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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2002

Commission File Number: 1-6862

Credit Suisse First Boston (USA), Inc.
(Exact name of registrant as specified in its charter)

(212) 325-2000
(Registrant's telephone number, including area code)

        The Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /x/    No

        All of the outstanding shares of common stock of the registrant, $0.10 par value, are held by Credit Suisse First Boston, Inc.

CREDIT SUISSE FIRST BOSTON (USA), INC.

Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2002

TABLE OF CONTENTS

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PART I

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)
(In millions)

See accompanying notes to condensed consolidated financial statements (unaudited).

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See accompanying notes to condensed consolidated financial statements (unaudited).

3

CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)
(In millions)

See accompanying notes to condensed consolidated financial statements (unaudited).

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CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)

For the Six Months Ended June 30, 2001 and June 30, 2002
(In millions)

See accompanying notes to condensed consolidated financial statements (unaudited).

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CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)
(In millions)

See accompanying notes to condensed consolidated financial statements (unaudited).

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CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)
(In millions)

See accompanying notes to condensed consolidated financial statements (unaudited).

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CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2002

1. Summary of Significant Accounting Policies

        Credit Suisse First Boston (USA), Inc., formerly known as Donaldson, Lufkin & Jenrette, Inc. ("DLJ") and subsidiaries (the "Company"), is a leading integrated investment bank serving institutional, corporate, government and individual clients. The Company provides clients with a broad range of products and services which include securities underwriting, sales and trading, investment banking, financial advisory services, private equity investments, investment research, full service brokerage services, financial services outsourcing solutions, and derivative and risk management products.

        The condensed consolidated financial statements include Credit Suisse First Boston (USA), Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company is a wholly owned subsidiary of Credit Suisse First Boston, Inc. ("CSFBI") and was acquired on November 3, 2000 (the "Acquisition"). No adjustments of the historical carrying values of the Company's assets and liabilities to reflect the Acquisition by CSFBI were recorded in the Company's historical consolidated financial statements. Similarly, although the Acquisition gave rise to goodwill, none of this goodwill was "pushed down" to the Company. For further discussion of the Acquisition, see the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

        Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America but is not required for interim reporting purposes has been condensed or omitted. These condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal, recurring accruals), which are necessary for a fair presentation of the condensed consolidated statements of financial condition and income for the interim periods presented.

        The results of operations for interim periods are not necessarily indicative of results for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

        To prepare condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management must estimate certain amounts that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses. Actual results could differ from those estimates.

        In the second quarter 2002, the Company purchased residential mortgage whole loans which are being held for trading purposes. Mortgage whole loans held for trading purposes are carried at fair value in the condensed consolidated statements of financial condition, with changes in fair value included in principal transactions-net in the consolidated statements of income. Mortgage whole loans held for sale are carried at the lower of aggregate cost or fair value in the condensed consolidated statements of financial condition. The amount by which aggregate cost exceeds fair value is reflected in principal transactions-net in the condensed consolidated statements of income.

        In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. The pooling of interest method is not permitted. The Company previously adopted SFAS 141 for all business combinations initiated after June 30, 2001. Effective January 1, 2002, the Company adopted the remaining provisions of SFAS 141.

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        In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires that goodwill and indefinite-lived intangible assets be reviewed annually for impairment instead of being amortized to earnings. Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment. Effective January 1, 2002, the Company adopted SFAS 142. During the second quarter of 2002, the Company completed the transitional impairment test of goodwill as of January 1, 2002 and determined that there was no impairment to goodwill and no effect on the Company's consolidated financial condition or results of operations as of January 1, 2002. There have been no events or circumstances occurring subsequent to the transitional impairment test that would more likely than not have resulted in the fair value of the Company's reporting units being below their respective carrying values. See note 15 for more information on goodwill and identifiable intangible assets.

        In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. Management believes that the adoption of SFAS 143 will not have a significant impact on the Company's consolidated financial condition or results of operations.

        In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which replaces FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 144 requires that long-lived assets which are "held for sale" be measured at the lower of carrying amount or fair value less cost to sell and also broadens the reporting requirements for discontinued operations. This statement is effective for fiscal years beginning after December 15, 2001, and is to be applied prospectively. Effective January 1, 2002, the Company adopted SFAS 144. There was no impact on the Company's consolidated financial condition or results of operations as a result of adopting SFAS 144.

