plan
may be granted to an individual grantee in
The following is a description of the 1999 is 3,500,000 shares of common stock
material terms of the stock incentive plan. and, in each Ñscal year that follows, is 110%
You should, however, refer to the exhibits of the maximum number of shares of com-
that are a part of the registration statement mon stock applicable for the preceding Ñscal
for a copy of the stock incentive plan. See year.
""Available Information''.
Our Stock Incentive Plan Committee has
Types of Awards. The stock incentive the authority to adjust the terms of any
plan provides for grants of incentive stock outstanding awards and the number of shares
options (within the meaning of Section 422 of of common stock issuable under the stock
the Internal Revenue Code of 1986, as incentive plan for any increase or decrease in
amended), nonqualiÑed stock options, stock the number of issued shares of common
appreciation rights, dividend equivalent rights, stock resulting from a stock split, reverse

99
stock split, stock dividend, spin-oÅ, combina- Restricted Stock Units. The Stock In-
tion or reclassiÑcation of the common stock, centive Plan Committee may grant restricted
or any other event that the Stock Incentive stock units in amounts, and subject to terms
Plan Committee determines aÅects our and conditions, as the Stock Incentive Plan
capitalization. Committee may determine. Recipients of re-
stricted stock units have only the rights of a
Eligibility. Awards may be made to any general unsecured creditor of Goldman Sachs
director, oÇcer or employee of Goldman and no rights as a shareholder of The
Sachs, including any prospective employee, Goldman Sachs Group, Inc. until the common
and to any consultant or advisor to Goldman stock underlying the restricted stock units is
Sachs selected by the Stock Incentive Plan delivered.
Committee.
Other Equity-Based Awards. The Stock
Administration. The stock incentive plan Incentive Plan Committee may grant other
will be administered by our board of directors types of equity-based awards, including the
or by the Stock Incentive Plan Committee, a grant of unrestricted shares, in amounts, and
committee appointed by our board of subject to terms and conditions, as the Stock
directors. Incentive Plan Committee may determine.
These awards may involve the transfer of
The Stock Incentive Plan Committee will actual shares of common stock, or the pay-
have the authority to construe, interpret and ment in cash or otherwise of amounts based
implement the stock incentive plan, and pre- on the value of shares of common stock, and
scribe, amend and rescind rules and regula- may include awards designed to comply with,
tions relating to the stock incentive plan. The or take advantage of certain beneÑts of, the
determination of the Stock Incentive Plan local laws of non-U.S. jurisdictions.
Committee on all matters relating to the stock
incentive plan or any award agreement will be Change in Control. The Stock Incentive
Ñnal and binding. Plan Committee may provide in any award
agreement for provisions relating to a change
Stock Options and Stock Appreciation in control of The Goldman Sachs Group, Inc.
Rights. The Stock Incentive Plan Committee or any of its subsidiaries or aÇliates, includ-
may grant incentive stock options and non- ing, without limitation, the acceleration of the
qualiÑed stock options to purchase shares of exercisability of, or the lapse of restrictions
common stock from Goldman Sachs (at the with respect to, the award.
price set forth in the award agreement), and Dividend Equivalent Rights. The Stock
stock appreciation rights in such amounts, Incentive Plan Committee may in its discretion
and subject to such terms and conditions, as include in the award agreement a dividend
the Stock Incentive Plan Committee may de- equivalent right entitling the grantee to receive
termine. No grantee of an option or stock amounts equal to the dividends that would be
appreciation right will have any of the rights paid, during the time such award is outstand-
of a shareholder of The Goldman Sachs ing, on the shares of common stock covered
Group, Inc. with respect to shares subject to by such award as if such shares were then
their award until the issuance of the shares. outstanding.
Restricted Stock. The Stock Incentive Nonassignability. Except to the extent
Plan Committee may grant restricted shares otherwise provided in the award agreement or
of common stock in amounts, and subject to approved by the Stock Incentive Plan Com-
terms and conditions, as the Stock Incentive mittee, no award or right granted to any
Plan Committee may determine. The grantee person under the stock incentive plan will be
will have the rights of a shareholder with assignable or transferable other than by will
respect to the restricted stock, subject to any or by the laws of descent and distribution,
restrictions and conditions as the Stock In- and all awards and rights will be exercisable
centive Plan Committee may include in the during the life of the grantee only by the
award agreement. grantee or the grantee's legal representative.

100
 Amendment and Termination. Except as The following is a description of the
otherwise provided in an award agreement, material terms of the deÑned contribution
the board of directors may from time to time plan. You should, however, refer to the exhib-
suspend, discontinue, revise or amend the its that are a part of the registration state-
stock incentive plan and the Stock Incentive ment for a copy of the deÑned contribution
Plan Committee may amend the terms of any plan. See ""Available Information''.
award in any respect.
Eligibility and Participation. Our board
U.S. Federal Income Tax Consequences of directors or the DeÑned Contribution Plan
of the Stock Incentive Plan. The following is Committee, a committee appointed by our
a brief description of the material U.S. federal board of directors, will select the employees
income tax consequences generally arising to participate in the deÑned contribution plan.
with respect to awards.
Contributions. Goldman Sachs will make
The grant of an option or stock apprecia- an initial irrevocable contribution to the Defined
tion right will create no tax consequences for Contribution Plan Trust, the trust underlying the
the participant or Goldman Sachs. Upon exer- defined contribution plan, of 12,555,866 shares
cising an option, other than an incentive stock of common stock simultaneously with the con-
option, the participant will generally recognize summation of the offerings. Goldman Sachs
ordinary income equal to the diÅerence be- may contribute additional shares of common
tween the exercise price and the fair market stock or cash to the Defined Contribution Plan
value of the shares acquired on the date of Trust from time to time in its sole discretion.
exercise and Goldman Sachs generally will be We currently intend to make ongoing contribu-
entitled to a tax deduction in the same tions to the defined contribution plan and to
amount. A participant generally will not recog- reallocate forfeitures under the defined contri-
nize taxable income upon exercising an in- bution plan to participants.
centive stock option and Goldman Sachs will Allocation of Contributions. There will
not be entitled to any tax deduction with be established an account in the name of
respect to an incentive stock option if the each participant and a separate, unallocated
participant holds the shares for the applicable account to which any forfeitures of common
periods speciÑed in the Internal Revenue stock will be credited pending reallocation to
Code of 1986, as amended. participants. The DeÑned Contribution Plan
With respect to other awards, upon the Committee will designate the number of
payment of cash or the issuance of shares or shares of common stock allocable to the
other property that is either not restricted as account of each participant. Any common
to transferability or not subject to a substan- stock remaining in the unallocated account as
tial risk of forfeiture (e.g., delivery under the of the last day of each plan year due to
restricted stock units), the participant will forfeitures and any distributions received on
generally recognize ordinary income equal to common stock credited to the unallocated
the cash or the fair market value of shares or account will be reallocated among the ac-
other property delivered. Goldman Sachs gen- counts of participants who are employed by
erally will be entitled to a deduction in an Goldman Sachs on the last day of each plan
amount equal to the ordinary income recog- year pro rata to each such participant's share
nized by the participant. of Goldman Sachs contributions, for that plan
year, or on such other formulaic basis as the
DeÑned Contribution Plan Committee may
The DeÑned Contribution Plan determine.
The deÑned contribution plan is not in- Voting and Tendering of Common Stock.
tended to be qualiÑed under Section 401(a) Shares of common stock allocated to partici-
of the Internal Revenue Code of 1986, as pants who are parties to the shareholders'
amended, and is not subject to the Employee agreement referred to below will be voted in
Retirement Income Security Act of 1974, as accordance with the shareholders' agreement
amended. and will be tendered by the trustee of the

101
Defined Contribution Plan Trust in accordance Administration of the DeÑned Contribu-
with confidential instructions provided by the tion Plan. The deÑned contribution plan will
participants if the transfer restrictions under the be administered by the DeÑned Contribution
shareholders' agreement are waived (and will Plan Committee. Our board of directors may,
not be tendered if the transfer restrictions are however, determine allocations of contribu-
not waived). See ""Certain Relationships and tions or resolve to otherwise administer the
Related Transactions Ì Shareholders' Agree- deÑned contribution plan.
ment'' for a discussion of those provisions. Any Amendments. Subject to limitations with
shares of common stock allocated to accounts respect to contributions previously made to
of participants who are not subject to the the deÑned contribution plan, our board of
shareholders' agreement will be voted and directors reserves the right to modify, alter,
tendered by the trustee of the Defined Contri- amend or terminate the deÑned contribution
bution Plan Trust in accordance with confiden- plan or the DeÑned Contribution Plan Trust.
tial instructions provided by the participant. No modiÑcation or amendment of the deÑned
Shares held in participants' accounts with re- contribution plan may be made which would
spect to which the trustee of the Defined cause or permit any part of the assets of the
Contribution Plan Trust does not receive voting DeÑned Contribution Plan Trust to be used
or tendering directions will not be voted or for, or diverted to, purposes other than for
tendered. the exclusive beneÑt of participants or their
Shares of common stock held in the beneÑciaries, or which would cause any part
unallocated account will be voted or tendered of the assets of the DeÑned Contribution Plan
by the trustee in the same proportion as the Trust to revert to or become the property of
shares of common stock allocated to partici- Goldman Sachs.
pants' accounts with respect to which voting Limit on Liability. All distributions under
or tendering instructions are received. the deÑned contribution plan will be paid or
Dividends. Any cash dividends on provided solely from the assets of the DeÑned
shares of common stock allocated to a par- Contribution Plan Trust and Goldman Sachs
ticipant's account will be distributed to each will have no responsibility or liability to any
participant after the end of the calendar participant or beneÑciary relating to the com-
quarter in which such dividend is received. mon stock or other assets of the DeÑned
Contribution Plan Trust. The agreement es-
Vesting and Distribution. With respect tablishing the DeÑned Contribution Plan Trust
to the initial contribution of common stock to will provide that no creditor of Goldman
the deÑned contribution plan, the right to Sachs will have any rights to the assets of the
receive shares of common stock allocated to DeÑned Contribution Plan Trust.
a participant's account generally will become
U.S. Federal Income Tax Consequences.
vested, and the common stock generally will
The following is a brief description of the
be distributable, in equal installments on or
material U.S. federal income tax conse-
about the third, fourth and Ñfth anniversaries
quences generally arising with respect to
of the date of such contribution if the partici-
participation in the deÑned contribution plan.
pant satisÑes certain conditions and the par-
A participant in the deÑned contribution plan
ticipant's employment with Goldman Sachs
will recognize ordinary income upon the vest-
has not been terminated, with certain excep-
ing of shares of common stock allocated to
tions for termination due to death or following
such participant's account in an amount equal
a change in control.
to the fair market value of the vested shares.
With respect to contributions to the de- Goldman Sachs will generally be entitled to a
Ñned contribution plan (other than the initial deduction equal to the fair market value of
contribution), the DeÑned Contribution Plan the shares at the time of the contribution in
Committee may determine the dates on which the taxable year in which the participant
the right to receive common stock (or cash) recognizes income under the deÑned contri-
allocated to a participant's account will vest bution plan in respect of the vesting of shares
and be distributable. of common stock.

102
 The Partner Compensation Plan through the end of Ñscal 2000. It is expected
that the participants in the initial cycle will
Overview
consist of the continuing managing directors
To perpetuate the sense of partnership who were proÑt participating limited partners.
and teamwork that exists among our senior Prior to the one- or two-Ñscal year cycle
professionals, and to reinforce the alignment commencing with Ñscal 2001, and on or
of employee and shareholder interests, our before each succeeding cycle, the Partner
board of directors has adopted a partner Compensation Plan Committee will determine
compensation plan for the purpose of com- the participants in the partner compensation
pensating senior professionals. The partner plan. Individual participants may also be ad-
compensation plan will be administered by ded from time to time outside the annual or
our board of directors or the Partner Com- biennial selection process.
pensation Plan Committee, a committee ap-
pointed by our board of directors. Determination of Salary and Bonus
Individuals will be selected to participate
The aggregate amount of compensation
in the partner compensation plan for a one-
to be included in the partner compensation
or two-Ñscal year cycle. Upon selection to the
plan for each Ñscal year will be determined by
partner compensation plan, participants will
the Partner Compensation Plan Committee,
be allocated a percentage interest in a pool
taking into account measures of our Ñnancial
for annual bonus payments in addition to
performance it deems appropriate (which in
base salaries. The size of the pool will be
1999 will include a full year's results), includ-
established by the Partner Compensation
ing, but not limited to, earnings per share,
Plan Committee annually, taking into account
return on average common equity, pre-tax
our results of operations and other measures
income, pre-tax operating income, net reve-
of Ñnancial performance. The Partner Com-
nues, net income, proÑts before taxes, book
pensation Plan Committee may also retain an
value per share, stock price, earnings availa-
unallocated percentage of the pool that it may
ble to common shareholders and ratio of
allocate among participants at Ñscal year end
compensation and beneÑts to net revenues.
in its sole discretion. By linking the partici-
pant's annual bonus payments to our results Prior to the commencement of the Ñrst
as a whole, as opposed to the results of any Ñscal year in any one- or two-Ñscal year
participant's individual business unit, we be- cycle, and prior to the consummation of the
lieve it will provide additional incentives for oÅerings in the case of the initial cycle, the
teamwork. Further, we believe that the tying Partner Compensation Plan Committee will
of the bonus payments to overall Ñnancial determine both the salaries of and the per-
results will more closely align the interests of centage of the partner compensation plan
the participants with our shareholders. Finally, pool that may be allocable to any particular
we believe that the retention of a percentage participant. The percentage allocated to any
of the pool for allocation among participants particular participant is expected to be appli-
at Ñscal year end in amounts determined at cable for each Ñscal year within the applicable
the sole discretion of the Partner Compensa- cycle. Any remaining portion of the partner
tion Plan Committee will provide appropriate compensation plan pool not so allocated will
compensation Öexibility. be allocated to individual participants at the
The following is a description of the end of the Ñscal year in amounts determined
material terms of the partner compensation by the Partner Compensation Plan
plan. You should, however, refer to the exhib- Committee.
its that are a part of the registration state-
ment for a copy of the partner compensation Amounts payable under the partner com-
plan. See ""Available Information''. pensation plan will be satisÑed in cash or as
awards under the stock incentive plan, as
Eligibility and Participation determined by the Partner Compensation Plan
Consistent with our historical practice of Committee and recommended to the Stock
partnership elections, the initial cycle will be Incentive Plan Committee.

103
 PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of the our employees are selling shares of common
date of this prospectus certain information stock in the oÅerings.
regarding the beneÑcial ownership of our
For purposes of this table, information as
common stock:
to the shares of common stock is calculated
‚ immediately prior to the consummation of based on 386,245,963 shares of common
the oÅerings, but after giving eÅect to the stock outstanding prior to the consummation
incorporation transactions and the related of the oÅerings and 437,245,963 shares of
transactions that are described under common stock outstanding after the oÅerings.
""Certain Relationships and Related Trans- For purposes of this table, ""beneÑcial owner-
actions Ì Incorporation and Related ship'' is determined in accordance with
Transactions''; and Rule 13d-3 under the Securities Exchange Act
‚ as adjusted to reÖect the sale of the of 1934, pursuant to which a person or group
shares of our common stock pursuant to of persons is deemed to have ""beneÑcial
the oÅerings by: ownership'' of any shares of common stock
1. each person who is known to that such person has the right to acquire
Goldman Sachs to be the beneÑcial within 60 days after the date of this prospec-
owner of more than 5% of our com- tus. For purposes of computing the percent-
mon stock after the consummation of age of outstanding shares of common stock
the oÅerings; held by each person or group of persons
2. each director and named executive named above, any shares which such person
oÇcer of Goldman Sachs; and or persons has the right to acquire within
3. all directors and executive oÇcers of 60 days after the date of this prospectus are
Goldman Sachs as a group. deemed to be outstanding but are not
deemed to be outstanding for the purpose of
Except as otherwise indicated, the per- computing the percentage ownership of any
sons or entities listed below have sole voting other person.
and investment power with respect to the
shares beneÑcially owned by them. None of
Shares BeneÑcially Shares BeneÑcially
Owned Prior Number of Owned After
to OÅerings Shares OÅerings
Name Number Percent OÅered Number Percent

5% Shareholders:
Sumitomo Bank Capital Markets, Inc.(1) 30,425,052 7.9% 9,000,000 21,425,052 4.9%
Kamehameha Activities Association(2) ÏÏ 30,975,421 8.0 9,000,000 21,975,421 5.0
Directors and named executive oÇcers:
Henry M. Paulson, Jr.(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,132,235 1.1 0 4,132,235 *
Robert J. Hurst(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,835,124 * 0 3,835,124 *
John A. Thain(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,101,426 * 0 3,101,426 *
John L. Thornton(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,012,541 * 0 3,012,541 *
Sir John Browne(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0 Ì 0 0 Ì
James A. Johnson(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0 Ì 0 0 Ì
John L. Weinberg(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 444,444 * 0 444,444 *
Jon S. Corzine(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,414,198 1.1 0 4,414,198 1.0
Roy J. Zuckerberg(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,026,974 * 0 3,026,974 *
All directors and continuing executive
oÇcers as a group (13 persons)(6) ÏÏÏÏ 26,152,648 6.8 0 26,152,648 6.0

* Less than 1% of the outstanding shares of common stock.

