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SECURITIES AND EXCHANGE COMMISSION

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FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

               For the quarterly period ended August 31, 2001

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

               For the transition period                                              to

Commission File Number: 001-14965

The Goldman Sachs Group, Inc.

Delaware		13-4019460
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)
85 Broad Street, New York, NY		10004
(Address of Principal Executive Offices)		(Zip Code)

(212) 902-1000

          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.           x      Yes      o      No

APPLICABLE ONLY TO CORPORATE ISSUERS

           As of October 5, 2001, there were 478,515,305 shares of the registrant’s common stock outstanding.

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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Review Report of Independent Accountants
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
EX-12.1 STMT. RE: COMP. OF RATIOS TO FIXED CHARGES
EX-15.1 LTR. RE: UNAUDITED INTERIM FINANCIAL INFO.

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The Goldman Sachs Group, Inc.

FORM 10-Q

				Page No.
PART I:		FINANCIAL INFORMATION
Item  1:		Financial Statements (Unaudited)
		Condensed Consolidated Statements of Earnings for the three and nine months ended August 31, 2001 and August 25, 2000			2
		Condensed Consolidated Statements of Financial Condition as of August 31, 2001 and November 24, 2000			3
		Condensed Consolidated Statements of Cash Flows for the nine months ended August 31, 2001 and August 25, 2000			4
		Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended August 31, 2001 and August 25, 2000			5
		Notes to Condensed Consolidated Financial Statements			6
		Review Report of Independent Accountants			13
Item  2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item  3:		Quantitative and Qualitative Disclosures About Market Risk			23
PART II:		OTHER INFORMATION
Item  1:		Legal Proceedings			27
Item  5:		Other Information			27
Item  6:		Exhibits and Reports on Form 8-K			28
Signatures					29

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PART I: FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

				Three Months								Nine Months
				Ended August								Ended August
				2001				2000				2001				2000
				(in millions, except per share amounts)
Revenues
Global capital markets
	Investment banking			$	1,080			$	1,316			$	2,995			$	4,131
	Trading and principal investments				1,267				2,112				5,128				5,543
Asset management and securities services					1,049				872				3,462				2,758
Interest income					3,964				4,551				13,435				12,579
		Total revenues			7,360				8,851				25,020				25,011
Interest expense					3,699				4,324				12,636				11,836
	Revenues, net of interest expense				3,661				4,527				12,384				13,175
Operating expenses
Compensation and benefits					1,794				2,263				6,068				6,587
Amortization of employee initial public offering and acquisition awards					112				102				371				314
Brokerage, clearing and exchange fees					218				136				619				419
Market development					90				126				316				343
Communications and technology					145				111				451				304
Depreciation and amortization					160				112				439				301
Amortization of goodwill and other intangible assets					66				7				192				21
Occupancy					142				116				453				312
Professional services and other					167				181				503				464
		Total non-compensation expenses			988				789				2,973				2,164
		Total operating expenses			2,894				3,154				9,412				9,065
Pre-tax earnings					767				1,373				2,972				4,110
Provision for taxes					299				549				1,159				1,644
Net earnings				$	468			$	824			$	1,813			$	2,466
Earnings per share
Basic				$	0.92			$	1.71			$	3.54			$	5.10
Diluted					0.87				1.62				3.33				4.85
Dividends paid per common share				$	0.12			$	0.12			$	0.36			$	0.36
Average common shares outstanding
Basic					508.1				481.3				512.3				483.4
Diluted					539.7				508.9				544.6				508.2