        In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The statement is effective for fiscal years beginning after May 15, 2002. Management is evaluating the impact of adopting SFAS 145.

        In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which requires companies to recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with restructuring, a discontinued operations, plant closing, or other exit or disposal activity. The statement is effective for exit or disposal activities initiated after December 31, 2002. Management is evaluating the impact of adopting SFAS 146.

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        In June 2002, the FASB issued an Exposure Draft, "Proposed Interpretation: Consolidation of Certain Special-Purpose Entities—an Interpretation of ARB No. 51". This Proposed Interpretation would address consolidation by business enterprises of special purpose entities ("SPEs") to which the usual condition for consolidation described in Accounting Research Bulletin No. 51, Consolidated Financial Statements, does not apply because the SPEs have no voting interests or otherwise are not subject to control through ownership of voting interests. If the Proposed Interpretation were adopted, off balance sheet treatment would be eliminated for many transactions that were structured by companies under current accounting guidance. Management is evaluating the impact of having to adopt the Proposed Interpretation.

        The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred income taxes are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not.

        On January 31, 2002, the Company acquired the assets of Holt Value Associates, L.P., a leading provider of independent research and valuation services to asset managers, which was integrated with CSFBEdge, the Company's online research and valuation database service.

        In the first quarter of 2002, the Company sold three of its broker-dealers, CSFBdirect LLC, DLJdirect Ltd. and Autranet, LLC. As a result, the Company recorded a pre-tax gain of $528 million in the quarter ended March 31, 2002.

        Certain reclassifications have been made to prior year condensed consolidated financial statements to conform to the 2002 presentation.

2. Merger-Related Costs

        Merger-related costs represent retention awards related to the Acquisition, which are being expensed over the vesting period. The vesting period is generally three years. The remaining retention awards of $345 million at June 30, 2002 are expected to be charged against earnings in the following periods:

3. Related Party Transactions

        Credit Suisse Group ("CSG"), through CSFBI, owns all of our outstanding voting common stock. The Company is involved in significant financing and other transactions, and has significant related party balances, with Credit Suisse First Boston and certain of its subsidiaries and affiliates. The Company enters into these transactions in the ordinary course of business and believes that these transactions are on market terms that could be obtained from unrelated third parties.

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        The following table sets forth related party assets and liabilities:

        Included in these related party transactions are revenues and expenses resulting from various securities trading, investment banking and financing activities with certain affiliates, as well as fees for administrative services performed by the Company under the terms of various service level arrangements. Service level fees are treated as a reduction of other operating expenses in the condensed consolidated statements of income.

        The following table sets forth related party revenues and expenses:

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        Pursuant to an agreement, the Company sold at cost, without recourse, to CSFBI the right, title and interest in certain assets aggregating $410.2 million and $216.2 million at June 30, 2002 and December 31, 2001, respectively.

        The CSG Share Plan (the "Plan") provides for equity-based awards to the Company's employees based on CSG registered shares. Pursuant to the Plan, employees of the Company may be granted, as compensation, stock or other equity-based awards. The provisions of the Plan include a provision to deliver CSG registered shares to the employees as compensation for services performed. To the extent that CSFBI does not require reimbursement from the Company for these awards, amounts are considered a capital contribution to the Company and credited to paid-in capital.

        As part of our securitization activities, the Company sells residential and commercial mortgage loans to an affiliate at market value. The affiliate then securitizes these assets. For the six months ended June 30, 2002, the Company sold $11.7 billion of commercial and residential mortgage loans to an affiliate.

4. Income Taxes

        The Company is included in a consolidated federal income tax return and combined New York State and New York City income tax returns filed by CSFBI. CSFBI allocates federal, state and local income taxes to its subsidiaries on a separate return basis. Any resulting liability is paid currently to CSFBI. Any credits for losses will be paid by CSFBI to the Company to the extent that such credits are for tax benefits that have been utilized in the consolidated federal or combined state and local income tax return. CSFBI allocated current tax expense of $29 million and $132 million to the Company for the six months ended June 30, 2002 and 2001, respectively. Prior to the Acquisition, the Company filed its own U.S. consolidated federal income tax return.