104
(1) 277 Park Avenue, New York, New York 10172. For purposes of calculating the number of shares of
common stock beneÑcially owned prior to the oÅerings, includes 9,000,000 shares of common stock
beneÑcially owned by Sumitomo Bank Capital Markets, Inc. that will be sold in the oÅerings. Excludes
7,440,362 shares of common stock that Sumitomo Bank Capital Markets, Inc. would receive upon the
conversion of its 7,440,362 shares of nonvoting common stock. The shares of nonvoting common stock
are not convertible until the 185th day after the consummation of the oÅerings. For a description of the
nonvoting common stock, see ""Description of Capital Stock Ì Nonvoting Common Stock''.
Sumitomo Bank Capital Markets, Inc. in the ordinary course of business enters into derivative contracts
and other transactions with Goldman Sachs. These contracts and other transactions are negotiated on
an arm's-length basis and contain customary terms and conditions.
(2) 567 South King Street, Suite 150, Honolulu, Hawaii 96813. Kamehameha Activities Association is the
owner of the shares to be oÅered. The Estate of Bernice Pauahi Bishop, an aÇliate of Kamehameha
Activities Association, is joining in and consenting to the sale.
Kamehameha Activities Association in the ordinary course of business is an investor in a number of
Goldman Sachs' merchant banking funds and from time to time is a party to other transactions with
Goldman Sachs. These investments and transactions are negotiated on an arm's-length basis and
contain customary terms and conditions.
(3) c/o The Goldman Sachs Group, Inc., 85 Broad Street, New York, New York 10004. Excludes any
shares of common stock subject to the shareholders' agreement referred to below that are owned by
other parties to the shareholders' agreement. While each of Messrs. Paulson, Hurst, Thain and
Thornton is a party to the shareholders' agreement and is a member of the Shareholders' Committee,
each disclaims beneÑcial ownership of the shares of common stock subject to the shareholders'
agreement other than those speciÑed above for each such person individually, and each disclaims
beneÑcial ownership of the shares of common stock subject to the voting agreements between
Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, respectively, on the one
hand, and Goldman Sachs, on the other hand. See ""Certain Relationships and Related Transactions Ì
Shareholders' Agreement'' for a discussion of the shareholders' agreement and the voting agreements.
(4) Mr. Corzine, who is leaving Goldman Sachs after the consummation of the oÅerings, served as
Chairman or Co-Chairman and Chief Executive OÇcer or Co-Chief Executive OÇcer of The Goldman
Sachs Group, L.P. during Ñscal 1998.
(5) Mr. Zuckerberg, who retired in November 1998, served as Vice Chairman of The Goldman Sachs
Group, L.P. during Ñscal 1998.
(6) Total excludes the shares of common stock beneÑcially owned by Messrs. Corzine and Zuckerberg,
former executive oÇcers of The Goldman Sachs Group, L.P. Each continuing executive oÇcer is a
party to the shareholders' agreement and each disclaims beneÑcial ownership of the shares of common
stock subject to the shareholders' agreement other than those speciÑed above, and each disclaims
beneÑcial ownership of the shares of common stock subject to the voting agreements between
Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, respectively, on the one
hand, and Goldman Sachs, on the other hand. See ""Certain Relationships and Related Transactions Ì
Shareholders' Agreement'' for a discussion of the shareholders' agreement and the voting agreements.

105
 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following are descriptions of the mate- amounts include the shares of common
rial provisions of the agreements and other stock issuable to the retired limited part-
documents discussed below. You should, how- ners in the merger of The Goldman Sachs
ever, refer to the exhibits that are a part of the Corporation into The Goldman Sachs
registration statement for a copy of each Group, Inc.);
agreement and document. See ""Available ‚ Sumitomo Bank Capital Markets, Inc. will
Information''. exchange its interests in The Goldman
Incorporation and Related Transactions Sachs Group, L.P. and Goldman, Sachs &
Co. for 30,425,052 shares of common stock
Simultaneously with the consummation of and 7,440,362 shares of nonvoting common
the oÅerings, we will complete a number of stock;
transactions in order to have The Goldman
Sachs Group, Inc. succeed to the business of ‚ Kamehameha Activities Association will ex-
The Goldman Sachs Group, L.P. change its interests in The Goldman Sachs
Group, L.P. for 30,975,421 shares of com-
The principal incorporation transactions mon stock; and
and related transactions are summarized
below. ‚ After all the interests of The Goldman
Sachs Group, L.P. have been transferred to
Incorporation Transactions The Goldman Sachs Group, Inc., The
Pursuant to our plan of incorporation: Goldman Sachs Group, L.P. will be merged
into The Goldman Sachs Group, Inc.
‚ The Goldman Sachs Corporation, which is
the general partner of The Goldman Sachs Related Transactions
Group, L.P., will merge into The Goldman ‚ The restricted stock units awarded to em-
Sachs Group, Inc. In this transaction, the ployees based on a formula or on a
managing directors who were proÑt partici- discretionary basis as well as options to
pating limited partners and who are share- purchase shares of common stock awarded
holders of The Goldman Sachs Corporation on a discretionary basis will be granted, the
will receive common stock and the other initial irrevocable contribution of shares of
shareholders of The Goldman Sachs Cor- common stock to the deÑned contribution
poration will receive common stock; plan will be made and certain senior em-
‚ The managing directors who were proÑt ployees, principally managing directors who
participating limited partners will exchange are not proÑt participating limited partners,
their interests in The Goldman Sachs will be selected to participate in the deÑned
Group, L.P. and certain aÇliates for contribution plan; and
265,019,073 shares of common stock ‚ After the consummation of the oÅerings, we
(these amounts include shares issuable in will make a $200 million cash contribution to
the merger of The Goldman Sachs Corpo- the Goldman Sachs Fund, a charitable foun-
ration into The Goldman Sachs Group, dation. The Goldman Sachs Fund, which
Inc.); has been in existence for over 30 years, is
‚ The retired limited partners of Goldman the entity that has historically conducted
Sachs will exchange their interests in The charitable initiatives for Goldman Sachs.
Goldman Sachs Group, L.P. and certain The Goldman Sachs Fund is subject to
aÇliates for cash, junior subordinated de- federal tax rules that prohibit it from engag-
bentures or common stock (or a combina- ing in any act of self-dealing or any activi-
tion thereof). It is expected that these ties that result in an impermissible beneÑt
transactions will result in the payment of to private persons. While the Goldman
approximately $891 million in cash and the Sachs Fund has no speciÑc intention to
issuance of $295 million principal amount of contribute to organizations with which
junior subordinated debentures and of Goldman Sachs' executive oÇcers or direc-
47,270,551 shares of common stock (these tors are aÇliated, the Goldman Sachs Fund

106
 may in the future make contributions to agreement all or any portion of the common
educational and other organizations with stock acquired by a managing director who is
which Goldman Sachs' directors or execu- a new employee of Goldman Sachs.
tive oÇcers are involved.
Transfer Restrictions
Shareholders' Agreement
Each party to the shareholders' agree-
Persons and Shares Covered ment will agree, among other things, to:
Each proÑt participating limited partner,
‚ have beneÑcial ownership while he or she
other than Sumitomo Bank Capital Markets,
is a managing director of at least 25% of
Inc. and Kamehameha Activities Association,
the cumulative number of his or her shares
and each other person who is or becomes a
that are beneÑcially owned or acquired, and
managing director on the date of the consum-
are or become subject to the shareholders'
mation of the oÅerings or thereafter will be a
agreement; and
party to the shareholders' agreement. After
the consummation of the oÅerings, not less ‚ comply with the underwriters' 180-day lock-
than 281,000,000 shares of common stock up arrangement described under
will be subject to the shareholders' ""Underwriting''.
agreement.
The proÑt participating limited partners,
The shares covered by the shareholders' other than Sumitomo Bank Capital Markets,
agreement will include generally all shares of Inc. and Kamehameha Activities Association,
common stock acquired from Goldman Sachs will be subject to additional restrictions on
by a party to the shareholders' agreement, their ability to transfer shares received in
including: connection with the incorporation transactions
‚ any shares of common stock received by described under ""Ì Incorporation and Re-
the managing directors who were proÑt lated Transactions Ì Incorporation Transac-
participating limited partners pursuant to tions''. Under these additional restrictions,
the incorporation transactions, except for each of these persons has agreed that he or
certain shares that aggregate less than she will not transfer any of these shares,
140,000 shares; other than up to 140,000 shares in the
aggregate that will be excluded from these
‚ any shares of common stock received from restrictions, until the third anniversary of the
the deÑned contribution plan; date of the consummation of the oÅerings.
‚ any shares of common stock received pur- These restrictions will lapse in equal install-
suant to the restricted stock units awarded ments on each of the third, fourth and Ñfth
to employees based on a formula, the anniversaries of the date of the consumma-
restricted stock units awarded on a discre- tion of the oÅerings.
tionary basis or the options to purchase
All transfer restrictions applicable to a
shares of common stock awarded on a
party to the shareholders' agreement, except
discretionary basis; and
for the underwriters' 180-day lock-up, termi-
‚ unless otherwise determined by our board nate upon death.
of directors and the Shareholders' Commit-
tee referred to below, any shares of com- Waivers
mon stock received from Goldman Sachs
Except in the case of a third-party tender
through any other employee compensation,
or exchange oÅer, the additional transfer
beneÑt or similar plan.
restrictions applicable to proÑt participating
Shares of common stock purchased in limited partners, other than Sumitomo Bank
the open market or in a subsequent under- Capital Markets, Inc. and Kamehameha Activi-
written public oÅering will not be subject to ties Association, may be waived or terminated
the shareholders' agreement. The Sharehold- at any time by the Shareholders' Committee.
ers' Committee may also exclude from the The Shareholders' Committee also has the
application of all or part of the shareholders' power to waive the other transfer restrictions

107
to permit parties to the shareholders' agree- ers' agreement. Thereafter, ""voting interests''
ment to: means all shares subject to the shareholders'
‚ participate as sellers in underwritten public agreement held by all managing directors.
oÅerings of common stock and tender and
Other Restrictions
exchange oÅers and share repurchase pro-
grams by Goldman Sachs; The shareholders' agreement also pre-
‚ transfer shares to charities, including chari- vents the persons subject to the sharehold-
table foundations; ers' agreement from engaging in the following
activities relating to any securities of Goldman
‚ transfer shares held in employee beneÑt Sachs with any person who is not a person
plans; and subject to the shareholders' agreement or a
‚ transfer shares in speciÑc transactions (for director or employee of Goldman Sachs:
example, to immediate family members and
‚ participating in a proxy solicitation;
trusts) or circumstances.
In the case of a third-party tender or ‚ depositing any shares subject to the share-
exchange oÅer, all transfer restrictions may holders' agreement in a voting trust or
be waived or terminated: subjecting any of these shares to any
voting agreement or arrangement;
‚ if our board of directors is recommending
acceptance or is not making any recom- ‚ forming, joining or in any way participating
mendation with respect to acceptance of in a ""group''; or
the tender or exchange oÅer, by a majority ‚ proposing certain transactions with
of the voting interests referred to below; or Goldman Sachs or seeking the removal of
‚ if our board of directors is recommending any of our directors or any change in the
rejection of the tender or exchange oÅer, composition of our board of directors.
by 66π% of the outstanding voting interests
referred to below. Term, Amendment and Continuation
In the case of a tender or exchange oÅer The shareholders' agreement is to con-
by Goldman Sachs, a majority of the out- tinue in eÅect until the earlier of January 1,
standing voting interests may also elect to 2050 and the time it is terminated by the vote
waive or terminate the transfer restrictions. of 66π% of the outstanding voting interests
referred to above. The additional transfer
In any event, the underwriters' 180-day
restrictions applicable to proÑt participating
lock-up may not be waived without the con-
limited partners, other than Sumitomo Bank
sent of the underwriters.
Capital Markets, Inc. and Kamehameha Activi-
Voting ties Association, will not terminate upon the
expiration or termination of the shareholders'
Prior to any vote of the shareholders of
agreement unless previously waived or termi-
Goldman Sachs, the shareholders' agreement
nated or unless subsequently waived or ter-
requires a separate, preliminary vote of the
minated by our board of directors. The
voting interests on each matter upon which a
shareholders' agreement may generally be
vote of the shareholders is proposed to be
amended at any time by a majority of the
taken. Each share subject to the sharehold-
outstanding voting interests referred to above.
ers' agreement will be voted in accordance
with the majority of the votes cast by the Unless otherwise terminated, in the event
voting interests in the preliminary vote. In of any transaction in which a third party
elections of directors, each share subject to succeeds to the business of Goldman Sachs
the shareholders' agreement will be voted in and in which persons subject to the share-
favor of the election of those persons receiv- holders' agreement hold securities of the third
ing the highest numbers of votes cast by the party, the shareholders' agreement will re-
voting interests in the preliminary vote. Prior main in full force and eÅect as to the
to January 1, 2001, ""voting interests'' means securities of the third party, and the third
all shares that are subject to the sharehold- party shall succeed to the rights and obliga-

108
tions of Goldman Sachs under the sharehold- was a general or limited partner, shareholder,
ers' agreement. member, director, oÇcer, employee or agent
of The Goldman Sachs Group, L.P. or certain
Information Regarding the Shareholders' of its aÇliates or subsidiaries or is serving or
Committee served, at the request of The Goldman Sachs
The terms and provisions of the share- Group, L.P. or certain of its aÇliates or
holders' agreement will be administered by subsidiaries, in any of these capacities in
the Shareholders' Committee. The Sharehold- another enterprise, Goldman Sachs is, subject
ers' Committee will initially consist of the to certain exceptions, obligated to indemnify
persons subject to the shareholders' agree- and hold such indemnitee harmless from any
ment who are both employees of Goldman losses, damages or expenses incurred by
Sachs and members of our board of direc- such indemnitee in the action, suit or pro-
tors. It is possible that over time all or a ceeding. The instrument of indemniÑcation
majority of the members of the Shareholders' does not duplicate the obligations of Goldman
Committee will not be members of our board Sachs under the tax indemniÑcation agree-
of directors. ment described below. The indemniÑcation
obligation of Goldman Sachs under the instru-
Members of the Shareholders' Committee ment of indemniÑcation also extends to the
are entitled to indemniÑcation from Goldman indemniÑcation obligations that certain indem-
Sachs in their capacities as members of the nitees, including each current director and
Shareholders' Committee as described under executive oÇcer of The Goldman Sachs
""Description of Capital Stock Ì Limitation of Group, Inc., may have to other indemnitees.
Liability and IndemniÑcation Matters''.
The instrument of indemniÑcation also
Voting Agreement provides that Goldman Sachs will, subject to
Both Sumitomo Bank Capital Markets, certain exceptions, release each indemnitee
Inc. and Kamehameha Activities Association from all actions, suits or other claims that The
have agreed to vote their shares of common Goldman Sachs Group, L.P. may have had or
stock in the same manner as a majority of the which Goldman Sachs, as a successor to The
shares of common stock held by the manag- Goldman Sachs Group, L.P., may have arising
ing directors of Goldman Sachs are voted. out of an indemnitee's partnership or other
The obligations of Sumitomo Bank Capital interest in The Goldman Sachs Group, L.P. or
Markets, Inc. and Kamehameha Activities As- certain of its aÇliates or subsidiaries or
sociation under the voting agreements are arising out of the conduct of such indemnitee
enforceable by The Goldman Sachs Group, while engaged in the conduct of the business
Inc. The managing directors will have no right of The Goldman Sachs Group, L.P. or its
to enforce the voting agreements. aÇliates or subsidiaries.

Instrument of IndemniÑcation Director and OÇcer IndemniÑcation

In connection with the oÅerings, Goldman We will enter into an agreement that
Sachs will enter into an instrument of indem- provides indemniÑcation to our directors and
niÑcation. The instrument of indemniÑcation oÇcers and to the directors and certain
will cover certain former partners of Goldman oÇcers of the general partner of The
Sachs, including the managing directors who Goldman Sachs Group, L.P., members of our
were proÑt participating limited partners, each Management Committee or our Partnership
current director and executive oÇcer of Committee or the former Executive Commit-
Goldman Sachs, the retired limited partners, tee of The Goldman Sachs Group, L.P. and all
Sumitomo Bank Capital Markets, Inc. and other persons requested or authorized by our
Kamehameha Activities Association. Under board of directors or the board of directors of
the instrument of indemniÑcation, in the event the general partner of The Goldman Sachs
any indemnitee is, or is threatened to be, Group, L.P. to take actions on behalf of us,
made a party to any action, suit or proceeding The Goldman Sachs Group, L.P. or the gen-
by reason of the fact that such indemnitee eral partner of The Goldman Sachs Group,

109
L.P. in connection with the plan of incorpora- tal Markets, Inc. and Kamehameha Activities
tion, the registration statement and certain Association, against certain increases in each
other registration statements for all losses, tax indemnitee's taxes that relate to activities
damages, costs and expenses incurred by the of The Goldman Sachs Group, L.P. or certain
indemniÑed person arising out of the relevant of its aÇliates in respect of periods prior to
registration statements or the transactions the oÅerings. We will be required to make
contemplated by the plan of incorporation. additional payments to oÅset any taxes paya-
This agreement is in addition to our indemniÑ- ble by a tax indemnitee in respect of pay-
cation obligations under our by-laws as de- ments made pursuant to the tax
scribed under ""Description of Capital indemniÑcation agreement only to the extent
Stock Ì Limitation of Liability and IndemniÑ- the payments made to that tax indemnitee
cation Matters''. exceed a Ñxed amount. Any such payment of
additional taxes by Goldman Sachs will be
Tax IndemniÑcation Agreement and oÅset by any tax beneÑt received by the tax
Related Matters indemnitee.
An entity that has historically operated in
The tax indemniÑcation agreement in-
corporate form generally is liable for any
cludes provisions that permit Goldman Sachs
adjustments to the corporation's taxes for
to control any tax proceeding or contest
periods prior to its initial public oÅering. In
which might result in Goldman Sachs being
contrast, the partners of The Goldman Sachs
required to make a payment under the tax
Group, L.P., rather than Goldman Sachs,
indemniÑcation agreement.
generally will be liable for adjustments to
taxes (including U.S. federal and state in- The incorporation transactions described
come taxes) attributable to the operations of under ""Ì Incorporation and Related Transac-
The Goldman Sachs Group, L.P. and its tions Ì Incorporation Transactions'' are
aÇliates prior to the oÅerings. In connection structured in a manner that is not expected to
with the oÅerings, we will enter into a tax result in a signiÑcantly disproportionate tax or
indemniÑcation agreement to indemnify cer- other burden to any partner of The Goldman
tain former limited partners of The Goldman Sachs Group, L.P. If the incorporation trans-
Sachs Group, L.P., including the managing actions were to have a disproportionate eÅect
directors who were proÑt participating limited on any partner, Goldman Sachs may, but is
partners, each current director and executive not required to, make special payments and
oÇcer of The Goldman Sachs Group, Inc., the arrangements with any person who incurs a
retired limited partners, Sumitomo Bank Capi- disproportionate tax or other burden.