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

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

			As of
			August 2001				November 2000
			(in millions, except share
			and per share amounts)
Assets
Cash and cash equivalents			$	4,631			$	3,870
Cash and securities segregated in compliance with U.S. federal and other regulations				22,754				17,132
Receivables from brokers, dealers and clearing organizations				5,904				6,226
Receivables from customers and counterparties				26,832				33,060
Securities borrowed				92,784				82,409
Securities purchased under agreements to resell				37,907				37,324
Right to receive securities				1,884				4,264
Financial instruments owned, at fair value				97,560				95,260
Other assets				11,773				10,215
			$	302,029			$	289,760
Liabilities and Shareholders’ Equity
Short-term borrowings, including commercial paper			$	38,230			$	33,471
Payables to brokers, dealers and clearing organizations				1,739				3,871
Payables to customers and counterparties				89,932				78,277
Securities loaned				11,359				9,215
Securities sold under agreements to repurchase				36,784				30,996
Obligation to return securities				2,436				3,355
Financial instruments sold, but not yet purchased, at fair value				67,364				74,889
Other liabilities and accrued expenses				5,952				7,761
Long-term borrowings				30,275				31,395
				284,071				273,230
Commitments and contingencies
Shareholders’ Equity
Preferred stock, par value $0.01 per share; 150,000,000 shares authorized, no shares issued and outstanding				—				—
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 498,913,303 and 489,964,838 shares issued, as of August 2001 and November 2000, respectively				5				5
Restricted stock units				4,642				4,760
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding				—				—
Additional paid-in capital				11,781				11,127
Retained earnings				4,933				3,294
Unearned compensation				(1,465	)			(1,878	)
Accumulated other comprehensive loss				(138	)			(130	)
Treasury stock, at cost, par value $0.01 per share; 19,048,736 and 6,490,145 shares as of August 2001 and November 2000, respectively				(1,800	)			(648	)
	Total shareholders’ equity			17,958				16,530
			$	302,029			$	289,760

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

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

					Nine Months
					Ended August
					2001				2000
					(in millions)
Cash flows from operating activities
	Net earnings				$	1,813			$	2,466
	Noncash items included in net earnings
		Depreciation and amortization				439				301
		Amortization of goodwill and other intangible assets				192				21
		Stock-based compensation				623				576
	Changes in operating assets and liabilities
		Cash and securities segregated in compliance with U.S. federal and other regulations				(5,622	)			(5,235	)
		Net receivables from brokers, dealers and clearing organizations				(1,795	)			614
		Net payables to customers and counterparties				17,883				6,619
		Securities borrowed, net of securities loaned				(8,221	)			(11,847	)
		Financial instruments owned, at fair value				(2,309	)			(9,187	)
		Financial instruments sold, but not yet purchased, at fair value				(5,732	)			10,173
		Other, net				(2,334	)			474
			Net cash used for operating activities			(5,063	)			(5,025	)
Cash flows from investing activities
	Property, leasehold improvements and equipment					(1,136	)			(990	)
	Business combinations, net of cash acquired					(271	)			—
	Other, net					(288	)			(118	)
			Net cash used for investing activities			(1,695	)			(1,108	)
Cash flows from financing activities
	Short-term borrowings, net					(1,110	)			(5,092	)
	Issuance of long-term borrowings					4,894				13,157
	Repayment of long-term borrowings					(144	)			(327	)
	Securities sold under agreements to repurchase, net of agreements to resell					5,205				(1,396	)
	Common stock repurchased					(1,152	)			(65	)
	Dividends paid					(174	)			(163	)
			Net cash provided by financing activities			7,519				6,114
		Net increase/(decrease) in cash and cash equivalents				761				(19	)
Cash and cash equivalents, beginning of year						3,870				3,055
Cash and cash equivalents, end of period					$	4,631			$	3,036

Cash payments for interest approximated the related expense for each of the fiscal periods presented.

Payments of income taxes were $1.23 billion and $1.59 billion for the nine months ended August 2001 and August 2000, respectively.

Noncash activities:

The value of common stock issued in connection with business combinations was $223 million for the nine months ended August 2001.