        Income taxes included in the condensed consolidated statements of income include the following:

        The following table summarizes the difference between the "expected" tax provision, which is computed by applying the statutory tax rate to income before provision for income taxes, and the actual

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provision for income taxes, which is computed by using the effective tax rate for the six months ended June 30, 2002 and 2001:

        Deferred tax assets and deferred tax liabilities are generated by the following temporary differences:

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        Management has determined that the realization of the recognized gross deferred tax asset of $1.7 billion and $2.4 billion at June 30, 2002 and December 31, 2001, respectively, is more likely than not based on anticipated future taxable income. In addition, for federal income tax purposes, the Company has planning strategies available that may enhance its ability to utilize these tax benefits. However, if estimates of future taxable income are reduced, the amount of the deferred tax asset considered realizable could also be reduced. Further, due to uncertainty concerning the Company's ability to generate the necessary amount and mix of state and local taxable income in future periods, the Company continues to maintain a valuation allowance against its deferred state and local tax asset in the amount of $42 million and $62 million, at June 30, 2002 and December 31, 2001, respectively.

5. Transfers and Servicing of Financial Assets

        As of June 30, 2002 and December 31, 2001, the fair market value of assets that the Company has pledged to counterparties was $170.0 billion and $143.5 billion, respectively, of which $51.9 billion and $42.3 billion, respectively, is included in financial instruments owned. The Company has also received similar assets as collateral where it has the right to re-pledge or sell the assets. As of June 30, 2002 and December 31, 2001, the fair market value of the assets pledged to the Company was $162.8 billion and $135.2 billion, respectively. The Company routinely re-pledges or lends these assets to third parties.

        As part of the Company's securitization activities, commercial and residential mortgages are sold to qualifying entities or SPEs and securitized. Beneficial interests in those entities are sold to investors. The investors and the securitization entities have no recourse to the Company's assets. For the six months ended June 30, 2002, the Company securitized $3 billion in residential mortgages. For the six months ended June 30, 2002, net loss recognized on these transactions was $21.2 million. For the six months ended June 30, 2001, the Company securitized $202.3 million in residential mortgages. For the six months ended June 30, 2001, net loss recognized on these transactions was $0.7 million. In addition, for the six months ended June 30, 2002 and 2001, the Company sold $11.7 billion and $6.5 billion, respectively, of residential and commercial mortgages to an affiliate, which were subsequently securitized. The Company's primary broker-dealer subsidiary acting as underwriter has unsold positions of $537 million and $528 million at June 30, 2002 and 2001, respectively, associated with these transactions.

6. Borrowings

        Short-term borrowings are generally demand obligations with interest approximating the Federal Funds rate, LIBOR or other money market indices. Such borrowings are generally used to facilitate the securities settlement process, to finance securities inventories, and to finance securities purchased by customers on margin.

        At June 30, 2002 and December 31, 2001, there were no borrowings secured by Company-own securities.

        The Company has two commercial paper programs exempt from registration under the Securities Act of 1933, which allows the Company to issue up to $7.0 billion in commercial paper. At June 30, 2002 and December 31, 2001, $1.4 billion and $1.2 billion, respectively, of commercial paper was outstanding under these programs.

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        The following table sets forth the Company's long-term borrowings:

        In May 2002, the Company replaced its $3.5 billion revolving credit facility with a new 364-day $3.0 billion revolving credit facility available to the Company as borrower. Proceeds from borrowings under this facility can be used for general corporate purposes and the facility is guaranteed by Credit Suisse Group. The facility contains customary covenants that the Company believes will not impair its ability to obtain funding. At June 30, 2002, no borrowings were outstanding under this facility.