110
 DESCRIPTION OF CAPITAL STOCK
Pursuant to our amended and restated stock and which could have certain anti-
certiÑcate of incorporation, our authorized takeover eÅects.
capital stock consists of 4,350,000,000
Subject to the rights of the holders of any
shares, each with a par value of $0.01 per
series of preferred stock, the number of
share, of which:
authorized shares of any series of preferred
‚ 150,000,000 shares are designated as pre- stock may be increased or decreased (but
ferred stock; not below the number of shares thereof then
outstanding) by resolution adopted by our
‚ 4,000,000,000 shares are designated as board of directors and approved by the
common stock, 467,271,909 shares of aÇrmative vote of the holders of a majority of
which will be outstanding as of the con- the voting power of all outstanding shares of
summation of the oÅerings, including capital stock entitled to vote on the matter,
30,025,946 shares of common stock voting together as a single class.
underlying the restricted stock units
awarded based on a formula; and Common Stock
‚ 200,000,000 shares are designated as non- Each holder of common stock is entitled
voting common stock, 7,440,362 shares of to one vote for each share owned of record
which will be outstanding as of the con- on all matters submitted to a vote of share-
summation of the oÅerings. holders. There are no cumulative voting
rights. Accordingly, the holders of a majority
All outstanding shares of common stock and of the shares of common stock voting for the
nonvoting common stock are, and the shares election of directors can elect all the directors
of common stock oÅered hereby will be, when if they choose to do so, subject to any voting
issued and sold, validly issued, fully paid and rights of holders of preferred stock to elect
nonassessable. directors. For a discussion of the ability of the
parties to the shareholders' agreement initially
The shareholders' agreement contains to elect all of our directors, see ""Risk Fac-
provisions relating to the voting and disposi- tors Ì Goldman Sachs Will Be Controlled by
tion of certain shares of common stock. See Its Managing Directors Whose Interests May
""Certain Relationships and Related Transac- DiÅer from Those of Other Shareholders''.
tions Ì Shareholders' Agreement'' for a dis-
cussion of those provisions. Subject to the preferential rights of any
holders of any outstanding series of preferred
Preferred Stock stock, the holders of common stock, together
with the holders of the nonvoting common
Our authorized capital stock includes stock, will be entitled to such dividends and
150,000,000 shares of preferred stock. Our distributions, whether payable in cash or
board of directors is authorized to divide the otherwise, as may be declared from time to
preferred stock into series and, with respect time by our board of directors from legally
to each series, to determine the designations available funds. Subject to the preferential
and the powers, preferences and rights, and rights of holders of any outstanding series of
the qualiÑcations, limitations and restrictions preferred stock, upon our liquidation, dissolu-
thereof, including the dividend rights, conver- tion or winding-up and after payment of all
sion or exchange rights, voting rights, re- prior claims, the holders of common stock,
demption rights and terms, liquidation with the shares of the common stock and the
preferences, sinking fund provisions and the nonvoting common stock being considered as
number of shares constituting the series. Our a single class for this purpose, will be entitled
board of directors could, without shareholder to receive pro rata all our assets. Any divi-
approval, issue preferred stock with voting dend in shares of common stock paid on or
and other rights that could adversely aÅect with respect to shares of common stock may
the voting power of the holders of common be paid only with shares of common stock.

111
Other than the shareholder protection rights Shareholder Protection Rights
discussed below, holders of common stock
have no redemption or conversion rights or Each share of common stock and non-
preemptive rights to purchase or subscribe voting common stock has attached to it a
for securities of Goldman Sachs. shareholder protection right. The shareholder
protection rights initially are represented only
by the certiÑcates for the shares and will not
Nonvoting Common Stock trade separately from the shares unless and
until:
The nonvoting common stock will have
‚ it is announced by Goldman Sachs that a
the same rights and privileges as, and will
person or group has become the beneÑcial
rank equally and share proportionately with,
owner of 15% or more of the outstanding
and be identical in all respects as to all
common stock (other than persons
matters to, the common stock, except that the
deemed to beneÑcially own common stock
nonvoting common stock will have no voting
solely because they are parties to the
rights other than those voting rights required
shareholders' agreement, members of the
by law. All of the outstanding shares of
Shareholders' Committee or certain other
nonvoting common stock will be beneÑcially
persons)(an ""acquiring person''); or
owned by Sumitomo Bank Capital Markets,
Inc. on the date of the consummation of the ‚ ten business days (or such later date as
oÅerings. our board of directors may Ñx by resolu-
tion) after the date a person or group
Our board of directors will not declare or commences a tender or exchange oÅer that
pay dividends, and no dividend will be paid, would result in such person or group
with respect to any outstanding share of becoming an acquiring person.
common stock or nonvoting common stock,
If and when the shareholder protection rights
unless, simultaneously, the same dividend is
separate and prior to the date of the an-
paid with respect to each share of common
nouncement by Goldman Sachs that any
stock and nonvoting common stock, except
person has become an acquiring person,
that in the case of any dividend in the form of
each shareholder protection right will entitle
capital stock of a subsidiary of Goldman
the holder to purchase, in the case of share-
Sachs, the capital stock of the subsidiary
holder protection rights relating to the com-
distributed to holders of common stock may
mon stock, 1/100 of a share of Series A
diÅer from the capital stock of the subsidiary
participating preferred stock or, in the case of
distributed to holders of the nonvoting com-
shareholder protection rights relating to the
mon stock to the extent and only to the
nonvoting common stock, 1/100 of a share of
extent that the common stock and the non-
Series B participating preferred stock, in each
voting common stock diÅer. Any dividend paid
case, for an exercise price of $250. Each 1/100
on or with respect to nonvoting common
of a share of Series A participating preferred
stock may be paid only with shares of
stock and Series B participating preferred
nonvoting common stock.
stock would have economic and voting terms
equivalent to one share of common stock and
The shares of nonvoting common stock nonvoting common stock, respectively.
may not be converted into common stock
until the 185th day after the date of the Upon the date of the announcement by
consummation of the oÅerings. Beginning on Goldman Sachs that any person or group has
the 185th day the nonvoting common stock become an acquiring person, each share-
will, upon transfer by Sumitomo Bank Capital holder protection right (other than share-
Markets, Inc. to a third party, and in certain holder protection rights beneÑcially owned by
other circumstances, convert into shares of the acquiring person or their transferees,
common stock on a one-for-one basis. The which shareholder protection rights become
nonvoting common stock has standard anti- void) will entitle its holder to purchase, for
dilution provisions. the exercise price, a number of shares of

112
common stock or, in the case of shareholder The shareholder protection rights may be
protection rights relating to nonvoting com- redeemed by our board of directors for $0.01
mon stock, a number of shares of nonvoting per shareholder protection right prior to the
common stock having a market value of twice date of the announcement by Goldman Sachs
the exercise price. Also, if, after the date of that any person has become an acquiring
the announcement by Goldman Sachs that person. Our charter permits this redemption
any person has become an acquiring person, right to be exercised by our board of direc-
the acquiring person controls our board of tors (or certain directors speciÑed or qualiÑed
directors and: by the terms of the instrument governing the
shareholder protection rights).
‚ Goldman Sachs is involved in a merger or
similar form of business combination and The shareholder protection rights will not
(i) any term of the transaction provides for prevent a takeover of Goldman Sachs. How-
diÅerent treatment of the shares of capital ever, these rights may cause substantial dilu-
stock held by the acquiring person as tion to a person or group that acquires 15%
compared to the shares of capital stock or more of the common stock unless the
held by all other shareholders or (ii) the shareholder protection rights are Ñrst re-
person with whom such transaction occurs deemed by our board of directors.
is the acquiring person or an aÇliate
thereof; or Limitation of Liability and
IndemniÑcation Matters
‚ Goldman Sachs sells or transfers assets
representing more than 50% of its assets Our charter provides that a director of
or generating more than 50% of its operat- Goldman Sachs will not be liable to Goldman
ing income or cash Öow to any person Sachs or its shareholders for monetary dam-
other than Goldman Sachs or its wholly ages for breach of Ñduciary duty as a direc-
owned subsidiaries, tor, except in certain cases where liability is
mandated by the Delaware General Corpora-
then each shareholder protection right will tion Law. Our by-laws provide for indemniÑca-
entitle its holder to purchase, for the exercise tion, to the fullest extent permitted by law, of
price, a number of shares (A) with respect to any person made or threatened to be made a
shareholder protection rights relating to the party to any action, suit or proceeding by
common stock, of capital stock with the reason of the fact that such person is or was
greatest voting power in respect of the elec- a director or oÇcer of Goldman Sachs, or is
tion of directors and (B) with respect to or was a director of a subsidiary of Goldman
shareholder protection rights relating to the Sachs, or is or was a member of the Share-
nonvoting common stock, of capital stock holders' Committee acting under the share-
identical to the stock described in clause (A) holders' agreement or, at the request of
except with voting provisions identical to that Goldman Sachs, serves or served as a direc-
of the nonvoting common stock, of either the tor or oÇcer of or in any other capacity for,
acquiring person or the other party to such or in relation to, any other enterprise, against
transaction, depending on the circumstances all expenses, liabilities, losses and claims
of the transaction, having a market value of actually incurred or suÅered by such person
twice the exercise price. If any person or in connection with the action, suit or proceed-
group acquires from 15% to and including ing. Our by-laws also provide that, to the
50% of the common stock, our board of extent authorized from time to time by our
directors may, at its option, exchange each board of directors, Goldman Sachs may pro-
outstanding shareholder protection right, ex- vide to any one or more employees and other
cept for those held by an acquiring person or agents of Goldman Sachs or any subsidiary
their transferees, for one share of common or other enterprise, rights of indemniÑcation
stock or, in the case of shareholder protec- and to receive payment or reimbursement of
tion rights relating to nonvoting common expenses, including attorneys' fees, that are
stock, one share of nonvoting common stock. similar to the rights conferred by the by-laws

113
on directors and oÇcers of Goldman Sachs ness combination'' includes a merger, asset
or any subsidiary or other enterprise. sale or a transaction resulting in a Ñnancial
beneÑt to the interested stockholder. An ""in-
terested stockholder'' is a person who, to-
Charter Provisions Approving Certain
gether with aÇliates and associates, owns
Actions
(or, in certain cases, within three years prior,
Our charter provides that our board of did own) 15% or more of the corporation's
directors may determine to take the following outstanding voting stock. Under Section 203,
actions, in its sole discretion, and Goldman a business combination between Goldman
Sachs and each shareholder of Goldman Sachs and an interested stockholder is pro-
Sachs will, to the fullest extent permitted by hibited unless it satisÑes one of the following
law, be deemed to have approved and rati- conditions:
Ñed, and waived any claim relating to, the
‚ prior to the time the stockholder became an
taking of any of these actions:
interested stockholder, the board of direc-
‚ causing Goldman Sachs to register with the tors of Goldman Sachs must have previ-
SEC for resale shares of common stock ously approved either the business
held by our directors, employees and for- combination or the transaction that resulted
mer directors and employees and our sub- in the stockholder becoming an interested
sidiaries and aÇliates and former partners stockholder;
and employees of The Goldman Sachs
Group, L.P. and its subsidiaries and aÇli- ‚ on consummation of the transaction that
ates as discussed under ""Shares Eligible resulted in the stockholder becoming an
for Future Sale Ì Other Registration interested stockholder, the interested
Rights''; stockholder owned at least 85% of the
voting stock of Goldman Sachs outstanding
‚ making payments to, and other arrange- at the time the transaction commenced
ments with, certain former limited partners (excluding, for purposes of determining the
of Goldman Sachs, including managing di- number of shares outstanding, shares
rectors who were proÑt participating limited owned by persons who are directors and
partners, in order to compensate them for, oÇcers); or
or to prevent, signiÑcantly disproportionate
‚ the business combination is approved by
adverse tax or other consequences as
the board of directors of Goldman Sachs
discussed under ""Certain Relationships and
and authorized at an annual or special
Related Transactions Ì Tax IndemniÑcation
meeting of the stockholders by the aÇrma-
Agreement and Related Matters''; and
tive vote of at least 66π% of the outstand-
‚ making a $200 million contribution to the ing voting stock which is not owned by the
Goldman Sachs Fund, a charitable interested stockholder.
foundation.
Our board of directors has adopted a
resolution providing that neither the share-
Section 203 of the
holders' agreement nor the voting agreements
Delaware General Corporation Law
of Sumitomo Bank Capital Markets, Inc. and
Upon the consummation of the oÅerings, Kamehameha Activities Association will create
Goldman Sachs will be subject to the provi- an ""interested stockholder''.
sions of Section 203 of the Delaware General
Corporation Law. In general, Section 203
prohibits a publicly held Delaware corporation Certain Anti-Takeover Matters
from engaging in a ""business combination'' Our charter and by-laws will, upon con-
with an ""interested stockholder'' for a period summation of the offerings, include a number
of three years after the date of the transac- of provisions that may have the effect of
tion in which the person became an interested encouraging persons considering unsolicited
stockholder, unless the business combination tender offers or other unilateral takeover pro-
is approved in a prescribed manner. A ""busi- posals to negotiate with our board of directors

114
rather than pursue non-negotiated takeover prior to the meeting at which the action is to
attempts. These provisions include: be taken. Generally, to be timely, notice must
be received at the principal executive oÇces
ClassiÑed Board of Directors of Goldman Sachs not less than 90 days nor
Our charter will provide for a board of more than 120 days prior to the Ñrst anniver-
directors divided into three classes, with one sary date of the annual meeting for the
class to be elected each year to serve for a preceding year. The notice must contain cer-
three-year term. The terms of the initial tain information speciÑed in the by-laws.
classes of directors will terminate on the date
of the annual meetings of shareholders in Special Meetings of Shareholders
2000, 2001 and 2002. As a result, at least two Our charter and by-laws deny sharehold-
annual meetings of shareholders may be ers the right to call a special meeting of
required for the shareholders to change a shareholders. Our charter and by-laws pro-
majority of our board of directors. In addition, vide that special meetings of the shareholders
the shareholders of Goldman Sachs can only may be called only by a majority of the board
remove directors for cause by the aÇrmative of directors.
vote of the holders of not less than 80% of
the outstanding shares of capital stock of No Written Consent of Shareholders
Goldman Sachs entitled to vote in the election Our charter requires all shareholder ac-
of directors. Vacancies on our board of tions to be taken by a vote of the sharehold-
directors may be Ñlled only by our board of ers at an annual or special meeting, and does
directors. The classiÑcation of directors and not permit our shareholders to act by written
the inability of shareholders to remove direc- consent, without a meeting.
tors without cause and to Ñll vacancies on the
board of directors will make it more diÇcult to Majority Vote Needed for Shareholder
change the composition of our board of Proposals
directors, but will promote a continuity of
existing management. Our by-laws require that any shareholder
proposal be approved by a majority of all of
Constituency Provision the outstanding shares of common stock and
not by only a majority of the shares present
In accordance with our charter, a director at the meeting and entitled to vote. This
of Goldman Sachs may (but is not required requirement may make it more diÇcult to
to) in taking any action (including an action approve shareholder resolutions.
that may involve or relate to a change or
potential change in control of Goldman Amendment of By-Laws and Charter
Sachs) consider, among other things, the
eÅects that Goldman Sachs' actions may Our charter requires the approval of not
have on other interests or persons (including less than 80% of the voting power of all
its employees, former partners of The outstanding shares of Goldman Sachs' capital
Goldman Sachs Group, L.P. and the commu- stock entitled to vote to amend any by-law by
nity) in addition to our shareholders. shareholder action or the charter provisions
described in this section. Those provisions
Advance Notice Requirements will make it more diÇcult to dilute the anti-
takeover eÅects of our by-laws and our
Our by-laws establish advance notice
charter.
procedures with regard to shareholder pro-
posals relating to the nomination of candi-
Blank Check Preferred Stock
dates for election as directors or new
business to be brought before meetings of Our charter provides for 150,000,000 au-
shareholders of Goldman Sachs. These pro- thorized shares of preferred stock. The exis-
cedures provide that notice of such share- tence of authorized but unissued shares of
holder proposals must be timely given in preferred stock may enable the board of
writing to the Secretary of Goldman Sachs directors to render more diÇcult or to dis-

115
courage an attempt to obtain control of shares of common stock and nonvoting com-
Goldman Sachs by means of a merger, tender mon stock. The issuance may also adversely
oÅer, proxy contest or otherwise. For exam- aÅect the rights and powers, including voting
ple, if in the due exercise of its Ñduciary rights, of such holders and may have the
obligations, the board of directors were to eÅect of delaying, deterring or preventing a
determine that a takeover proposal is not in change in control of Goldman Sachs. The
the best interests of Goldman Sachs, the board of directors currently does not intend to
board of directors could cause shares of seek shareholder approval prior to any issu-
preferred stock to be issued without share- ance of shares of preferred stock, unless
holder approval in one or more private oÅer- otherwise required by law.
ings or other transactions that might dilute the
voting or other rights of the proposed ac- Listing
quiror or insurgent shareholder or share-
We will list the common stock on the
holder group. In this regard, the charter
NYSE.
grants our board of directors broad power to
establish the rights and preferences of autho-
Transfer Agent
rized and unissued shares of preferred stock.
The issuance of shares of preferred stock The transfer agent for the common stock
could decrease the amount of earnings and will be ChaseMellon Shareholder Services,
assets available for distribution to holders of L.L.C.