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

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

		Three Months								Nine Months
		Ended August								Ended August
		2001				2000				2001				2000
		(in millions)
Net earnings		$	468			$	824			$	1,813			$	2,466
Currency translation adjustment, net of tax			30				(16	)			(8	)			(126	)
Comprehensive income		$	498			$	808			$	1,805			$	2,340

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

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

Note 1.  Description of Business

      The Goldman Sachs Group, Inc. (“Group Inc.”), a Delaware corporation, together with its consolidated subsidiaries (collectively, the “firm”), is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base.

      The firm’s activities are divided into two segments:

	•	Global Capital Markets. This segment comprises Investment Banking, which includes Financial Advisory and Underwriting, and Trading and Principal Investments, which includes Fixed Income, Currency and Commodities (“FICC”), Equities and Principal Investments (Principal Investments primarily represents net revenues from the firm’s merchant banking investments); and
	•	Asset Management and Securities Services. This segment comprises Asset Management, Securities Services and Commissions.

Note 2.  Significant Accounting Policies

  Basis of Presentation

      The condensed consolidated financial statements include the accounts of Group Inc. and its U.S. and international subsidiaries including Goldman, Sachs & Co. (“GS&Co.”), J. Aron & Company and Spear, Leeds & Kellogg, L.P. (“SLK”) in New York, Goldman Sachs International (“GSI”) in London and Goldman Sachs (Japan) Ltd. (“GSJL”) in Tokyo. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements incorporated by reference in the Annual Report on Form 10-K of Group Inc. for the fiscal year ended November 24, 2000. The condensed consolidated financial information as of November 24, 2000 has been derived from audited consolidated financial statements not included herein. Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation. All material intercompany transactions and balances have been eliminated.

      These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make estimates and assumptions regarding trading inventory valuations, the outcome of pending litigation and other matters that affect the consolidated financial statements and related disclosures. These estimates and assumptions are based on judgment and available information and, consequently, actual results could be materially different from these estimates.

      These unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results in 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 August 2001 and August 2000 refer to the firm’s fiscal periods ended, or the date, as the context requires, August 31, 2001 and August 25, 2000, respectively. All references to November 2000 refer to the firm’s fiscal year ended, or the date, as the context requires, November 24, 2000.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

  Accounting Developments

      In September 2000, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125”, which revises the standards for accounting for securitizations and other transfers of financial assets and collateral. In addition, specific implementation guidelines were established to further distinguish transfers of financial assets that are sales from transfers that are secured borrowings. During the second quarter of 2001, the firm adopted the provisions of SFAS No. 140 relating to transfers of financial assets and securitizations, which became effective for transfers occurring after March 31, 2001. The provisions of SFAS No. 140 relating to the accounting for collateral are effective as of the end of the firm’s current fiscal year and are not expected to have a material effect on the firm’s financial condition or results of operations. Accordingly, the firm accounted for collateral under the provisions of SFAS No. 125 through the third quarter of 2001. Pursuant to the collateral provisions of SFAS No. 125, total assets and liabilities were increased by $2.62 billion and $5.35 billion as of August 2001 and November 2000, respectively.

      In June 2001, the FASB issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that companies use the purchase method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside a business combination and the recognition and measurement of goodwill and other intangible assets subsequent to acquisition. Under the new standards, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but, instead, will be tested at least annually for impairment. Other intangible assets will continue to be amortized over their useful lives. The firm intends to adopt the new standards on accounting for goodwill and other intangible assets on December 1, 2001, the beginning of fiscal 2002. Application of the non-amortization provisions of SFAS No. 142 is currently expected to result in an increase in net earnings of approximately $95 million in 2002. Cash flows will not be affected. During 2002, the firm will perform the required impairment tests of goodwill and indefinite-lived intangible assets as of December 1, 2001. Management does not expect these tests to have a material effect on the firm’s financial condition or results of operations.

Note 3.  Financial Instruments

  Fair Value of Financial Instruments

      Gains and losses on financial instruments and commission income and related expenses are recorded on a trade date basis in the condensed consolidated statements of earnings. The condensed consolidated statements of financial condition generally reflect purchases and sales of financial instruments, including agency transactions, on a trade date basis.