        Under the Company's currently effective $10 billion shelf registration statement on file with the Securities and Exchange Commission, which allows the Company to issue from time to time senior and subordinated debt securities and warrants to purchase such securities, the Company had at August 13, 2002 approximately $8.5 billion available for issuance. During the six months ended June 30, 2002, under this and predecessor shelf registration statements, the Company issued both medium-term notes and longer-dated fixed income securities to extend the maturity profile of the Company's debt. In the six months ended June 30, 2002, the Company issued $2.75 billion 6¹/2% notes due 2012, $1.75 billion 5³/4% notes due 2007 and $2.7 billion in medium-term notes off current and predecessor shelf registration statements and $822 million in Euro medium-term notes under the Company's $5 billion program established in July 2001. On July 19, 2002, the Company issued $1.0 billion 7¹/8% senior notes due 2032 off its shelf registration statement.

        For the six months ended June 30, 2002 and 2001, interest paid on all borrowings and financing arrangements was $2.2 billion and $6.4 billion, respectively. At June 30, 2002 and December 31, 2001, the Company had entered into interest rate and currency swaps on $7.0 billion and $3.3 billion, respectively, of its senior and medium-term notes. See note 10 for more discussion on derivatives.

7. Private equity and other long-term investments

        Private equity and other long-term investment activities include direct investments and investments in partnerships that make private equity and related investments in various portfolio companies and funds. The Company's subsidiaries act as general partner for many of these private equity partnerships. These investments are carried at estimated fair value in the condensed consolidated financial statements. These investments are primarily in unlisted or illiquid equity or equity-related securities. At June 30, 2002 and December 31, 2001, the Company had investments of $776 million and $963 million, respectively, and had commitments to invest up to an additional $2.1 billion and $1.7 billion, respectively. The cost of these investments was $1.1 billion and $1.2 billion at June 30, 2002, and December 31, 2001, respectively.

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Changes in net unrealized (depreciation) appreciation arising from changes in fair value or upon realization are reflected in principal transactions-net in the condensed consolidated statements of income.

8. Net Capital

        The Company's principal wholly owned subsidiaries, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") and Credit Suisse First Boston Corporation ("CSFB Corp."), are registered broker-dealers, registered futures commission merchants and member firms of The New York Stock Exchange, Inc. (the "NYSE"). As such, they are subject to the NYSE's net capital rule, which conforms to the Uniform Net Capital Rule pursuant to Rule 15c3-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under the alternative method permitted by this rule, the required net capital may not be less than two percent of aggregate debit balances arising from customer transactions or four percent of segregated funds, whichever is greater. If a member firm's capital is less than four percent of aggregate debit balances, the NYSE may require the firm to reduce its business. If a member firm's net capital is less than five percent of aggregate debit balances, the NYSE may prevent the firm from expanding its business and declaring cash dividends. At June 30, 2002, DLJSC's and CSFB Corp.'s net capital of approximately $1.6 billion and $3.5 billion, respectively, was 32.97 percent and 114.24 percent, respectively, of aggregate debit balances and in excess of the minimum requirement by approximately $1.5 billion and $3.4 billion, respectively. The Company's broker-dealer lite entity, Credit Suisse First Boston Capital LLC, is also subject to the uniform net capital rule, but calculates its net capital requirements under Appendix F of SEC Rule 15c3-1. The Company's London-based broker-dealer subsidiaries are subject to the requirements of the Financial Services Authority. Certain other subsidiaries are also subject to capital adequacy requirements. At June 30, 2002, the Company and its subsidiaries complied with all applicable regulatory capital adequacy requirements.

9. Cash and Securities Segregated Under Federal and Other Regulations

        In compliance with the Commodities Exchange Act, the Company segregates funds deposited by customers and funds accruing to customers as a result of trades or contracts. As of June 30, 2002 and December 31, 2001, cash and securities aggregating $1.5 billion and $1.0 billion, respectively, were segregated or secured in separate accounts on behalf of customers.

        In accordance with the Securities and Exchange Commission's no action letter dated November 3, 1998, the Company computed a reserve requirement for the proprietary accounts of introducing broker-dealers. As of June 30, 2002, and December 31, 2001, securities aggregating $40.3 million and $40.4 million, respectively, were segregated on behalf of introducing broker-dealers.

        In addition, U.S. Treasury securities with a market value of $4.2 billion and $5.3 billion, as of June 30, 2002 and December 31, 2001, respectively, were segregated in a special reserve bank account to benefit customers as required by Rule 15c3-3 of the Securities and Exchange Commission.