116
 SHARES ELIGIBLE FOR FUTURE SALE
Prior to the oÅerings, there has been no ‚ 47,270,551 shares will be held by the
public market for our common stock. Future retired limited partners, of which 101,878
sales of substantial amounts of common shares will be subject only to the underwrit-
stock in the public market, or the perception ers' lock-up described below, 31,099,839
that such sales may occur, could adversely shares will be transferable beginning one
aÅect the prevailing market price of the year after the date of the consummation of
common stock. Upon completion of the oÅer- the oÅerings, and the remainder of which
ings, there will be 467,271,909 shares of will be transferrable beginning three years
common stock outstanding, including after the date of the consummation of the
30,025,946 shares of common stock underly- oÅerings, unless these restrictions are
ing the restricted stock units awarded based waived. All of these shares are also subject
on a formula but excluding 7,440,362 shares to the underwriters' lock-up described
of nonvoting common stock. Of these shares, below;
69,000,000 shares of common stock sold in
the oÅerings will be freely transferable without ‚ 12,555,866 shares held by the deÑned con-
restriction or further registration under the tribution plan will not be distributable to the
Securities Act of 1933. Of the remaining plan participants until on or about the third,
398,271,909 shares of common stock fourth and Ñfth anniversaries of the date of
outstanding: the initial contribution, assuming the rele-
vant conditions have been satisÑed. See
‚ 264,882,840 shares held by the managing ""Management Ì The Employee Initial Pub-
directors who were proÑt participating lim- lic OÅering Awards'' for a description of the
ited partners will not be transferable until deÑned contribution plan;
on or after the third anniversary of the date ‚ 30,025,946 shares of common stock under-
of the consummation of the oÅerings, un- lying the restricted stock units awarded
less these restrictions are waived, and will based on a formula generally will be deliv-
also be subject to the underwriters' lock-up erable beginning on or about the Ñrst
described below. See ""Certain Relation- anniversary of the date of the consumma-
ships and Related Transactions Ì Share- tion of the oÅerings, assuming the relevant
holders' Agreement''; conditions are satisÑed, as described in
‚ 21,425,052 shares will be held by ""Management Ì The Employee Initial Pub-
Sumitomo Bank Capital Markets, Inc. and, lic OÅering Awards Ì Formula Awards'';
together with the 7,440,362 shares of non- and
voting common stock that it will hold, will ‚ 136,233 shares of common stock held by
be transferable only as described under the managing directors who were proÑt
""Ì Sumitomo Bank Capital Markets, Inc. participating limited partners will be subject
and Kamehameha Activities Association to the underwriters' lock-up described be-
Registration Rights'', unless these restric- low and will be eligible for resale pursuant
tions are waived by our board of directors. to Rule 144 after one year as described
All of these shares will also be subject to below.
the underwriters' lock-up described below;
Shares of common stock underlying the
‚ 21,975,421 shares will be held by restricted stock units awarded on a discre-
Kamehameha Activities Association and will tionary basis will be deliverable beginning on
be transferable only as described under or about the third anniversary of the date of
""Ì Sumitomo Bank Capital Markets, Inc. the consummation of the oÅerings, assuming
and Kamehameha Activities Association the relevant conditions have been satisÑed.
Registration Rights'', unless these restric- The options to purchase shares of common
tions are waived by our board of directors. stock awarded on a discretionary basis will be
All of these shares will also be subject to exercisable beginning on or about the third
the underwriters' lock-up described below; anniversary of the date of the consummation

117
of the oÅerings, assuming the relevant condi- The shares of common stock received by
tions have been satisÑed. See ""Manage- the managing directors who were proÑt par-
mentÌThe Employee Initial Public OÅering ticipating limited partners, Sumitomo Bank
Awards'' for a discussion of the terms of the Capital Markets, Inc. and Kamehameha Activi-
restricted stock units awarded based on a ties Association will constitute ""restricted se-
formula, the restricted stock units awarded on curities'' for purposes of the Securities Act of
a discretionary basis and the options to 1933. As a result, absent registration under
purchase shares of common stock awarded the Securities Act of 1933 or compliance with
on a discretionary basis. Rule 144 thereunder or an exemption there-
from, these shares of common stock will not
Goldman Sachs, Sumitomo Bank Capital be freely transferable to the public. For a
Markets, Inc., Kamehameha Activities Associ- description of the registration rights granted
ation, the parties to the shareholders' agree- to Sumitomo Bank Capital Markets, Inc. and
ment, including all of the directors and Kamehameha Activities Association and the
executive oÇcers of The Goldman Sachs restrictions on the transfer of their shares of
Group, Inc., and the retired limited partners common stock, see ""Ì Sumitomo Bank Capi-
have agreed not to dispose of or hedge any tal Markets, Inc. and Kamehameha Activities
of their common stock or securities converti- Association Registration Rights'' below and
ble into or exchangeable for shares of com- for a description of the registration rights that
mon stock during the period from the date of may be granted to the managing directors
this prospectus continuing through the date who were proÑt participating limited partners,
180 days after the date of this prospectus, see ""Ì Other Registration Rights'' below.
except with the prior written consent of
Goldman, Sachs & Co. This agreement does In general, under Rule 144 as currently in
not apply to the shares of common stock eÅect, a person (or persons whose shares
underlying any of the restricted stock units are aggregated), including an aÇliate, who
awarded based on a formula, or the restricted beneÑcially owns ""restricted securities'' may
stock units awarded on a discretionary basis, not sell those securities until they have been
the options to purchase shares of common beneÑcially owned for at least one year.
stock awarded on a discretionary basis or Thereafter, the person would be entitled to
accounts in the deÑned contribution plan, in sell within any three-month period a number
each case, received by non-managing direc- of shares that does not exceed the greater of:
tors or to any future awards made under the ‚ 1% of the number of shares of common
stock incentive plan. stock then outstanding (which will equal
approximately 4,372,460 shares immedi-
We intend to Ñle a registration statement ately after the oÅerings); or
with the SEC in order to register the reoÅer
and resale of the shares of common stock ‚ the average weekly trading volume of the
issued pursuant to the deÑned contribution common stock on the NYSE during the four
plan, restricted stock units awarded based on calendar weeks preceding the Ñling with the
a formula, restricted stock units awarded on a SEC of a notice on the SEC's Form 144
discretionary basis and options to purchase with respect to such sale.
shares of common stock awarded on a dis- Sales under Rule 144 are also subject to
cretionary basis. As a result, any shares of certain other requirements regarding the man-
common stock delivered under these awards ner of sale, notice and availability of current
will, subject to any restrictions under the public information about Goldman Sachs.
shareholders' agreement, be freely transfera-
ble to the public unless the shares of com- Under Rule 144(k), a person who is not,
mon stock are acquired by an ""aÇliate'' of and has not been at any time during the
Goldman Sachs. Any shares of common 90 days preceding a sale, an aÇliate of
stock acquired by an ""aÇliate'' of Goldman Goldman Sachs and who has beneÑcially
Sachs will be transferable to the public in owned the shares proposed to be sold for at
accordance with the SEC's Rule 144. least two years (including the holding period

118
of any prior owner except an aÇliate) is tion of the oÅerings, each registration rights
entitled to sell such shares without complying holder may use its available registration rights
with the manner of sale, public information, described above to sell:
volume limitation or notice provisions of
‚ In each 12-month period following the Ñrst
Rule 144. While the shares of common stock
and second anniversary of the date of the
received by the retired limited partners will
consummation of the oÅerings, up to 20%
constitute ""restricted securities'', these
of the shares of common stock received by
shares will be freely transferable by the
such registration rights holder in the incor-
retired limited partners in accordance with
poration transactions (such holder's ""origi-
Rule 144(k) upon the lapse or waiver of the
nal block''); and
transfer restrictions described above.
‚ With the consent of Goldman Sachs, com-
Sumitomo Bank Capital Markets, Inc. and mon stock constituting up to an additional
Kamehameha Activities Association 13∏% of such holder's original block.
Registration Rights
In each 12-month period following the
Goldman Sachs is a party to agreements third anniversary of the date of the consum-
with Sumitomo Bank Capital Markets, Inc. mation of the oÅerings, each registration
and The Sumitomo Bank, Limited under which rights holder may use its available registration
Sumitomo Bank Capital Markets, Inc. and The rights described above to sell common stock
Sumitomo Bank, Limited may require constituting up to 33∏% of its original block.
Goldman Sachs to register under the Securi-
These rights are not available for nonvot-
ties Act of 1933 certain of Sumitomo Bank
ing common stock.
Capital Markets, Inc.'s shares of common
stock, which includes shares of common In addition to the rights described above,
stock receivable upon the conversion of the each registration rights holder will also be
nonvoting common stock. Goldman Sachs is entitled to sell additional shares of common
a party to similar agreements with stock to the extent that managing directors
Kamehameha Activities Association. who were proÑt participating limited partners
sell shares of common stock in an amount
Except for certain transfers to wholly
which in any one year period following the
owned subsidiaries, each registration rights
oÅerings represents, in the aggregate, a
holder has agreed that it will only dispose of
greater percentage of the number of shares
common stock (i) by means of a widely
of common stock issued to these managing
dispersed underwritten public oÅering and
directors in the incorporation transactions
(ii) pursuant to the exercise of the registra-
than the percentages speciÑed above (i.e.,
tion rights set forth below.
0% during year one, 20% during years two
Each registration rights holder has the and three, and 33∏% thereafter). The exer-
right: cise by the registration rights holders of their
respective rights under their registration rights
‚ on up to ten occasions (but not more than
agreement may, if we determine that such
twice every 12 months) to require Goldman
exercise would interfere with a public oÅering
Sachs to register shares of common stock
by us, be delayed by us for up to 90 days.
under the Securities Act of 1933; and
Goldman Sachs has agreed to bear cer-
‚ to include its shares of common stock in
tain customary expenses associated with the
any registered public oÅering in which the
oÅering of common stock by Sumitomo Bank
managing directors participate.
Capital Markets, Inc. and Kamehameha Activi-
Prior to the Ñrst anniversary of the date ties Association. Thereafter, the registration
of the consummation of the oÅerings, the rights agreements provide that the expenses
registration rights holders are not permitted to of an oÅering of common stock are generally
transfer shares of common stock or nonvot- the responsibility of each participating regis-
ing common stock. Between the Ñrst and third tration rights holder selling common stock,
anniversaries of the date of the consumma- apportioned on a pro rata basis. Under the

119
registration rights agreements, Goldman received in connection with the incorporation
Sachs has agreed to indemnify each partici- transactions under the Securities Act of 1933.
pating registration rights holder against cer- However, the plan of incorporation and our
tain liabilities, including those arising under charter permit our board of directors to grant
the Securities Act of 1933. registration rights to these managing directors.
As a result, the board of directors may at any
The registration rights agreements also
time and from time to time grant registration
provide that if Goldman Sachs makes a
rights to these managing directors.
general oÅer to purchase shares of common
stock held by the managing directors who The ability of our board of directors to
were proÑt participating limited partners, then grant registration rights to the managing direc-
a registration rights holder will be permitted to tors who were profit participating limited part-
participate in such transaction on a pro rata ners, together with the ability of the
basis with these managing directors. In addi- Shareholders' Committee under the sharehold-
tion, a registration rights holder may tender ers' agreement to waive the transfer restrictions
its shares of common stock in any tender or related to the managing directors who were
exchange oÅer recommended for approval by profit participating limited partners thereunder
our board of directors (or as to which our and under the plan of incorporation, could, if
board of directors makes no exercised, permit these managing directors to
recommendation). sell significant amounts of common stock at
any time following the expiration of the under-
Other Registration Rights
writers' lock-up. See ""Risk Factors Ì Our
The managing directors who were profit Share Price May Decline Due to the Large
participating limited partners are not being Number of Shares Eligible for Future Sale'' for
granted the right to require Goldman Sachs to a further discussion of the risks associated with
register the shares of common stock that they these actions.

VALIDITY OF COMMON STOCK

The validity of the common stock offered Gregory K. Palm. Sullivan & Cromwell has in
hereby will be passed upon for The Goldman the past represented, and continues to repre-
Sachs Group, Inc. by Sullivan & Cromwell, New sent, one or more of the underwriters and
York, New York, and for the underwriters by their aÇliates in a variety of matters. Cleary,
Cleary, Gottlieb, Steen & Hamilton, New York, Gottlieb, Steen & Hamilton has in the past
New York. Certain legal matters will be passed represented, and continues to represent,
upon for The Goldman Sachs Group, Inc. by Goldman Sachs in a variety of matters.
one of its General Counsel, Robert J. Katz or

EXPERTS
The Ñnancial statements of Goldman The historical consolidated income state-
Sachs as of November 28, 1997 and ment data and balance sheet data set forth in
November 27, 1998 and for each of the three ""Selected Consolidated Financial Data'' for
years in the period ended November 27, 1998 each of the Ñve years in the period ended
included in this prospectus and the Ñnancial November 27, 1998 included in this prospec-
statement schedule included in the registra- tus have been so included in reliance on the
tion statement have been so included in report of PricewaterhouseCoopers LLP, inde-
reliance on the report of Pricewaterhouse- pendent accountants, given on the authority
Coopers LLP, independent accountants, given of said Ñrm as experts in auditing and
on the authority of said Ñrm as experts in accounting.
auditing and accounting.
The Pro Forma Consolidated Income
Statement Information for the year ended

120
November 27, 1998 included in this prospec- tus, PricewaterhouseCoopers LLP reported
tus has been so included in reliance on the that they have applied limited procedures in
report of PricewaterhouseCoopers LLP, inde- accordance with professional standards for a
pendent accountants, on their examination of review of such information. However, their
the Pro Forma Adjustments as described in separate reports dated April 9, 1999 with
Note 2 to the Pro Forma Consolidated Finan- respect to the unaudited condensed consoli-
cial Information, and the application of those dated Ñnancial statements of Goldman Sachs
adjustments to the historical amounts in the as of and for the three months ended Febru-
Pro Forma Consolidated Income Statement ary 26, 1999 and for the three months ended
Information for the year ended November 27, February 27, 1998, and May 3, 1999 with
1998, given on the authority of said Ñrm as respect to the unaudited pro forma consoli-
experts in performing examinations of pro dated balance sheet information as of Febru-
forma Ñnancial information in accordance with ary 26, 1999 and the related unaudited pro
standards established by the American Insti- forma consolidated income statement infor-
tute of CertiÑed Public Accountants. mation for the three months then ended,
appearing herein state that they did not audit
The information under the caption ""Man-
and they do not express an opinion on the
agement's Discussion and Analysis of Finan-
unaudited historical Ñnancial information or
cial Condition and Results of Operations'',
the unaudited pro forma Ñnancial information.
except for the (i) information presented
Accordingly, the degree of reliance on their
under the headings ""VaR'' or ""VaR Methodol-
reports on such information should be re-
ogy, Assumptions and Limitations'' and
stricted in light of the limited nature of the
(ii) information for the three months ended
review procedures applied. Price-
February 26, 1999 and February 27, 1998,
waterhouseCoopers LLP is not subject to the
taken as a whole, of Goldman Sachs for the
liability provisions of Section 11 of the Securi-
three-year period ended November 27, 1998
ties Act of 1933 for their reports on the
included in this prospectus has been so
unaudited historical Ñnancial information and
included in reliance on the report of
on the unaudited pro forma Ñnancial informa-
PricewaterhouseCoopers LLP, independent
tion because those reports are not a ""report''
accountants, given on the authority of said
or a ""part'' of the registration statement
Ñrm as experts in performing examinations of
prepared or certiÑed by Pricewaterhouse-
management's discussion and analysis of Ñ-
Coopers LLP within the meaning of Sec-
nancial condition and results of operations in
tions 7 and 11 of the Securities Act of 1933.
accordance with standards established by the
American Institute of CertiÑed Public Except as otherwise indicated, all
Accountants. amounts with respect to the volume, number
and market share of mergers and acquisitions
With respect to the unaudited condensed
and underwriting transactions and related
consolidated Ñnancial statements of Goldman
ranking information included in this prospec-
Sachs as of and for the three months ended
tus have been derived from information com-
February 26, 1999 and for the three months
piled and classiÑed by Securities Data
ended February 27, 1998, and the unaudited
Company and have been so included in
consolidated pro forma balance sheet infor-
reliance on Securities Data Company's au-
mation as of February 26, 1999 and the
thority as experts in compiling and classifying
related unaudited consolidated pro forma in-
information as to securities transactions.
come statement information for the three
months then ended, included in this prospec-

121
 AVAILABLE INFORMATION
Upon the consummation of the oÅerings, that include financial information reported on
Goldman Sachs will be required to Ñle annual, by our independent public accountants.
quarterly and current reports, proxy state-
We have Ñled a registration statement on
ments and other information with the SEC.
Form S-1 with the SEC. This prospectus is a
You may read and copy any documents Ñled part of the registration statement and does
by us at the SEC's public reference room at not contain all of the information in the
450 Fifth Street, N.W., Washington, D.C. registration statement. Whenever a reference
20549. Please call the SEC at is made in this prospectus to a contract or
1-800-SEC-0330 for further information on the other document of Goldman Sachs, please be
public reference room. Our Ñlings with the aware that such reference is not necessarily
SEC are also available to the public through complete and that you should refer to the
the SEC's Internet site at http://www.sec.gov exhibits that are a part of the registration
and through the NYSE, 20 Broad Street, New statement for a copy of the contract or other
York, New York 10005, on which our common document. You may review a copy of the
stock is listed. After the offerings, we expect registration statement at the SEC's public
to provide annual reports to our shareholders reference room in Washington, D.C., as well
as through the SEC's Internet site.

122
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Consolidated Financial Statements as of November 27, 1998 and November 28, 1997 and
for the three years in the period ended November 27, 1998
Report of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-2
Consolidated Statements of Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-3
Consolidated Statements of Financial Condition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-4
Consolidated Statements of Changes in Partners' Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-5
Consolidated Statements of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-6
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-7

Condensed Consolidated Financial Statements as of February 26, 1999 and for the three
months ended February 26, 1999 and February 27, 1998 (unaudited)
Review Report of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-24
Condensed Consolidated Statements of EarningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-25
Condensed Consolidated Statement of Financial Condition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-26
Condensed Consolidated Statement of Changes in Partners' Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-27
Condensed Consolidated Statements of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-28
Notes to Condensed Consolidated Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-29

F-1
 REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners,
The Goldman Sachs Group, L.P.:
In our opinion, the accompanying consolidated statements of Ñnancial condition and the related
consolidated statements of earnings, changes in partners' capital and cash Öows (included on
pages F-3 to F-23 of this prospectus) present fairly, in all material respects, the consolidated
Ñnancial position of The Goldman Sachs Group, L.P. and Subsidiaries (the ""Firm'') as of
November 27, 1998 and November 28, 1997, and the results of their consolidated operations and
their consolidated cash Öows for the three years in the period ended November 27, 1998, in
conformity with generally accepted accounting principles. These Ñnancial statements are the
responsibility of the Firm's management; our responsibility is to express an opinion on these
Ñnancial statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we plan and perform
the audits to obtain reasonable assurance about whether the Ñnancial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the Ñnancial statements, assessing the accounting principles used
and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We have also previously audited, in accordance with generally accepted auditing standards, the
consolidated statements of Ñnancial condition as of November 29, 1996, November 24, 1995 and
November 25, 1994, and the related consolidated statements of earnings, changes in partners'
capital and cash Öows for the years ended November 24, 1995 and November 25, 1994 (none of
which are presented herein); and we expressed unqualiÑed opinions on those consolidated
Ñnancial statements. In our opinion, the information set forth in the selected historical
consolidated income statement and balance sheet data for each of the Ñve years in the period
ended November 27, 1998 (included on pages 34 and 35 of this prospectus) is fairly stated, in
all material respects, in relation to the consolidated Ñnancial statements from which it has been
derived.

PricewaterhouseCoopers LLP

New York, New York

January 22, 1999.

F-2
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Year Ended November
1996 1997 1998
(in millions)
Revenues:
Investment bankingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,113 $ 2,587 $ 3,368
Trading and principal investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,496 2,303 2,015
Asset management and securities services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 981 1,456 2,085
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,699 14,087 15,010
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,289 20,433 22,478
Interest expense, principally on short-term fundingÏÏÏÏÏÏÏÏÏÏ 11,160 12,986 13,958
Revenues, net of interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,129 7,447 8,520
Operating expenses:
Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,421 3,097 3,838
Brokerage, clearing and exchange fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 278 357 424
Market developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137 206 287
Communications and technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 173 208 265
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 172 178 242
Occupancy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154 168 207
Professional services and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 188 219 336
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,523 4,433 5,599
Pre-tax earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,606 3,014 2,921
Provision for taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 207 268 493
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,399 $ 2,746 $ 2,428

The accompanying notes are an integral part of these consolidated Ñnancial statements.