      Substantially all financial instruments used in the firm’s trading and nontrading 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, or if liquidating the firm’s position is reasonably expected to affect market prices, 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. Over-the-counter derivative instruments are valued using pricing models that consider, among other

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

factors, current and contractual market prices, time value, and yield curve and/or volatility factors of the underlying positions.

      The following table sets forth the firm’s financial instruments owned, at fair value:

		As of August 2001								As of November 2000
		Assets				Liabilities				Assets				Liabilities
		(in millions)
Commercial paper, certificates of deposit and time deposits		$	1,045			$	—			$	866			$	—
U.S. government, federal agency and sovereign obligations			25,351				16,966				24,038				23,580
Corporate debt			13,912				5,684				13,317				3,988
Equities and convertible debentures			21,458				11,187				21,481				8,829
State, municipal and provincial obligations			437				—				499				—
Derivative contracts			35,024				32,919				34,627				37,815
Physical commodities			333				608				432				677
Total		$	97,560			$	67,364			$	95,260			$	74,889

  Derivative Activities

      On November 25, 2000, the firm adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. The adoption of this statement did not have a material effect on the firm’s statements of financial condition or the results of operations. 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. It requires that an entity recognize all derivatives as either assets or liabilities on the statement of financial 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.

      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. Risk exposures are managed through diversification, by controlling position sizes and by establishing hedges in related securities or derivatives. For example, the firm may hedge a portfolio of common stock by taking an offsetting position in a related equity-index futures contract. Gains and losses on derivatives used for trading purposes are generally included in “Trading and principal investments” on the condensed consolidated statements of earnings.

      The firm also enters into derivative contracts, which are designated as fair-value hedges, to manage the interest rate and currency exposure on its long-term borrowings. These derivatives generally include interest rate futures contracts, interest rate swap agreements and currency swap agreements, which are primarily utilized to convert a substantial portion of the firm’s fixed rate debt into U.S. dollar-based floating rate obligations. The gains and losses associated with the ineffective portion of the fair value hedges were included in “Trading and principal investments” on the condensed consolidated statement of earnings and were immaterial for the three and nine months ended August 2001.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Derivative contracts are financial 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 financial instruments or commodities, or to exchange currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified 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 flows 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.

      Derivative contracts are reported on a net-by-counterparty basis on the firm’s condensed consolidated statements of financial condition where management believes a legal right of setoff exists under an enforceable netting agreement. The fair value of derivative financial instruments, computed in accordance with the firm’s netting policy, is set forth below:

		As of August 2001								As of November 2000(1)
		Assets				Liabilities				Assets				Liabilities
		(in millions)
Forward settlement contracts		$	5,318			$	5,207			$	6,315			$	6,748
Swap agreements			18,510				14,592				15,770				16,321
Option contracts			11,196				13,120				12,543				15,118
Total		$	35,024			$	32,919			$	34,628			$	38,187

(1)	Includes the fair value of nontrading derivative contracts previously accounted for under the accrual basis.

  Securitization Activities

      The firm securitizes commercial mortgages and residential mortgages and home equity loans, government and corporate bonds, lease and trade receivables, and other types of financial assets. Gains or losses on securitizations are determined with reference to the carrying amount of the financial assets transferred, which is allocated to the assets sold and the retained interests, if any, based on their relative fair values at the date of transfer. To ascertain fair value for retained interests, quoted market prices are used if readily available. When quoted market prices are not readily available, the firm generally estimates fair value using pricing models that consider, among other factors, credit risk, prepayment rates, forward yield curves, volatilities and discount rates commensurate with the risks involved. Retained interests in securitized assets were not material as of August 2001. During the nine months ended August 2001, the firm securitized $29.9 billion of financial assets.