10. Derivative Contracts

        The Company uses derivative contracts for both trading and hedging purposes. These derivatives include options, forwards, futures and swaps. Most of the Company's derivatives transactions are accounted for as trading positions.

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Hedging Derivatives

        The Company manages its interest rate exposure on its fixed-rate debt by using interest rate swaps that qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). These financials instruments are accounted for as fair value hedges, with changes in fair value included in other revenues in the condensed consolidated statements of income.

        The effectiveness of hedging relationships is evaluated using quantitative measures of correlation. If a hedge relationship is not found to be highly effective, it no longer qualifies as a hedge and any subsequent gains or losses attributable to the hedged item cease to be recognized, while the subsequent changes in the derivative instrument's fair value are recognized in earnings, in each reporting period. There were no gains or losses on derivatives that were excluded from the assessment of effectiveness during the six months ended June 30, 2002.

        Other derivatives used for hedging purposes that do not qualify as hedges under SFAS 133 are carried at fair value with changes in value included in principal transactions-net in the condensed consolidated statements of income. For the six months ended June 30, 2002 and 2001, the Company recognized an after tax gain (loss) of ($4.0) million and $3.4 million, respectively, for these derivatives.

Trading Derivatives

Options

        The Company writes option contracts specifically designed to meet customer needs or for asset/liability management purposes. These options do not expose the Company to credit risk since the Company, not its counterparty, is obligated to perform. At the beginning of the contract period, the Company receives a cash premium. During the contract period, the Company bears the risk of unfavorable changes in the value of the financial instruments underlying the options ("market risk"). To manage this market risk, the Company purchases or sells cash or derivative financial instruments on a proprietary basis. Such purchases and sales may include debt and equity securities, forward and futures contracts and options.

        The Company also purchases options for trading purposes. With purchased options, the Company gets the right, for a fee, to buy or sell the underlying instrument at a fixed price on or before a specified date. The underlying instruments for these options include mortgage-backed securities, equities, foreign currencies and interest rate instruments or indices. The counterparties to these purchases are reviewed to determine whether they are creditworthy.

Forwards and Futures

        The Company enters into forward purchases and sales contracts for mortgage-backed securities and foreign currencies. In addition, the Company enters into futures contracts on equity-based indices, foreign currencies and other financial instruments as well as options on futures contracts.

        For forward contracts, cash is generally not required at inception; cash equal to the contract value is required at settlement. For futures contracts, the original margin is required generally in cash at inception; cash equal to the change in market value is required daily.

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        Since forward contracts are subject to the financial reliability of the counterparty, the Company is exposed to credit risk. To monitor this credit risk, the Company limits transactions with specific counterparties, reviews credit limits and adheres to internally established credit extension policies. For futures contracts and options on futures contracts, the change in the market value is settled with a clearing broker in cash each day. As a result, the credit risk with the clearing broker is limited to the net positive change in the market value for a single day.

Swaps

        The Company's swap agreements consist primarily of interest rate and equity swaps. Interest rate swaps are contractual agreements to exchange interest rate payments based on agreed notional amounts and maturity.

        Equity swaps are contractual agreements to receive the appreciation or depreciation in value based on a specific strike price on an equity instrument in exchange for paying another rate, which is usually based on index or interest rate movements.

Quantitative Disclosures for All Derivatives

        The fair values of all derivatives contracts outstanding at June 30, 2002 and December 31, 2001 were as follows:

        These instruments are included as derivatives contracts in financial instruments owned/sold not yet purchased in the condensed consolidated statements of financial condition.

11. Financial Instruments With Off Balance Sheet Risk

        In the normal course of business, the Company's customer, trading and clearance activities include executing, settling and financing various securities and financial instrument transactions. To execute these transactions, the Company purchases and sells (including "short sales") securities, and purchases and sells forward contracts for mortgage-backed securities and foreign currencies and financial futures contracts. If the customer or counterparty to the transaction is unable to fulfill its contractual obligations, and margin requirements are not sufficient to cover losses, the Company may be exposed to off balance sheet risk. In these situations, the Company may be required to purchase or sell financial instruments at prevailing market prices, which may not fully cover the obligations of its customers or counterparties. This risk is limited by requiring customers and counterparties to maintain margin collateral that complies with regulatory and internal guidelines. Additionally, with respect to the Company's clearance activities,

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introducing brokers are required to guarantee the performance of their customers to meet contractual obligations.