F-3
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

As of November
1997 1998
(in millions)
Assets:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,328 $ 2,836
Cash and securities segregated in compliance with U.S. federal and
other regulations (principally U.S. government obligations) ÏÏÏÏÏÏÏÏÏÏÏ 4,903 7,887
Receivables from brokers, dealers and clearing organizations ÏÏÏÏÏÏÏÏÏÏÏ 3,754 4,321
Receivables from customers and counterparties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,060 14,953
Securities borrowed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,058 69,158
Securities purchased under agreements to resellÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,376 37,484
Right to receive securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 7,564
Financial instruments owned, at fair value:
Commercial paper, certiÑcates of deposit and time deposits ÏÏÏÏÏÏÏÏÏÏ 1,477 1,382
U.S. government, federal agency and sovereign obligations ÏÏÏÏÏÏÏÏÏÏÏ 25,736 24,789
Corporate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,321 10,744
Equities and convertible debenturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,870 11,066
State, municipal and provincial obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,105 918
Derivative contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,788 21,299
Physical commodities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,092 481
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,533 2,498
$178,401 $217,380
Liabilities and Net Worth:
Short-term borrowings, including commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 21,008 $ 27,430
Payables to brokers, dealers and clearing organizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 952 730
Payables to customers and counterpartiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,995 36,179
Securities loaned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,627 21,117
Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,057 36,257
Obligation to return securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9,783
Financial instruments sold, but not yet purchased, at fair value:
U.S. government, federal agency and sovereign obligations ÏÏÏÏÏÏÏÏÏÏÏ 22,371 22,360
Corporate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,708 1,441
Equities and convertible debenturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,357 6,406
Derivative contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,964 24,722
Physical commodities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78 966
Other liabilities and accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,080 3,699
Long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,667 19,906
171,864 210,996
Commitments and contingencies
Partners' capital allocated for income taxes and potential withdrawals ÏÏÏ 430 74
Partners' capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,107 6,310
$178,401 $217,380

The accompanying notes are an integral part of these consolidated Ñnancial statements.

F-4
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

Year Ended November

1996 1997 1998
(in millions)
Partners' capital, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,905 $ 5,309 $ 6,107
Additions:
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,399 2,746 2,428
Capital contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 89 9
Total additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,403 2,835 2,437
Deductions:
Returns on capital and certain distributions to partners ÏÏÏÏÏÏ (473) (557) (619)
Termination of the ProÑt Participation Plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (368)
Transfers to partners' capital allocated for income taxes and
potential withdrawals, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,526) (1,480) (1,247)
Total deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,999) (2,037) (2,234)
Partners' capital, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,309 $ 6,107 $ 6,310

The accompanying notes are an integral part of these consolidated Ñnancial statements.

F-5
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended November

1996 1997 1998
(in millions)
Cash Öows from operating activities:
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,399 $ 2,746 $ 2,428
Non-cash items included in net earnings:
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 172 178 242
Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85 32 23
Changes in operating assets and liabilities:
Cash and securities segregated in compliance with U.S. federal and other
regulationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,445) (670) (2,984)
Net receivables from brokers, dealers and clearing organizations ÏÏÏÏÏÏÏÏÏÏ 169 (1,599) (789)
Net payables to customers and counterpartiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,279 2,339 8,116
Securities borrowed, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17,075) (8,124) (14,610)
Financial instruments owned, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9,415) (7,439) 148
Financial instruments sold, but not yet purchased, at fair valueÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,276 11,702 7,559
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 926 905 (71)
Net cash (used for)/provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,629) 70 62
Cash Öows from investing activities:
Property, leasehold improvements and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (258) (259) (476)
Financial instruments owned, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 115 (360) (180)
Acquisitions, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (75) (74) Ì
Net cash used for investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (218) (693) (656)
Cash Öows from Ñnancing activities:
Short-term borrowings, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 391 1,082 2,193
Securities sold under agreements to repurchase, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,012 (4,717) (5,909)
Issuance of long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,172 7,734 10,527
Repayment of long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,986) (1,855) (2,058)
Capital contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 89 9
Returns on capital and certain distributions to partners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (473) (557) (619)
Termination of the ProÑt Participation Plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (368)
Partners' capital allocated for income taxes and potential withdrawals ÏÏÏÏÏÏÏÏ (1,017) (2,034) (1,673)
Net cash provided by/(used for) Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,103 (258) 2,102
Net increase/(decrease) in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,256 (881) 1,508
Cash and cash equivalents, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 953 2,209 1,328
Cash and cash equivalents, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,209 $ 1,328 $ 2,836
Supplemental disclosures:
Cash payments for interest approximated the related expense for each of the Ñscal periods presented. Payments of income taxes
were not material.
A zero coupon bond of $32 million representing a portion of the acquisition price of CIN Management Limited was recorded on the
consolidated statement of Ñnancial condition as of November 1996 and was excluded from the consolidated statement of cash
Öows as it represented a non-cash item.
An increase in total assets and liabilities of $11.64 billion related to the provisions of SFAS No. 125 that were deferred under SFAS
No. 127 was excluded from the consolidated statement of cash Öows for the year ended November 1998 as it represented a non-
cash item.

The accompanying notes are an integral part of these consolidated Ñnancial statements.

F-6
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business

The Goldman Sachs Group, L.P., a Delaware limited partnership (""Group L.P.''), together
with its consolidated subsidiaries (collectively, the ""Firm''), is a global investment banking and
securities Ñrm that provides a wide range of services worldwide to a substantial and diversiÑed
client base.
The Firm's activities are divided into three principal business lines:
‚ Investment Banking, which includes Ñnancial advisory services and underwriting;
‚ Trading and Principal Investments, which includes Ñxed income, currency and commodities
(""FICC''), equities and principal investments (principal investments reÖect primarily the
Firm's investments in its merchant banking funds); and
‚ Asset Management and Securities Services, which includes asset management, securities
services and commissions.

Note 2. SigniÑcant Accounting Policies

Basis of Presentation
The consolidated Ñnancial statements include the accounts of Group L.P. and its U.S. and
international subsidiaries including Goldman, Sachs & Co. (""GS&Co.'') and J. Aron & Company
in New York, Goldman Sachs International (""GSI'') in London and Goldman Sachs (Japan) Ltd.
(""GSJL'') in Tokyo. Certain reclassiÑcations have been made to prior year amounts to conform
to the current presentation.
These consolidated Ñnancial statements have been prepared in accordance with generally
accepted accounting principles that require management to make estimates and assumptions
regarding trading inventory valuations, partner retirements, the outcome of pending litigation and
other matters that aÅect the consolidated Ñnancial statements and related disclosures. These
estimates and assumptions are based on judgment and available information and, consequently,
actual results could be materially diÅerent from these estimates.
Unless otherwise stated herein, all references to 1996, 1997 and 1998 refer to the Firm's
Ñscal year ended, or the date, as the context requires, November 29, 1996, November 28, 1997
and November 27, 1998, respectively.

Cash and Cash Equivalents

The Firm deÑnes cash equivalents as highly liquid overnight deposits held in the ordinary
course of business.

Repurchase Agreements and Collateralized Financing Arrangements

Securities purchased under agreements to resell and securities sold under agreements to
repurchase, principally U.S. government, federal agency and investment-grade foreign sovereign
obligations, represent short-term collateralized Ñnancing transactions and are carried at their
contractual amounts plus accrued interest. These amounts are presented on a net-by-
counterparty basis, where management believes a legal right of setoÅ exists under an
enforceable master netting agreement. The Firm takes possession of securities purchased under
agreements to resell, monitors the market value of the underlying securities on a daily basis and
obtains additional collateral as appropriate.

F-7
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Securities borrowed and loaned are recorded on the statements of Ñnancial condition based
on the amount of cash collateral advanced or received. These transactions are generally
collateralized by either cash, securities or letters of credit. The Firm takes possession of
securities borrowed, monitors the market value of securities loaned and obtains additional
collateral as appropriate. Income or expense is recognized as interest over the life of the
transaction.

Financial Instruments
Gains and losses on Ñnancial instruments and commission income and related expenses are
recorded on a trade date basis in the consolidated statements of earnings. For purposes of the
consolidated statements of Ñnancial condition only, purchases and sales of Ñnancial instruments,
including agency transactions, are generally recorded on a settlement date basis. Recording such
transactions on a trade date basis would not result in a material adjustment to the consolidated
statements of Ñnancial condition.
Substantially all Ñnancial instruments used in the Firm's trading and non-trading activities are
carried at fair value or amounts that approximate fair value and unrealized gains and losses are
recognized in earnings. Fair value is based generally on listed market prices or broker or dealer
price quotations. To the extent that prices are not readily available, fair value is based on either
internal valuation models or management's estimate of amounts that could be realized under
current market conditions, assuming an orderly liquidation over a reasonable period of time.
Certain over-the-counter (""OTC'') derivative instruments are valued using pricing models that
consider, among other factors, current and contractual market prices, time value, and yield curve
and/or volatility factors of the underlying positions. The fair value of the Firm's trading and non-
trading assets and liabilities is discussed further in Notes 3, 4 and 5.

Principal Investments
Principal investments are carried at fair value, generally as evidenced by quoted market
prices or by comparable substantial third-party transactions. Where fair value is not readily
ascertainable, principal investments are recorded at cost or management's estimate of the
realizable value.
The Firm is entitled to receive merchant banking overrides (i.e., an increased share of a
fund's income and gains) when the return on the fund's investments exceeds certain threshold
returns. Overrides are based on investment performance over the life of each merchant banking
fund, and future investment underperformance may require amounts previously distributed to the
Firm to be returned to the funds. Accordingly, overrides are recognized in earnings only when
management determines that the probability of return is remote. Overrides are included in ""Asset
Management and Securities Services'' on the consolidated statements of earnings.

Derivative Contracts
Derivatives used for trading purposes are reported at fair value and are included in
""Derivative contracts'' on the consolidated statements of Ñnancial condition. Gains and losses on
derivatives used for trading purposes are included in ""Trading and Principal Investments'' on the
consolidated statements of earnings.
Derivatives used for non-trading purposes include interest rate futures contracts and interest
rate and currency swap agreements, which are primarily utilized to convert a substantial portion
of the Firm's Ñxed rate debt into U.S. dollar-based Öoating rate obligations. Gains and losses on

F-8
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

these transactions are generally deferred and recognized as adjustments to interest expense
over the life of the derivative contract. Gains and losses resulting from the early termination of
derivatives used for non-trading purposes are generally deferred and recognized over the
remaining life of the underlying debt. If the underlying debt is terminated prior to its stated
maturity, gains and losses on these transactions, including the associated hedges, are
recognized in earnings immediately.
Derivatives are reported on a net-by-counterparty basis on the consolidated statements of
Ñnancial condition where management believes a legal right of setoÅ exists under an enforceable
master netting agreement.

Property, Leasehold Improvements and Equipment

Depreciation and amortization generally are computed using accelerated cost recovery
methods for all property and equipment and for leasehold improvements where the term of the
lease is greater than the economic useful life of the asset. All other leasehold improvements are
amortized on a straight-line basis over the term of the lease.

Goodwill
The cost of acquired companies in excess of the fair value of net assets acquired at
acquisition date is recorded as goodwill and amortized over periods of 15 to 25 years on a
straight-line basis.

Provision for Taxes

The Firm accounts for income taxes incurred by its corporate subsidiaries in accordance with
Statement of Financial Accounting Standards (""SFAS'') No. 109, ""Accounting for Income
Taxes''. The consolidated statements of earnings for the periods presented include a provision
for, or beneÑt from, income taxes on income earned, or losses incurred, by Group L.P. and its
subsidiaries including a provision for, or beneÑt from, unincorporated business tax on income
earned, or losses incurred, by Group L.P. and its subsidiaries conducting business in New York
City. No additional income tax provision is required in the consolidated statements of earnings
because Group L.P. is a partnership and the remaining tax eÅects accrue directly to its partners.

Foreign Currency Translation

Assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar
are translated using currency exchange rates prevailing at the end of the period presented, while
revenues and expenses are translated using average exchange rates during the period. Gains or
losses resulting from the translation of foreign currency Ñnancial statements are recorded as
cumulative translation adjustments, and are included as a component of ""Partners' capital
allocated for income taxes and potential withdrawals'' on the consolidated statements of Ñnancial
condition. Gains or losses resulting from foreign exchange transactions are recorded in earnings.

Investment Banking
Underwriting revenues and fees from mergers and acquisitions and other corporate Ñnance
advisory assignments are recorded when the underlying transaction is completed under the terms
of the engagement. Syndicate expenses related to securities oÅerings in which the Firm acts as
an underwriter or agent are deferred until the related revenue is recognized.

F-9
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Accounting Developments
In June 1996, the Financial Accounting Standards Board (""FASB'') issued SFAS No. 125,
""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities'',
eÅective for transactions occurring after December 31, 1996. SFAS No. 125 establishes
standards for distinguishing transfers of Ñnancial assets that are accounted for as sales from
transfers that are accounted for as secured borrowings.
The provisions of SFAS No. 125 relating to repurchase agreements, securities lending
transactions and other similar transactions were deferred by the provisions of SFAS No. 127,
""Deferral of the EÅective Date of Certain Provisions of FASB Statement No. 125'', and became
eÅective for transactions entered into after December 31, 1997. This Statement requires that the
collateral obtained in certain types of secured lending transactions be recorded on the balance
sheet with a corresponding liability reÖecting the obligation to return such collateral to its owner.
EÅective January 1, 1998, the Firm adopted the provisions of SFAS No. 125 that were deferred
by SFAS No. 127. The adoption of this standard increased the Firm's total assets and liabilities
by $11.64 billion as of November 1998.
In February 1997, the FASB issued SFAS No. 128, ""Earnings Per Share'' (""EPS''), eÅective
for periods ending after December 15, 1997, with restatement required for all prior periods.
SFAS No. 128 establishes new standards for computing and presenting EPS. This Statement
replaces primary and fully diluted EPS with ""basic EPS'', which excludes dilution, and ""diluted
EPS'', which includes the eÅect of all potentially dilutive common shares and other dilutive
securities. Because the Firm has not historically reported EPS, this Statement will have no impact
on the Firm's historical Ñnancial statements. This Statement will, however, apply to Ñnancial
statements of the Firm prepared after the oÅerings.
In June 1997, the FASB issued SFAS No. 130, ""Reporting Comprehensive Income'', eÅective
for Ñscal years beginning after December 15, 1997, with reclassiÑcation of earlier periods
required for comparative purposes. SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components in the Ñnancial statements. The Firm
intends to adopt this standard in the Ñrst quarter of Ñscal 1999. This Statement is limited to
issues of reporting and presentation and, therefore, will not aÅect the Firm's results of operations
or Ñnancial condition.
In June 1997, the FASB issued SFAS No. 131, ""Disclosures about Segments of an
Enterprise and Related Information'', eÅective for Ñscal years beginning after December 15, 1997,
with reclassiÑcation of earlier periods required for comparative purposes. SFAS No. 131
establishes the criteria for determining an operating segment and establishes the disclosure
requirements for reporting information about operating segments. The Firm intends to adopt this
standard at the end of Ñscal 1999. This Statement is limited to issues of reporting and
presentation and, therefore, will not aÅect the Firm's results of operations or Ñnancial condition.
In February 1998, the FASB issued SFAS No. 132, ""Employers' Disclosures about Pensions
and Other Postretirement BeneÑts'', eÅective for Ñscal years beginning after December 15, 1997,
with restatement of disclosures for earlier periods required for comparative purposes.
SFAS No. 132 revises certain employers' disclosures about pension and other post-retirement
beneÑt plans. The Firm intends to adopt this standard at the end of Ñscal 1999. This Statement is
limited to issues of reporting and presentation and, therefore, will not aÅect the Firm's results of
operations or Ñnancial condition.
In March 1998, the Accounting Standards Executive Committee of the American Institute of
CertiÑed Public Accountants issued Statement of Position (""SOP'') No. 98-1, ""Accounting for

F-10
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

the Costs of Computer Software Developed or Obtained for Internal Use'', eÅective for Ñscal
years beginning after December 15, 1998. SOP No. 98-1 requires that certain costs of computer
software developed or obtained for internal use be capitalized and amortized over the useful life
of the related software. The Firm currently expenses the cost of all software development in the
period in which it is incurred. The Firm intends to adopt this Statement in Ñscal 2000 and is
currently assessing its eÅect.

In June 1998, the FASB issued SFAS No. 133, ""Accounting for Derivative Instruments and
Hedging Activities'', eÅective for Ñscal years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as derivatives), and
for hedging activities. This Statement requires that an entity recognize all derivatives as either
assets or liabilities in the statement of Ñnancial condition and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative instrument depends on its
intended use and the resulting designation. The Firm intends to adopt this standard in Ñscal 2000
and is currently assessing its eÅect.

Note 3. Financial Instruments

Financial instruments, including both cash instruments and derivatives, are used to manage
market risk, facilitate customer transactions, engage in trading transactions and meet Ñnancing
objectives. These instruments can be either executed on an exchange or negotiated in the OTC
market.

Transactions involving Ñnancial instruments sold, but not yet purchased, entail an obligation
to purchase a Ñnancial instrument at a future date. The Firm may incur a loss if the market value
of the Ñnancial instrument subsequently increases prior to the purchase of the instrument.

Fair Value of Financial Instruments

Substantially all of the Firm's assets and liabilities are carried at fair value or amounts that
approximate fair value.

Trading assets and liabilities, including derivative contracts used for trading purposes, are
carried at fair value and reported as Ñnancial instruments owned and Ñnancial instruments sold,
but not yet purchased on the consolidated statements of Ñnancial condition. Non-trading assets
and liabilities are carried at fair value or amounts that approximate fair value.

Non-trading assets include cash and cash equivalents, cash and securities segregated in
compliance with U.S. federal and other regulations, receivables from brokers, dealers and
clearing organizations, receivables from customers and counterparties, securities borrowed,
securities purchased under agreements to resell, right to receive securities and certain
investments, primarily those made in connection with the Firm's merchant banking activities.

Non-trading liabilities include short-term borrowings, payables to brokers, dealers and

clearing organizations, payables to customers and counterparties, securities loaned, securities
sold under agreements to repurchase, obligation to return securities, other liabilities and accrued
expenses and long-term borrowings. Fair value of the Firm's long-term borrowings and
associated hedges is discussed in Note 5.