  Secured Borrowing and Lending Activities

      The firm enters into secured borrowing and lending transactions to obtain securities for settlement, to finance inventory positions and to meet customers’ needs. In these transactions,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the firm either provides or receives collateral including U.S. government, federal agency and investment-grade non-U.S. sovereign obligations.

      The firm receives collateral in connection with resale agreements, securities lending transactions, derivative transactions, customer margin loans and other secured lending activities. In many cases, the firm is permitted to sell or repledge securities held as collateral. These securities may be used to secure repurchase agreements, enter into securities lending or derivative transactions, or cover short positions. As of August 2001, the fair value of securities received as collateral by the firm that it was permitted to sell or repledge was $258.1 billion, of which $213.7 billion was sold or repledged.

      The firm also pledges its own assets to collateralize repurchase agreements and other secured financings. As of August 2001, the carrying value of securities included in “Financial instruments owned, at fair value” that had been loaned or pledged to creditors was $31.0 billion, including $16.7 billion loaned or pledged to counterparties that do not have the right to sell or repledge.

Note 4.  Short-Term Borrowings

      The firm obtains secured short-term financing 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
		August 2001				November 2000
		(in millions)
Commercial paper		$	8,559			$	10,721
Promissory notes			16,356				14,516
Bank loans and other(1)			13,315				8,234
Total		$	38,230			$	33,471

(1)	As of August 2001 and November 2000, short-term borrowings included $7.28 billion and $4.06 billion of long-term borrowings maturing within one year, respectively.

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

Note 5.  Earnings Per Share

      Earnings per share (“EPS”) is computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic EPS is calculated by dividing net earnings by the weighted average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The computations of basic and diluted EPS are set forth below:

			Three Months								Nine Months
			Ended August								Ended August
			2001				2000				2001				2000
			(in millions, except per share amounts)
Numerator for basic and diluted EPS — earnings available to common stockholders			$	468			$	824			$	1,813			$	2,466
Denominator for basic EPS — weighted average number of common shares				508.1				481.3				512.3				483.4
Effect of dilutive securities
	Restricted stock units			22.5				17.1				21.4				14.8
	Stock options			9.1				10.5				10.9				10.0
Dilutive potential common shares				31.6				27.6				32.3				24.8
Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares				539.7	(1)			508.9				544.6				508.2
Basic EPS			$	0.92			$	1.71			$	3.54			$	5.10
Diluted EPS				0.87				1.62				3.33				4.85

(1)	The exercise prices for approximately one million options exceeded the average market prices for the three months ended August  2001. Therefore, these options were considered to be antidilutive and were excluded from the diluted EPS computation.

Note 6.  Commitments and 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 effect on the firm’s financial 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.

Note 7.  Regulated Subsidiaries

      GS&Co. and SLK are registered U.S. broker-dealers and futures commission merchants subject to Rule 15c3-1 under the Securities Exchange Act of 1934 and Rule 1.17 under the Commodity Exchange Act which specify uniform minimum net capital requirements, as defined, for their registrants. GS&Co. and SLK have elected to compute their net capital in accordance with the “Alternative Net Capital Requirement” as permitted by Rule 15c3-1. As of August 2001, GS&Co. had regulatory net capital, as defined, of $3.97 billion, which exceeded the amount required by $3.33 billion. As of August 2001, SLK had regulatory net capital, as defined, of $963 million, which exceeded the amount required by $934 million.

      GSI, a registered U.K. broker-dealer, 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 Financial Services Agency. As of August 2001, GSI and GSJL were in compliance with their local capital adequacy requirements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 August 2001, these subsidiaries were in compliance with their local capital adequacy requirements.

Note 8.  Business Segments

      In reporting to management, the firm’s operating results are categorized into two principal segments: Global Capital Markets, and Asset Management and Securities Services. For a further discussion of the firm’s segments, see the firm’s Annual Report on Form 10-K for the fiscal year ended November 2000.