        As part of the Company's financing and securities settlement activities, the Company uses securities as collateral to support various secured financing sources. If the counterparty does not meet its contractual obligation to return securities used as collateral, the Company may be exposed to the risk of reacquiring the securities at prevailing market prices to satisfy its obligations. The Company controls this risk by monitoring the market value of securities pledged each day and by requiring collateral levels to be adjusted in the event of excess market exposure.

        The Company enters into forward contracts under which securities and currency are delivered or received in the future at a specified price or yield. If counterparties are unable to perform under the terms of the contracts or if the value of securities or currency interest rates changes, the Company is exposed to risk. Such risk is controlled by monitoring the market value of the securities contracted for each day and by reviewing the creditworthiness of the counterparties.

        The settlement of the above transactions is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations.

12. Concentrations of Credit Risk

        As a securities broker and dealer, the Company is engaged in various securities trading and brokerage activities servicing a diverse group of domestic and foreign corporations, governments, and institutional and individual investors. A substantial portion of the Company's transactions is executed with and on behalf of institutional investors including other brokers and dealers, mortgage brokers, commercial banks, U.S. agencies, mutual funds and other financial institutions. These transactions are generally collateralized. Credit risk is the potential for loss resulting from the default by a counterparty of its obligations. Exposure to credit risk is generated by securities and currency settlements, contracting derivative and forward transactions with customers and dealers, and the holding in inventory of bonds and/or loans. The Company uses various means to manage its credit risk. The creditworthiness of all counterparties is analyzed at the outset of a credit relationship with the Company. These counterparties are subsequently reviewed on a periodic basis. The Company sets a maximum exposure limit for each counterparty, as well as for groups or classes of counterparties. Furthermore, the Company enters into master netting agreements when feasible and demands collateral from certain counterparties or for certain types of credit transactions.

        The Company's customer securities activities are transacted either in cash or on a margin basis, in which the Company extends credit to the customer. The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral to comply with various regulatory and internal guidelines. The Company monitors required margin levels each day and requires customers to deposit additional collateral, or reduce positions, when necessary.

13. Commitments and Contingent Liabilities

        The Company had commitments of approximately $2.1 billion and $1.7 billion at June 30, 2002 and December 31, 2001, respectively, to invest in or on a side-by-side basis with partnerships that make private equity and related investments in various portfolio companies or other private equity funds.

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        The Company was contingently liable for letters of credit aggregating approximately $638 million and $588 million at June 30, 2002 and December 31, 2001, respectively. These letters of credit satisfy various collateral requirements.

        As of June 30, 2002 and December 31, 2001, the Company had commitments to enter into securities purchased under agreements to resell and securities sold under agreements to repurchase of approximately $1.0 billion and $3.0 billion, respectively. See "Contractual Obligations and Contingent Commitments" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this report.

14. Industry Segment and Geographic Data

        The Company operates and manages its businesses through three operating divisions: Investment Banking and Private Equity Division ("IBD"), Securities Division consisting of Equity and Fixed Income and Financial Services Division.

        Such divisions are managed based on types of products and services offered and their related client bases. The Company evaluates the performance of its divisions based primarily on income (loss) before income taxes and cumulative effect of a change in accounting principle.

        IBD raises and invests capital and provides financial advice to companies throughout the United States and abroad. Through IBD, the Company manages and underwrites offerings of securities, arranges private placements, provides client advisory and other services, pursues private equity investments in a variety of areas, and provides venture capital to companies.

        Securities Division:

The Equity business trades, conducts research on, originates and distributes equity securities and equity-related derivatives.

The Fixed Income business trades, conducts research on, originates and distributes fixed income securities and fixed income-related derivatives, and places private debt instruments.

        Financial Services Division provides a broad array of services to individual high-net-worth investors and the financial intermediaries that represent them. This division also provides introducing broker services, clearing, research and trading services.

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