F-11
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Trading and Principal Investments

The Firm's Trading and Principal Investments business facilitates customer transactions and
takes proprietary positions through market-making in and trading of securities, currencies,
commodities and swaps and other derivatives. Derivative Ñnancial instruments are often used to
hedge cash instruments or other derivative Ñnancial instruments as an integral part of the Firm's
strategies. As a result, it is necessary to view the results of any activity on a fully-integrated
basis, including cash positions, the eÅect of related derivatives and the Ñnancing of the
underlying positions.

Net revenues represent total revenues less allocations of interest expense to speciÑc
securities, commodities and other positions in relation to the level of Ñnancing incurred by each.
The following table sets forth the net revenues of the Firm's Trading and Principal Investments
business:
Year Ended November
1996 1997 1998
(in millions)
FICCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,749 $2,055 $1,438
Equities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 730 573 795
Principal investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 214 298 146
Total Trading and Principal Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,693 $2,926 $2,379

Risk Management

The Firm seeks to monitor and control its risk exposure through a variety of separate but
complementary Ñnancial, credit, operational and legal reporting systems for individual entities and
the Firm as a whole. Management believes that it has eÅective procedures for evaluating and
managing the market, credit and other risks to which it is exposed. The Management Committee,
the Firm's primary decision-making body, determines (both directly and through delegated
authority) the types of business in which the Firm engages, approves guidelines for accepting
customers for all product lines, outlines the terms under which customer business is conducted
and establishes the parameters for the risks that the Firm is willing to undertake in its business.

Market Risk. The Firmwide Risk Committee, which reports to senior management and
meets weekly, is responsible for managing and monitoring all of the Firm's risk exposures. In
addition, the Firm maintains segregation of duties, with credit review and risk-monitoring
functions performed by groups that are independent from revenue-producing departments.

The potential for changes in the market value of the Firm's trading positions is referred to as
""market risk''. The Firm's trading positions result from underwriting, market-making and
proprietary trading activities.

The broadly deÑned categories of market risk include exposures to interest rates, currency
rates, equity prices and commodity prices.

‚ Interest rate risks primarily result from exposures to changes in the level, slope and curvature
of the yield curve, the volatility of interest rates, mortgage prepayment speeds and credit
spreads.

‚ Currency rate risks result from exposures to changes in spot prices, forward prices and
volatilities of currency rates.

F-12
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

‚ Equity price risks result from exposures to changes in prices and volatilities of individual
equities, equity baskets and equity indices.

‚ Commodity price risks result from exposures to changes in spot prices, forward prices and
volatilities of commodities, such as electricity, natural gas, crude oil, petroleum products and
precious and base metals.

These risk exposures are managed through diversiÑcation, by controlling position sizes and
by establishing oÅsetting hedges in related securities or derivatives. For example, the Firm may
hedge a portfolio of common stock by taking an oÅsetting position in a related equity-index
futures contract. The ability to manage these exposures may, however, be limited by adverse
changes in the liquidity of the security or the related hedge instrument and in the correlation of
price movements between the security and the related hedge instrument.

Credit Risk. Credit risk represents the loss that the Firm would incur if a counterparty or
issuer of securities or other instruments it holds fails to perform its contractual obligations to the
Firm. To reduce its credit exposures, the Firm seeks to enter into netting agreements with
counterparties that permit the Firm to oÅset receivables and payables with such counterparties.
The Firm does not take into account any such agreements when calculating credit risk, however,
unless management believes a legal right of setoÅ exists under an enforceable master netting
agreement.

Credit concentrations may arise from trading, underwriting and securities borrowing activities
and may be impacted by changes in economic, industry or political factors. The Firm's
concentration of credit risk is monitored actively by the Credit Policy Committee. As of
November 1998, U.S. government and federal agency obligations represented 7% of the Firm's
total assets. In addition, most of the Firm's securities purchased under agreements to resell are
collateralized by U.S. government, federal agency and sovereign obligations.

Derivative Activities

Most of the Firm's derivative transactions are entered into for trading purposes. The Firm
uses derivatives in its trading activities to facilitate customer transactions, to take proprietary
positions and as a means of risk management. The Firm also enters into non-trading derivative
contracts to manage the interest rate and currency exposure on its long-term borrowings. Non-
trading derivatives related to the Firm's long-term borrowings are discussed in Note 5.

Derivative contracts are Ñnancial instruments, such as futures, forwards, swaps or option
contracts, that derive their value from underlying assets, indices, reference rates or a
combination of these factors. Derivatives may involve future commitments to purchase or sell
Ñnancial instruments or commodities, or to exchange currency or interest payment streams. The
amounts exchanged are based on the speciÑc terms of the contract with reference to speciÑed
rates, securities, commodities or indices.

Derivative contracts exclude certain cash instruments, such as mortgage-backed securities,

interest-only and principal-only obligations and indexed debt instruments, that derive their values
or contractually required cash Öows from the price of some other security or index. Derivatives
also exclude option features that are embedded in cash instruments, such as the conversion
features and call provisions embedded in bonds. The Firm has elected to include commodity-
related contracts in its derivative disclosure, although not required to do so, as these contracts
may be settled in cash or are readily convertible into cash.

F-13
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The gross notional (or contractual) amounts of derivative Ñnancial instruments represent the
volume of these transactions and not the amounts potentially subject to market risk. In addition,
measurement of market risk is meaningful only when all related and oÅsetting transactions are
taken into consideration. Gross notional (or contractual) amounts of derivative Ñnancial
instruments used for trading purposes with oÅ-balance-sheet market risk are set forth below:
As of November
1997 1998
(in millions)
Interest Rate Risk:
Financial futures and forward settlement contracts ÏÏÏÏÏÏÏÏÏÏÏ $334,916 $ 406,302
Swap agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 918,067 1,848,977
Written option contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 351,359 423,561
Equity Price Risk:
Financial futures and forward settlement contracts ÏÏÏÏÏÏÏÏÏÏÏ 7,457 7,405
Swap agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,993 2,752
Written option contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51,916 54,856
Currency and Commodity Price Risk:
Financial futures and forward settlement contracts ÏÏÏÏÏÏÏÏÏÏÏ 355,882 420,138
Swap agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,355 51,502
Written option contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 179,481 183,929
Market risk on purchased option contracts is limited to the market value of the option;
therefore, purchased option contracts have no oÅ-balance-sheet market risk. The gross notional
(or contractual) amounts of purchased option contracts used for trading purposes are set forth
below:
As of November
1997 1998
(in millions)
Purchased Option Contracts:
Interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $301,685 $509,770
Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,021 59,571
Currency and commodityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 180,859 186,748
The Firm utilizes replacement cost as its measure of derivative credit risk. Replacement cost,
as reported in Ñnancial instruments owned, at fair value on the consolidated statements of
Ñnancial condition, represents amounts receivable from various counterparties, net of any
unrealized losses owed where management believes a legal right of setoÅ exists under an
enforceable master netting agreement. Replacement cost for purchased option contracts is the
market value of the contract. The Firm controls its credit risk through an established credit
approval process, by monitoring counterparty limits, obtaining collateral where appropriate and,
in some cases, using legally enforceable master netting agreements.

F-14
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The fair value of derivative Ñnancial instruments used for trading purposes, computed in
accordance with the Firm's netting policy, is set forth below:
As of November
1997 1998
Assets Liabilities Assets Liabilities
(in millions)
Period End:
Forward settlement contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,634 $ 3,436 $ 4,061 $ 4,201
Swap agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,269 5,358 10,000 11,475
Option contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,787 7,166 7,140 9,038
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,690 $15,960 $21,201 $24,714
Monthly Average:
Forward settlement contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,351 $ 3,162 $ 4,326 $ 3,979
Swap agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,397 4,020 7,340 8,158
Option contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,511 5,059 6,696 8,958
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,259 $12,241 $18,362 $21,095

Note 4. Short-Term Borrowings

The Firm obtains secured short-term Ñnancing principally through the use of repurchase
agreements and securities lending agreements, collateralized mainly by U.S. government, federal
agency, investment grade foreign sovereign obligations and equity securities. The Firm obtains
unsecured short-term borrowings through issuance of commercial paper, promissory notes and
bank loans. The carrying value of these short-term obligations approximates fair value due to
their short-term nature.
Short-term borrowings are set forth below:
As of November
1997 1998
(in millions)
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,468 $10,008
Promissory notes(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,411 10,763
Bank loans and other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,129 6,659
Total(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21,008 $27,430

(1) As of November 1997 and November 1998, short-term borrowings included $2,454 million and $2,955 million of long-
term borrowings maturing within one year, respectively.
(2) Weighted average interest rates for total short-term borrowings, including commercial paper, were 5.43 % as of
November 1997 and 5.19% as of November 1998.

The Firm maintains unencumbered securities with a market value in excess of all
uncollateralized short-term borrowings.

F-15
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Note 5. Long-Term Borrowings

The Firm's long-term borrowings are set forth below:

As of November
1997 1998
(in millions)
Fixed-rate obligations(1)
U.S. dollar denominated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,217 $ 5,260
Non-U.S. dollar denominated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,556 2,066
Floating-rate obligations(2)
U.S. dollar denominated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,342 11,858
Non-U.S. dollar denominated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 552 722
Total long-term borrowings(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,667 $19,906

(1) Interest rate ranges for U.S. dollar and non-U.S. dollar Ñxed rate obligations are set forth below:

As of
November
1997 1998

U.S. dollar denominated

High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.10% 10.10%
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.82 5.74
Non-U.S. dollar denominated
High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.51 9.51
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.90 1.90

(2) Floating interest rates generally are based on LIBOR, the U.S. treasury bill rate or the federal funds rate. Certain
equity-linked and indexed instruments are included in Öoating rate obligations.
(3) Long-term borrowings bear Ñxed or Öoating interest rates and have maturities that range from 1 to 30 years from the
date of issue.

Long-term borrowings by maturity date are set forth below:

As of November 1997 As of November 1998

U.S. Non-U.S. U.S. Non-U.S.
Dollar Dollar Total Dollar Dollar Total
(in millions)
Maturity Dates:
1998ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,159 $ 135 $ 1,294 $ Ì $ Ì $ Ì
1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,436 451 2,887 2,443 199 2,642
2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,544 263 2,807 4,293 272 4,565
2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 971 142 1,113 2,261 148 2,409
2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,376 281 1,657 1,669 265 1,934
2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 941 109 1,050 1,409 412 1,821
2004-24ÏÏÏÏÏÏÏÏÏÏÏ 4,132 727 4,859 5,043 1,492 6,535
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,559 $2,108 $15,667 $17,118 $2,788 $19,906

F-16
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The Firm enters into non-trading derivative contracts, such as interest rate and currency
swap agreements, to eÅectively convert a substantial portion of its Ñxed rate long-term
borrowings into U.S. dollar-based Öoating rate obligations. Accordingly, the aggregate carrying
value of these long-term borrowings and related hedges approximates fair value. The eÅective
weighted average interest rates for long-term borrowings, after hedging activities, are set forth
below:

As of As of
November 1997 November 1998
Amount Rate Amount Rate
($ in millions)
Long-term borrowings:
Fixed-rate obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 291 7.76% $ 222 8.09%
Floating-rate obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,376 5.84 19,684 5.63
Total long-term borrowings ÏÏÏÏ $15,667 5.88 $19,906 5.66

The notional amounts, fair value and carrying value of the related swap agreements used for
non-trading purposes are set forth below:
As of November
1997 1998
(in millions)
Notional amount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,708 $10,206

As of November
1997 1998
Assets Liabilities Assets Liabilities
(in millions)
Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $212 $4 $519 $7
Carrying value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98 4 98 8

Note 6. Commitments and Contingencies

Litigation

The Firm is involved in a number of judicial, regulatory and arbitration proceedings

concerning matters arising in connection with the conduct of its businesses. Management
believes, based on currently available information, that the results of such proceedings, in the
aggregate, will not have a material adverse eÅect on the Firm's Ñnancial condition, but might be
material to the Firm's operating results for any particular period, depending, in part, upon the
operating results for such period.

Leases

The Firm has obligations under long-term non-cancelable lease agreements, principally for
oÇce space, expiring on various dates through 2016. Certain agreements are subject to periodic
escalation charges for increases in real estate taxes and other charges. Minimum rental
commitments, net of minimum sublease rentals, under non-cancelable leases for 1999 and the

F-17
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

succeeding four years and rent charged to operating expense for the last three years are set
forth below:
(in millions)
Minimum rental commitments:
1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 142
2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139
2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 139
2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 136
2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 128
ThereafterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 860
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,544

Net rent expense:

1996 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 83
1997 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87
1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104

Other Commitments
The Firm acts as an investor in merchant banking transactions which includes making long-
term investments in equity and debt securities in privately negotiated transactions, corporate
acquisitions and real estate transactions, and in connection with a bridge loan fund. In connection
with these activities, the Firm had commitments to invest up to $670 million and $1.39 billion in
corporate and real estate merchant banking investment and bridge loan funds as of November
1997 and November 1998, respectively.
In connection with loan origination and participation, the Firm had loan commitments of $5.23
billion and $1.51 billion as of November 1997 and November 1998, respectively. These
commitments are agreements to lend to counterparties, have Ñxed termination dates and are
contingent on all conditions to borrowing set forth in the contract having been met. Since these
commitments may expire unused, the total commitment amount does not necessarily reÖect the
actual future cash Öow requirements.
The Firm also had outstanding guarantees of $786 million and $790 million relating to its
fund management activities as of November 1997 and November 1998, respectively.
The Firm had pledged securities of $23.60 billion and $22.88 billion as collateral for securities
borrowed of approximately equivalent value as of November 1997 and November 1998,
respectively.
The Firm obtains letters of credit issued to counterparties by various banks that are used in
lieu of securities or cash to satisfy various collateral and margin deposit requirements. Letters of
credit outstanding were $10.13 billion and $8.81 billion as of November 1997 and Novem-
ber 1998, respectively.

Note 7. Employee BeneÑt Plans

The Firm sponsors various pension plans and certain other post-retirement beneÑt plans,
primarily health care and life insurance, which cover most employees worldwide. The Firm also
provides certain beneÑts to former or inactive employees prior to retirement. Plan beneÑts are
primarily based on the employee's compensation and years of service. Pension costs are

F-18
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

determined actuarially and are funded in accordance with the Internal Revenue Code. Plan assets
are held in a trust and consist primarily of listed stocks and U.S. bonds. A summary of these
plans is set forth below:

DeÑned BeneÑt Pension Plans

The components of pension expense/(income) are set forth below:
Year Ended November
1996 1997 1998
(in millions)
Service cost, beneÑts earned during the periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 15 $ 15 $ 14
Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 10 11
Return on plan assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (24) (18) (14)
Net amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 4 (1)
Total pension expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13 $ 11 $ 10
U.S. plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (1) $ (3) $ (3)
International plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14 14 13
Total pension expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13 $ 11 $ 10

The weighted average assumptions used to develop net periodic pension cost and the
actuarial present value of the projected beneÑt obligation are set forth below. The assumptions
represent a weighted average of the assumptions used for the U.S. and international plans and
are based on the economic environment of each applicable country.

Year Ended November

1996 1997 1998

U.S. Plans:
Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.50% 7.50% 7.00%
Rate of increase in future compensation levelsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.00 5.00 5.00
Expected long-term rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.50 7.50 7.50
International Plans:
Discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.70 5.70 5.00
Rate of increase in future compensation levelsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.30 5.30 4.75
Expected long-term rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.00 7.00 6.00

F-19
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The funded status of the qualiÑed plans is set forth below:

Year Ended
November
1997 1998
(in millions)
Actuarial present value of vested beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(149) $(203)
Accumulated beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (151) (207)
EÅect of future salary increases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16) (21)
Projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (167) (228)
Plan assets at fair market value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 187 208
Projected beneÑt obligation less than/(greater than) plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ 20 (20)
Unrecognized net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 43
Unrecognized net transition gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20) (18)
Prepaid pension cost, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $ 5
Prepaid Pension Cost:
U.S. plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $ 5
International plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì
Prepaid pension cost, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2 $ 5

Post-Retirement Plans
The Firm has unfunded post-retirement beneÑt plans that provide medical and life insurance
for eligible retirees, employees and dependents. The Firm's accrued post-retirement beneÑt
liability was $50 million and $53 million as of November 1997 and November 1998, respectively.
The Firm's expense for these plans was $6 million, $7 million and $6 million in the years ended
1996, 1997 and 1998, respectively.

Post-Employment Plans
Post-employment beneÑts include, but are not limited to, salary continuation, supplemental
unemployment beneÑts, severance beneÑts, disability-related beneÑts, and continuation of health
care and life insurance coverage provided to former or inactive employees after employment but
before retirement. The accrued but unfunded liability under the plans was $12 million and $10
million as of November 1997 and November 1998, respectively. The Firm's expense for these
plans was $2 million in each of the Ñscal years ended 1996, 1997 and 1998.

DeÑned Contribution Plans

The Firm contributes to employer sponsored U.S. and international deÑned contribution
plans. The Firm's contribution to the U.S. plans was $39 million, $44 million and $48 million for
the years ended 1996, 1997 and 1998, respectively. The Firm's contribution to the international
plans was $7 million, $14 million and $10 million for the years ended 1996, 1997 and 1998,
respectively.

F-20
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Note 8. Capital
Partners' Capital
Partners' capital includes both the general partner's and limited partners' capital and is
subject to certain withdrawal restrictions. As of November 1998, the Firm had $6.31 billion in
partners' capital. Managing directors that are participating limited partners in Group L.P.
(""PLPs'') who elect to retire are entitled to redeem their capital over a period of not less than
Ñve years following retirement, but often reinvest a signiÑcant portion of their capital as limited
partners for longer periods. Partners' capital was reduced by $368 million in 1998 due to the
termination of the ProÑt Participation Plans under which certain employees received payments
based on the earnings of the Firm. Partners' capital allocated for income taxes and potential
withdrawals represents management's estimate of net amounts currently distributable, primarily
to the PLPs, under the Partnership Agreement, for items including, among other things, income
taxes and capital withdrawals.
Sumitomo Bank Capital Markets, Inc. (""SBCM''), a limited partner that had capital invested
of approximately $834 million as of November 1998, may require Group L.P. to redeem its capital
over a Ñve-year period beginning no earlier than 2007. Kamehameha Activities Association
(""KAA''), a limited partner that had capital invested of approximately $757 million as of
November 1998, may require Group L.P. to redeem $391 million of its capital over a Ñve-year
period beginning no earlier than 2010 and $366 million of its capital over a Ñve-year period
beginning no earlier than 2013.
Institutional Limited Partners (other than SBCM and KAA) had aggregate capital invested of
$755 million as of November 1998. Group L.P. must repay these Institutional Limited Partners'
capital as follows: $270 million in six equal annual installments commencing in December 2001,
$257 million in March 2005, $146 million in November 2013 and $82 million in November 2023.
Group L.P. may defer any required redemption of capital if the redemption would cause a
subsidiary subject to regulatory authority to be in violation of the rules of such authority or if the
withdrawal of funds to satisfy the redemption from an unregulated subsidiary would have a
material eÅect on such subsidiary.

Regulated Subsidiaries
GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to the Securities and
Exchange Commission's ""Uniform Net Capital Rule'', and has elected to compute its net capital
in accordance with the ""Alternative Net Capital Requirement'' of that rule. As of November 1997
and November 1998, GS&Co. had regulatory net capital, as deÑned, of $1.77 billion and $3.25
billion, respectively, which exceeded the amounts required by $1.37 billion and $2.70 billion,
respectively.
GSI, a registered U.K. broker-dealer and subsidiary of Group L.P., is subject to the capital
requirements of the Securities and Futures Authority Limited and GSJL, a Tokyo-based broker-
dealer, is subject to the capital requirements of the Japanese Ministry of Finance and the
Financial Supervisory Agency. As of November 1997 and November 1998, GSI and GSJL were in
compliance with their local capital adequacy requirements.
Certain other subsidiaries of the Firm are also subject to capital adequacy requirements
promulgated by authorities of the countries in which they operate. As of November 1997 and
November 1998, these subsidiaries were in compliance with their local capital adequacy
requirements.

F-21
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Note 9. Geographic Data

The Firm's activities as an investment banking and securities Ñrm constitute a single
business segment pursuant to SFAS No. 14 ""Financial Reporting for Segments of a Business
Enterprise''.
Due to the highly integrated nature of international Ñnancial markets, the Firm manages its
business based on the proÑtability of the enterprise as a whole, not by geographic region.
Accordingly, management believes that proÑtability by geographic region is not necessarily
meaningful.
The total revenues, net revenues, pre-tax earnings and identiÑable assets of Group L.P. and
its consolidated subsidiaries by geographic region are summarized below:
Year Ended November
1996 1997 1998
(in millions)
Total Revenues:
Americas(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,864 $15,091 $15,972
Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,762 4,463 5,156
Asia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 663 879 1,350
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17,289 $20,433 $22,478

Net Revenues:
Americas(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,397 $ 5,104 $ 5,436
Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,355 1,739 2,180
Asia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 377 604 904
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,129 $ 7,447 $ 8,520

Pre-tax Earnings:
Americas(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,963 $ 2,061 $ 1,527
Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 536 683 913
Asia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 107 270 481
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,606 $ 3,014 $ 2,921

F-22
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

As of November
1996 1997 1998
(in millions)
IdentiÑable Assets:
Americas(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 171,345 $ 206,312 $ 229,412
Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,172 80,551 106,721
Asia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,894 13,240 19,883
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (88,365) (121,702) (138,636)
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 152,046 $ 178,401 $ 217,380

(1) Americas principally represents the United States.

Note 10. Quarterly Results (unaudited)

Year Ended November 1996
1st 2nd 3rd 4th
(in millions)
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,030 $4,656 $4,313 $4,290
Interest expense, principally on short-term funding ÏÏÏÏÏ 2,566 2,986 2,845 2,763
Revenues, net of interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,464 1,670 1,468 1,527
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 899 961 879 784
Pre-tax earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 565 709 589 743
Provision for taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21 23 31 132
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 544 $ 686 $ 558 $ 611

Year Ended November 1997

1st 2nd 3rd 4th
(in millions)
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,932 $4,608 $5,957 $4,936
Interest expense, principally on short-term funding ÏÏÏÏÏ 2,975 2,934 3,727 3,350
Revenues, net of interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,957 1,674 2,230 1,586
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,052 1,064 1,298 1,019
Pre-tax earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 905 610 932 567
Provision for taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44 99 60 65
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 861 $ 511 $ 872 $ 502

Year Ended November 1998

1st 2nd 3rd 4th
(in millions)
Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,903 $6,563 $5,735 $4,277
Interest expense, principally on short-term funding ÏÏÏÏÏ 3,431 3,574 3,591 3,362
Revenues, net of interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,472 2,989 2,144 915
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,450 1,952 1,389 808
Pre-tax earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,022 1,037 755 107
Provision for taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 138 190 102 63
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 884 $ 847 $ 653 $ 44

F-23
 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners,
The Goldman Sachs Group, L.P.:
We have reviewed the condensed consolidated statement of Ñnancial condition of The Goldman
Sachs Group, L.P. and Subsidiaries (the ""Firm'') as of February 26, 1999, and the related
condensed consolidated statements of earnings, and cash Öows for the three months ended
February 26, 1999 and February 27, 1998 and the related condensed consolidated statement of
changes in partners' capital for the three months ended February 26, 1999 (included on
pages F-25 to F-33 of this prospectus). These Ñnancial statements are the responsibility of the
Firm's management.
We conducted our review in accordance with standards established by the American Institute of
CertiÑed Public Accountants. A review of interim Ñnancial information consists principally of
applying analytical procedures to Ñnancial data and making inquiries of persons responsible for
Ñnancial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the Ñnancial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modiÑcations that should be made to the
accompanying condensed consolidated Ñnancial statements for them to be in conformity with
generally accepted accounting principles.

PricewaterhouseCoopers LLP

New York, New York

April 9, 1999.

F-24
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended
February
1998 1999
(unaudited)
(in millions)
Revenues:
Investment banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 633 $ 902
Trading and principal investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,115 1,398
Asset management and securities servicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 512 543
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,643 3,013
Total revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,903 5,856
Interest expense, principally on short-term funding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,431 2,861
Revenues, net of interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,472 2,995
Operating expenses:
Compensation and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,100 1,275
Brokerage, clearing and exchange fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93 111
Market development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54 77
Communications and technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58 78
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 97
Occupancy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44 78
Professional services and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 91
Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,450 1,807
Pre-tax earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,022 1,188
Provision for taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 138 181
Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 884 $1,007

The accompanying notes are an integral part of these

condensed consolidated Ñnancial statements.

F-25
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

As of
February
1999
(unaudited)
(in millions)
Assets:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,345
Cash and securities segregated in compliance with U.S. federal and other
regulations (principally U.S. government obligations) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,361
Receivables from brokers, dealers and clearing organizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,624
Receivables from customers and counterpartiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,311
Securities borrowedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 74,036
Securities purchased under agreements to resell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41,776
Right to receive securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,280
Financial instruments owned, at fair value:
Commercial paper, certiÑcates of deposit and time depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,413
U.S. government, federal agency and sovereign obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,580
Corporate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,080
Equities and convertible debentures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,298
State, municipal and provincial obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,021
Derivative contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,441
Physical commodities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 688
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,370
$230,624
Liabilities and Net Worth:
Short-term borrowings, including commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 33,863
Payables to brokers, dealers and clearing organizations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,294
Payables to customers and counterparties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,143
Securities loaned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,770
Securities sold under agreements to repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,906
Obligation to return securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,078
Financial instruments sold, but not yet purchased, at fair value:
U.S. government, federal agency and sovereign obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,391
Corporate debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,579
Equities and convertible debentures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,238
Derivative contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,677
Physical commodities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 267
Other liabilities and accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,022
Long-term borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,405
223,633
Commitments and contingencies
Accumulated other comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (37)
Partners' capital allocated for income taxes and potential withdrawals ÏÏÏÏÏÏÏÏÏÏÏÏ 416
Partners' capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,612
$230,624

The accompanying notes are an integral part of these

condensed consolidated Ñnancial statements.

F-26
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL

Period Ended
February
1999
(unaudited)
(in millions)
Partners' capital, beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,310
Additions:
Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,007
Capital contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48
Total additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,055
Deductions:
Returns on capital and certain distributions to partnersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (171)
Transfers to partners' capital allocated for income taxes and potential
withdrawals, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (582)
Total deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (753)
Partners' capital, end of periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,612

The accompanying notes are an integral part of these

condensed consolidated Ñnancial statements.

F-27
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
February
1998 1999
(unaudited)
(in millions)
Cash Öows from operating activities:
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 884 $ 1,007
Non-cash items included in net earnings:
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42 97
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 5
Changes in operating assets and liabilities:
Cash and securities segregated in compliance with U.S. federal and
other regulations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (191) 526
Net receivables from brokers, dealers and clearing organizations ÏÏÏÏÏ 233 260
Net payables to customers and counterparties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,950 (8,394)
Securities borrowed, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,579) (1,225)
Financial instruments owned, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (51,461) (2,267)
Financial instruments sold, but not yet purchased, at fair value ÏÏÏÏÏÏÏ 14,601 8,205
Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (759) (617)
Net cash used for operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (47,272) (2,403)
Cash Öows from investing activities:
Property, leasehold improvements and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (63) (103)
Financial instruments owned, at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (45) 58
Net cash used for investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (108) (45)
Cash Öows from Ñnancing activities:
Short-term borrowings, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,500 2,567
Securities sold under agreements to repurchase, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,157 (3,643)
Issuance of long-term borrowingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,630 4,468
Repayment of long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (608) (105)
Capital contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 48
Returns on capital and certain distributions to partners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (157) (171)
Partners' capital allocated for income taxes and potential
withdrawals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (309) (207)
Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50,219 2,957
Net increase in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,839 509
Cash and cash equivalents, beginning of periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,328 2,836
Cash and cash equivalents, end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,167 $ 3,345

Supplemental disclosures:
Cash payments for interest approximated the related expense for each of the Ñscal periods presented. Payments of
income taxes were not material.
The increases in total assets and liabilities related to the provisions of Statement of Financial Accounting Standards
No. 125 that were deferred under Statement of Financial Accounting Standards No. 127 were excluded from the
consolidated statements of cash Öows as they represented non-cash items.

The accompanying notes are an integral part of these

condensed consolidated Ñnancial statements.

F-28
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Description of Business

The Goldman Sachs Group, L.P., a Delaware limited partnership (""Group L.P.''), together
with its consolidated subsidiaries (collectively, the ""Firm''), is a global investment banking and
securities Ñrm that provides a wide range of services worldwide to a substantial and diversiÑed
client base.
The Firm's activities are divided into three principal business lines:
‚ Investment Banking, which includes Ñnancial advisory services and underwriting;
‚ Trading and Principal Investments, which includes Ñxed income, currency and commodities
(""FICC''), equities and principal investments (principal investments reÖect primarily the
Firm's investments in its merchant banking funds); and
‚ Asset Management and Securities Services, which includes asset management, securities
services and commissions.

Note 2. SigniÑcant Accounting Policies

Basis of Presentation
The consolidated Ñnancial statements include the accounts of Group L.P. and its U.S. and
international subsidiaries including Goldman, Sachs & Co. (""GS&Co.'') and J. Aron & Company
in New York, Goldman Sachs International (""GSI'') in London and Goldman Sachs (Japan) Ltd.
(""GSJL'') in Tokyo. The consolidated Ñnancial statements are unaudited and should be read in
conjunction with the audited consolidated Ñnancial statements included elsewhere in this
prospectus.
These consolidated Ñnancial statements have been prepared in accordance with generally
accepted accounting principles that require management to make estimates and assumptions
regarding trading inventory valuations, partner retirements, the outcome of pending litigation and
other matters that aÅect the consolidated Ñnancial statements and related disclosures. These
estimates and assumptions are based on judgment and available information and, consequently,
actual results could be materially diÅerent from these estimates.
The unaudited consolidated Ñnancial statements reÖect all adjustments, consisting only of
normal recurring adjustments, that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. Interim period operating results may
not be indicative of the operating results for a full year.
Unless otherwise stated herein, all references to February 1998 and February 1999 refer to
the Firm's Ñscal quarter ended, or the date, as the context requires, February 27, 1998 and
February 26, 1999, respectively.

Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, ""Reporting Comprehensive Income'', which establishes standards
for the reporting and presentation of comprehensive income and its components in the Ñnancial
statements. This Statement is eÅective for Ñscal years beginning after December 15, 1997 and
was adopted by the Firm in the Ñrst quarter of 1999. The components of comprehensive income
are set forth below:

F-29
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(UNAUDITED)

Three Months Ended

February
1998 1999
(in millions)
Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 884 $1,007
Other comprehensive loss
Foreign currency translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5) (6)
Total comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 879 $1,001

Note 3. Financial Instruments

Gains and losses on Ñnancial instruments and commission income and related expenses are
recorded on a trade date basis in the consolidated statements of earnings. For purposes of the
consolidated statement of Ñnancial condition only, purchases and sales of Ñnancial instruments,
including agency transactions, are generally recorded on a settlement date basis. Recording such
transactions on a trade date basis would not result in a material adjustment to the consolidated
statement of Ñnancial condition.

Substantially all Ñnancial instruments used in the Firm's trading and non-trading activities are
carried at fair value or amounts that approximate fair value and unrealized gains and losses are
recognized in earnings. Fair value is based generally on listed market prices or broker or dealer
price quotations. To the extent that prices are not readily available, fair value is based on either
internal valuation models or management's estimate of amounts that could be realized under
current market conditions, assuming an orderly liquidation over a reasonable period of time.
Certain over-the-counter derivative instruments are valued using pricing models that consider,
among other factors, current and contractual market prices, time value, and yield curve and/or
volatility factors of the underlying positions.

The Firm's Trading and Principal Investments business facilitates customer transactions and
takes proprietary positions through market-making in and trading of securities, currencies,
commodities and swaps and other derivatives. Derivative Ñnancial instruments are often used to
hedge cash instruments or other derivative Ñnancial instruments as an integral part of the Firm's
strategies. As a result, it is necessary to view the results of any activity on a fully-integrated
basis, including cash positions, the eÅect of related derivatives and the Ñnancing of the
underlying positions.

Net revenues represent total revenues less allocations of interest expense to speciÑc
securities, commodities and other positions in relation to the level of Ñnancing incurred by each.
The following table sets forth the net revenues of the Firm's Trading and Principal Investments
business:
Three Months Ended
February
1998 1999
(in millions)
FICC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 741 $ 876
Equities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 365 455
Principal investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 76 26
Total Trading and Principal Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,182 $1,357

F-30
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(UNAUDITED)

Derivative Activities
Most of the Firm's derivative transactions are entered into for trading purposes. The Firm
uses derivatives in its trading activities to facilitate customer transactions, to take proprietary
positions and as a means of risk management. The Firm also enters into non-trading derivative
contracts to manage the interest rate and currency exposure on its long-term borrowings.
Derivative contracts are Ñnancial instruments, such as futures, forwards, swaps or option
contracts, that derive their value from underlying assets, indices, reference rates or a
combination of these factors. Derivatives may involve future commitments to purchase or sell
Ñnancial instruments or commodities, or to exchange currency or interest payment streams. The
amounts exchanged are based on the speciÑc terms of the contract with reference to speciÑed
rates, securities, commodities or indices.
Derivative contracts exclude certain cash instruments, such as mortgage-backed securities,
interest-only and principal-only obligations and indexed debt instruments, that derive their values
or contractually required cash Öows from the price of some other security or index. Derivatives
also exclude option features that are embedded in cash instruments, such as the conversion
features and call provisions embedded in bonds. The Firm has elected to include commodity-
related contracts in its derivative disclosure, although not required to do so, as these contracts
may be settled in cash or are readily convertible into cash.
Derivatives used for trading purposes are reported at fair value and are included in
""Derivative contracts'' on the consolidated statement of Ñnancial condition. Gains and losses on
derivatives used for trading purposes are included in ""Trading and Principal Investments'' on the
consolidated statements of earnings.
The Firm utilizes replacement cost as its measure of derivative credit risk. Replacement cost,
as reported in Ñnancial instruments owned, at fair value on the consolidated statement of
Ñnancial condition, represents amounts receivable from various counterparties, net of any
unrealized losses owed where management believes a legal right of setoÅ exists under an
enforceable master netting agreement. Replacement cost for purchased option contracts is the
market value of the contract. The Firm controls its credit risk through an established credit
approval process, by monitoring counterparty limits, obtaining collateral where appropriate and,
in some cases, using legally enforceable master netting agreements.
The fair value of derivative Ñnancial instruments used for trading purposes, computed in
accordance with the Firm's netting policy, is set forth below:
As of
February 1999
Assets Liabilities
(in millions)
Forward settlement contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,991 $ 3,725
Swap agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,233 10,460
Option contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,140 8,484
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,364 $22,669

Derivatives used for non-trading purposes include interest rate futures contracts and interest
rate and currency swap agreements, which are primarily utilized to convert a substantial portion
of the Firm's Ñxed rate debt into U.S. dollar-based Öoating rate obligations. Gains and losses on
these transactions are generally deferred and recognized as adjustments to interest expense

F-31
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(UNAUDITED)

over the life of the derivative contract. Gains and losses resulting from the early termination of
derivatives used for non-trading purposes are generally deferred and recognized over the
remaining life of the underlying debt. If the underlying debt is terminated prior to its stated
maturity, gains and losses on these transactions, including the associated hedges, are
recognized in earnings immediately. The fair value and carrying value of derivatives used for non-
trading purposes are set forth below:
As of
February 1999
Assets Liabilities
(in millions)

Fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $319 $13

Carrying value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 77 8

Note 4. Short-Term Borrowings

The Firm obtains secured short-term Ñnancing principally through the use of repurchase
agreements and securities lending agreements, collateralized mainly by U.S. government, federal
agency, investment grade foreign sovereign obligations and equity securities. The Firm obtains
unsecured short-term borrowings through issuance of commercial paper, promissory notes and
bank loans. The carrying value of these short-term obligations approximates fair value due to
their short term nature.

Short-term borrowings are set forth below:

As of
February
1999
(in millions)
Commercial paperÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,740
Promissory notes* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,893
Bank loans and other* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,230
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $33,863

* As of February 1999, short-term borrowings included $6,285 million of long-term borrowings maturing within one year.

The Firm maintains unencumbered securities with a market value in excess of all
uncollateralized short-term borrowings.

Note 5. Regulated Subsidiaries

GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to the Securities and
Exchange Commission's ""Uniform Net Capital Rule'', and has elected to compute its net capital
in accordance with the ""Alternative Net Capital Requirement'' of that rule. As of February 1999,
GS&Co. had regulatory net capital, as deÑned, of $2.89 billion, which exceeded the amount
required by $2.40 billion.

GSI, a registered U.K. broker-dealer and subsidiary of Group L.P., is subject to the capital
requirements of the Securities and Futures Authority Limited and GSJL, a Tokyo-based broker-
dealer, is subject to the capital requirements of the Japanese Ministry of Finance and the
Financial Supervisory Agency. As of February 1999, GSI and GSJL were in compliance with their
local capital adequacy requirements.

F-32
 THE GOLDMAN SACHS GROUP, L.P. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(UNAUDITED)

Certain other subsidiaries of the Firm are also subject to capital adequacy requirements
promulgated by authorities of the countries in which they operate. As of February 1999, these
subsidiaries were in compliance with their local capital adequacy requirements.

Note 6. Contingencies
The Firm is involved in a number of judicial, regulatory and arbitration proceedings
concerning matters arising in connection with the conduct of its businesses. Management
believes, based on currently available information, that the results of such proceedings, in the
aggregate, will not have a material adverse eÅect on the Firm's Ñnancial condition, but might be
material to the Firm's operating results for any particular period, depending, in part, upon the
operating results for such period.

F-33
 UNDERWRITING
The Goldman Sachs Group, Inc., Suisse First Boston Corporation, Donaldson,
Sumitomo Bank Capital Markets, Inc., Lufkin & Jenrette Securities Corporation, Leh-
Kamehameha Activities Association and the man Brothers Inc., Merrill Lynch, Pierce, Fen-
underwriters for the U.S. oÅering (the ""U.S. ner & Smith Incorporated, J.P. Morgan
underwriters'') named below have entered Securities Inc., Morgan Stanley & Co. Incor-
into an underwriting agreement with respect porated, PaineWebber Incorporated, Pruden-
to the shares being oÅered in the United tial Securities Incorporated, Salomon Smith
States and Canada. Subject to certain condi- Barney Inc., Sanford C. Bernstein & Co., Inc.
tions, each U.S. underwriter has severally and Schroder & Co. Inc. are the representa-
agreed to purchase the number of shares tives of the U.S. underwriters.
indicated in the following table. Goldman,
Sachs & Co., Bear, Stearns & Co. Inc., Credit
Number of
U.S. Underwriters Shares
Goldman, Sachs & Co. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,116
Bear, Stearns & Co. Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Credit Suisse First Boston Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Donaldson, Lufkin & Jenrette Securities Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Lehman Brothers Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Merrill Lynch, Pierce, Fenner & Smith Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
J.P. Morgan Securities Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Morgan Stanley & Co. IncorporatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
PaineWebber Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Prudential Securities Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Salomon Smith Barney Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Sanford C. Bernstein & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
Schroder & Co. Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,572,107
BT Alex. Brown Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
BancBoston Robertson Stephens Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
CIBC World Markets Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Chase Securities Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
A.G. Edwards & Sons, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
EVEREN Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Hambrecht & Quist LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Edward D. Jones & Co., L.P. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Lazard Freres
fi & Co. LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Muriel Siebert & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
NationsBanc Montgomery Securities LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Nesbitt Burns Securities Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
RBC Dominion Securities Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Scotia Capital Markets (USA) Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
TD Securities (USA) Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Utendahl Capital Partners, L.P. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Wasserstein Perella Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
William Blair & Company, L.L.C. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 340,400
Advest, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Robert W. Baird & Co. Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
M. R. Beal & Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400

U-1
 Number of
U.S. Underwriters Shares
J.C. Bradford & Co. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ÏÏÏÏÏÏÏÏÏ 317,400
Gruntal & Co., L.L.C. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Keefe, Bruyette & Woods, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Legg Mason Wood Walker, Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
McDonald Investments Inc., A KeyCorp CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Neuberger Berman, LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Putnam, Lovell, de Guardiola & Thornton, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Ramirez & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
RONEY CAPITAL MARKETS, A division of BANC ONE CAPITAL
MARKETS, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Scott & Stringfellow, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Stephens Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Stifel, Nicolaus & Company Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Sutro & Co. Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Tucker Anthony Cleary Gull ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
U.S. Bancorp Piper JaÅray Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Wachovia Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317,400
Adams, Harkness & Hill, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Apex Securities, a division of Rice Financial Products Company ÏÏÏÏÏÏÏÏÏÏÏ 124,200
Arnhold and S. Bleichroeder, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
George K. Baum & CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Blaylock & Partners, L.P. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
The Buckingham Research Group IncorporatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Burnham Securities Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
The Chapman Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Chatsworth Securities LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Conning & Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Crowell, Weedon & Co. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
D.A. Davidson & Co. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Doft & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Doley Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Fahnestock & Co. Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Ferris, Baker Watts, IncorporatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Fifth Third Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
First Albany Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
First Security Van Kasper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
First Southwest CompanyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
First Union Capital Markets Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Fox-Pitt, Kelton Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Friedman, Billings, Ramsey & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Gerard Klauer Mattison & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Graicap, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Guzman & Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
HCFP/Brenner Securities, LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Hanifen, ImhoÅ Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
J.J.B. Hilliard, W.L. Lyons, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200

U-2
 Number of
U.S. Underwriters Shares
Hoak Breedlove Wesneski & Co. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
William R. Hough & Co. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Howard, Weil, Labouisse, Friedrichs IncorporatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Jackson Securities IncorporatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Janney Montgomery Scott Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
JeÅeries & Company, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Johnston, Lemon & Co. Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
C.L. King & Associates, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Kirkpatrick, Pettis, Smith, Polian Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Ladenburg, Thalmann & Co. Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Laidlaw Global Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Lam Securities Investments, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Loop Capital Markets, LLCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Mesirow Financial, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Morgan Keegan & Company, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Needham & Company, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Ormes Capital Markets, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Parker/Hunter IncorporatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Pennsylvania Merchant GroupÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Petrie Parkman & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Pryor & Company, LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Ragen MacKenzie Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Raymond James & Associates, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
The Robinson-Humphrey Company, LLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
SBK Brooks Investment Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Sanders Morris Mundy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Sandler O'Neill & Partners, L.P. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Sands Brothers & Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Seasongood & Mayer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Simmons & Company International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
SWM Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
SoundView Technology Group, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Southwest Securities, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Sterne, Agee & Leach, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Sturdivant & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
SunTrust Equitable Securities Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Sutter Securities Incorporated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
C.E. Unterberg, Towbin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Volpe Brown Whelan & Company, LLCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Walton Johnson & Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Wedbush Morgan Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
The Williams Capital Group, L.P. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
B.C. Ziegler and Company ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124,200
Ameritrade, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,500
DATEK ONLINE BROKERAGE SERVICES CORP. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,500

U-3
 Number of
U.S. Underwriters Shares
E*OÅering Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,500
GS-Online LLCÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,500
Charles Schwab & Co., Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,500
Wit Capital Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57,500
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,200,000

The U.S. underwriters had the option, if Asia/PaciÑc region and 4,000,000 shares in
they sold more than 48,000,000 shares, to the Asia/PaciÑc region. The terms and condi-
purchase up to an additional 7,200,000 shares tions of all three oÅerings are the same and
from The Goldman Sachs Group, Inc. The the sale of shares in all three oÅerings are
foregoing table reÖects the exercise, in full, by conditioned on each other. Goldman Sachs
the U.S. underwriters of such option. International, ABN AMRO Rothschild, Banque
Nationale de Paris, BAYERISCHE HYPO- und
Shares sold by the underwriters to the
VEREINSBANK Aktiengesellschaft, Caze-
public are being oÅered at the initial public
nove & Co., Commerzbank Aktiengesellschaft,
oÅering price set forth on the cover page of
Deutsche Bank AG London, ING Barings
this prospectus. Any shares sold by the
Limited as Agent for ING Bank N.V., London
underwriters to securities dealers may be sold
Branch, Kleinwort Benson Limited, MEDI-
at a discount of up to $1.35 per share from
OBANCA - Banca di Credito Finanziaro
the initial public oÅering price. Any such
S.p.A., Paribas and UBS AG, acting through
securities dealers may resell any shares pur-
its division Warburg Dillon Read, are repre-
chased from the underwriters to certain other
sentatives of the underwriters for the interna-
brokers or dealers at a discount of up to
tional oÅering outside of the United States,
$0.10 per share from the initial public oÅering
Canada and the Asia/PaciÑc region (the
price. If all of the shares are not sold at the
""International underwriters'') and Goldman
initial public oÅering price, the representatives
Sachs (Asia) L.L.C., BOCI Asia Limited,
may change the oÅering price and the other
China Development Industrial Bank Inc.,
selling terms.
China International Capital Corporation Lim-
The oÅer and sale by the underwriters of ited, Daiwa Securities (H.K.) Limited, The
the shares of common stock is subject to the Development Bank of Singapore Ltd, HSBC
underwriters having received and accepted Investment Bank Asia Limited, Jardine Flem-
the shares from The Goldman Sachs Group, ing Securities Limited, KOKUSAI Securities
Inc., Sumitomo Bank Capital Markets, Inc. (Hong Kong) Limited, Kotak Mahindra (Inter-
and Kamehameha Activities Association. In national) Limited, The Nikko Merchant Bank
addition, the underwriters may, in their sole (Singapore) Limited, Nomura International
discretion, reject all or any part of any order plc, Samsung Securities Co., Ltd., Standard
for the shares which is received by them. The Chartered Asia Limited and Were Stockbro-
underwriters expect to deliver the shares in king Limited are representatives of the under-
New York, New York on the date indicated on writers for the Asia/PaciÑc region oÅering
the front cover page of this prospectus in (the ""Asia/PaciÑc underwriters''). The Inter-
exchange for payment in immediately availa- national and Asia/PaciÑc underwriters have
ble funds. exercised, in full, their options to purchase
1,800,000 shares of common stock from The
The Goldman Sachs Group, Inc.,
Goldman Sachs Group, Inc.
Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association have en- The underwriters for each of the three
tered into underwriting agreements with un- oÅerings have entered into an agreement in
derwriters for the sale of 8,000,000 shares which they have agreed to restrictions on
outside of the United States, Canada and the where and to whom they and any dealer

U-4
purchasing from them may oÅer shares as a In connection with the oÅerings, the un-
part of the distribution of the shares. The derwriters may purchase and sell shares of
underwriters have also agreed that they may common stock in the open market. These
sell shares among each of the underwriting transactions may include short sales, stabiliz-
groups. ing transactions and purchases to cover posi-
tions created by short sales. Short sales
The Goldman Sachs Group, Inc., involve the sale by the underwriters of a
Sumitomo Bank Capital Markets, Inc., greater number of shares than they are
Kamehameha Activities Association, the par- required to purchase in the oÅerings. Stabiliz-
ties to the shareholders' agreement, including ing transactions consist of certain bids or
all of the directors and executive oÇcers of purchases made for the purpose of prevent-
The Goldman Sachs Group, Inc., and the ing or retarding a decline in the market price
retired limited partners have agreed not to of the common stock while the oÅerings are
dispose of or hedge any of their common in progress.
stock or securities convertible into or ex-
changeable for shares of common stock dur- The underwriters also may impose a
ing the period from the date of this penalty bid. This occurs when a particular
prospectus continuing through the date underwriter repays to the underwriters a por-
180 days after the date of this prospectus, tion of the underwriting discount received by
except with the prior written consent of it because the representatives have repur-
Goldman, Sachs & Co. This agreement does chased shares sold by or for the account of
not apply to the shares of common stock such underwriter in stabilizing or short cover-
underlying any awards described under ing transactions.
""Management Ì The Employee Initial Public These activities by the underwriters may
OÅering Awards'' that are received by per- stabilize, maintain or otherwise aÅect the
sons who are not managing directors or any market price of the common stock. As a
future awards granted under the stock incen- result, the price of the common stock may be
tive plan. See ""Shares Eligible for Future higher than the price that otherwise might
Sale'' for a discussion of certain transfer exist in the open market. If these activities
restrictions. are commenced, they may be discontinued by
Prior to the oÅerings, there has been no the underwriters at any time. These transac-
public market for the shares. The initial public tions may be eÅected on the NYSE, in the
oÅering price has been negotiated among The over-the-counter market or otherwise.
Goldman Sachs Group, Inc. and the repre- After the oÅerings, because Goldman,
sentatives. Among the factors considered in Sachs & Co. is a member of the NYSE and
determining the initial public oÅering price of because of its relationship to The Goldman
the shares, in addition to prevailing market Sachs Group, Inc., it will not be permitted
conditions, were The Goldman Sachs Group, under the rules of the NYSE to make markets
Inc.'s historical performance, estimates of the in or recommendations regarding the
business potential and earnings prospects of purchase or sale of the common stock. This
The Goldman Sachs Group, Inc., an assess- may adversely aÅect the trading market for
ment of The Goldman Sachs Group, Inc.'s the common stock.
management and the consideration of the
above factors in relation to market valuation Also, because of the relationship between
of companies in related businesses. Goldman, Sachs & Co. and GS-Online LLC
and The Goldman Sachs Group, Inc., the
The common stock will be listed on the oÅerings are being conducted in accordance
NYSE under the symbol ""GS''. In order to with Rule 2720 of the NASD. That rule
meet one of the requirements for listing the requires that the initial public oÅering price
common stock on the NYSE, the underwriters can be no higher than that recommended by
have undertaken to sell lots of 100 or more a ""qualiÑed independent underwriter'', as de-
shares to a minimum of 2,000 beneÑcial Ñned by the NASD. Donaldson, Lufkin &
holders. Jenrette Securities Corporation, Merrill Lynch,

U-5
Pierce, Fenner & Smith Incorporated and that their shares of the total expenses of the
Morgan Stanley & Co. Incorporated have oÅerings, excluding underwriting discounts
served in that capacity and performed due and commissions, will be approximately
diligence investigations and reviewed and par- $9,000,000, $100,000 and $100,000,
ticipated in the preparation of the registration respectively.
statement of which this prospectus forms a
The Goldman Sachs Group, Inc.,
part. Each of Donaldson, Lufkin & Jenrette
Sumitomo Bank Capital Markets, Inc. and
Securities Corporation, Merrill Lynch, Pierce,
Kamehameha Activities Association have
Fenner & Smith Incorporated and Morgan
agreed to indemnify the several underwriters
Stanley & Co. Incorporated has received
against certain liabilities, including liabilities
$10,000 from The Goldman Sachs Group, Inc.
under the Securities Act of 1933.
as compensation for such role.
Certain of the underwriters and their
The underwriters may not conÑrm sales
aÇliates have in the past provided, and may
to discretionary accounts without the prior
in the future from time to time provide,
written approval of the customer.
investment banking and general Ñnancing and
Goldman, Sachs & Co., Goldman Sachs banking services to The Goldman Sachs
International, Goldman Sachs (Asia) L.L.C. Group, L.P., The Goldman Sachs Group, Inc.
and GS-Online LLC are subsidiaries of The and their aÇliates for which they have in the
Goldman Sachs Group, Inc. In aggregate, past received, and may in the future receive,
these four aÇliated underwriters have sever- customary fees. The Goldman Sachs Group,
ally agreed to purchase approximately 4.8% L.P., The Goldman Sachs Group, Inc. and
of the shares being oÅered in the three their aÇliates have in the past provided, and
oÅerings. If any of the shares underwritten by may in the future from time to time provide,
these four aÇliates are sold by them at a similar services to the underwriters and their
price less than the initial public oÅering price, aÇliates on customary terms and for custom-
the net proceeds from the oÅerings to The ary fees.
Goldman Sachs Group, Inc. on a consolidated
This prospectus may be used by the
basis will be reduced because such aÇliates
underwriters and other dealers in connection
and The Goldman Sachs Group, Inc. are
with oÅers and sales of the shares, including
accounted for on a consolidated basis.
sales of shares initially sold by the underwrit-
The Goldman Sachs Group, Inc., ers in the oÅerings being made outside of the
Sumitomo Bank Capital Markets, Inc. and United States, to persons located in the
Kamehameha Activities Association estimate United States.

U-6
 The inside back cover of this prospectus is
a series of photographs of
Goldman Sachs employees participating in
our Community TeamWorks initiative.

The following text appears in the center of the page:

THE WORLD OF GOLDMAN SACHS

The dedication we bring to our professional relationships extends beyond the world of
Ñnance into our communities. At Goldman Sachs, we work side by side with our clients to "adopt'
schools, clean parks, build housing for those in need and engage in a host of other acts of
citizenship. Each volunteer relationship is an investment with returns that not only enrich our
communities, but also beneÑt our clientsÌby strengthening our sense of teamwork and enriching
our understanding of and appreciation for people and places beyond our daily responsibilities.
 The World of Goldman Sachs
The dedication we bring to our professional relation-
ships extends beyond the world of finance into our
communities. At Goldman Sachs, we work side by
side with our clients to “adopt” schools, clean parks,
build housing for those in need and engage in a host
11.75"

of other acts of citizenship. Each volunteer relation-

ship is an investment with returns that not only
enrich our communities, but also benefit our clients —
by strengthening our sense of teamwork and enriching
our understanding of and appreciation for people and
10.75"

places beyond our daily responsibilities.

8.25"

GOL200_B6320_Prospectus
 No dealer, salesperson or other person is
authorized to give any information or to
represent anything not contained in this
prospectus. You must not rely on any
unauthorized information or representations.
This prospectus is an oÅer to sell or to buy 69,000,000 Shares
only the shares oÅered hereby, but only under
circumstances and in jurisdictions where it is
lawful to do so. The information contained in
this prospectus is current only as of its date.
The Goldman Sachs
TABLE OF CONTENTS
Group, Inc.
Page
Our Business Principles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2
Prospectus Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 Common Stock
Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11
Use of ProceedsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22
Dividend Policy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22
Reports of Independent Accountants on
Pro Forma Consolidated Financial
InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23
Pro Forma Consolidated Financial
InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25
Dilution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32
Capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33
Selected Consolidated Financial DataÏÏÏ 34
Report of Independent Accountants on
Management's Discussion and
Analysis of Financial Condition and
Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37
Industry and Economic Outlook ÏÏÏÏÏÏÏÏ 63
Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66 Goldman, Sachs & Co.
Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91 Bear, Stearns & Co. Inc.
Principal and Selling Shareholders ÏÏÏÏÏ 104
Certain Relationships and Related Credit Suisse First Boston
Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 106 Donaldson, Lufkin & Jenrette
Description of Capital Stock ÏÏÏÏÏÏÏÏÏÏÏ 111
Shares Eligible for Future Sale ÏÏÏÏÏÏÏÏÏ 117
Lehman Brothers
Validity of Common Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏ 120 Merrill Lynch & Co.
Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 120 J.P. Morgan & Co.
Available Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 122
Index to Consolidated Financial Morgan Stanley Dean Witter
Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-1 PaineWebber Incorporated
Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ U-1 Prudential Securities
Salomon Smith Barney
Through and including May 28, 1999 (the Sanford C. Bernstein & Co., Inc.
25th day after the date of this prospectus), all Schroder & Co. Inc.
dealers eÅecting transactions in these
securities, whether or not participating in this Representatives of the Underwriters
oÅering, may be required to deliver a
prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting
as underwriters and with respect to their
unsold allotments or subscriptions.