      Management believes that the following information provides a reasonable representation of each segment’s contribution to consolidated pre-tax earnings and total assets:

				Three Months								Nine Months
				Ended August								Ended August
				2001				2000				2001				2000
				(in millions)
Global Capital		Net revenues		$	2,337			$	3,436			$	8,127			$	9,753
Markets		Operating expenses			1,960				2,211				6,432				6,389
		Pre-tax earnings		$	377			$	1,225			$	1,695			$	3,364
		Segment assets		$	147,404			$	143,039			$	147,404			$	143,039
Asset Management		Net revenues		$	1,324			$	1,091			$	4,257			$	3,422
and Securities Services		Operating expenses			849				841				2,684				2,362
		Pre-tax earnings		$	475			$	250			$	1,573			$	1,060
		Segment assets		$	153,860			$	130,974			$	153,860			$	130,974
Total		Net revenues		$	3,661			$	4,527			$	12,384			$	13,175
		Operating expenses(1)			2,894				3,154				9,412				9,065
		Pre-tax earnings		$	767			$	1,373			$	2,972			$	4,110
		Total assets(2)		$	302,029			$	275,004			$	302,029			$	275,004

(1)	Includes the amortization of employee initial public offering awards that has not been allocated to the firm’s segments.
(2)	Includes deferred tax assets relating to the firm’s conversion to corporate form and certain assets that management believes are not allocable to a particular segment.

Note 9.  Subsequent Event

      The Board of Directors of Group Inc. declared a dividend of $0.12 per share to be paid on November 26, 2001, to common shareholders of record on October 29, 2001.

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Review Report of Independent Accountants

To the Directors and Shareholders,

      We have reviewed the accompanying condensed consolidated statement of financial condition of The Goldman Sachs Group, Inc. and Subsidiaries (the “Company”) as of August 31, 2001, the related condensed consolidated statements of earnings for the three and nine months ended August 31, 2001 and August 25, 2000, the condensed consolidated statements of cash flows for the nine months ended August 31, 2001 and August 25, 2000, and the condensed consolidated statements of comprehensive income for the three and nine months ended August 31, 2001 and August 25, 2000. These condensed financial statements are the responsibility of the Company’s management.

      We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

      Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

      We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial condition of The Goldman Sachs Group, Inc. and Subsidiaries as of November 24, 2000, and the related consolidated statements of earnings, changes in shareholders’ equity, cash flows and comprehensive income for the year ended November 24, 2000 (not presented herein); in our report dated January 19, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of November 24, 2000, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.

/s/ PricewaterhouseCoopers LLP

New York, New York

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Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

      Goldman Sachs is a leading global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base.

      Our activities are divided into two segments:

	•	Global Capital Markets. This segment comprises Investment Banking, which includes Financial Advisory and Underwriting, and Trading and Principal Investments, which includes Fixed Income, Currency and Commodities (“FICC”), Equities and Principal Investments (Principal Investments primarily represents net revenues from our merchant banking investments); and
	•	Asset Management and Securities Services. This segment comprises Asset Management, Securities Services and Commissions.

      Unless specifically stated otherwise, all references to August 2001 and August 2000 refer to our fiscal periods ended, or the date, as the context requires, August 31, 2001 and August 25, 2000, respectively. All references to November 2000, unless specifically stated otherwise, refer to our fiscal year ended, or the date, as the context requires, November 24, 2000.

      When we use the terms “Goldman Sachs”, “we” and “our”, we mean The Goldman Sachs Group, Inc., a Delaware corporation, and its consolidated subsidiaries.

Business Environment

      The slowdown in global economic growth experienced during the first half of fiscal 2001 continued during the third quarter. Uncertainty about the extent of the economic downturn led to continuing declines in global equity valuations, as well as reduced corporate activity. Mergers and acquisitions and equity underwriting activity in 2001 remained well below 2000 levels. In addition, transaction volumes and volatility in the secondary equity markets declined during the quarter.

      In the United States, reduced capital spending and lower employment levels resulted in significantly slower economic growth. In addition, declining corporate earnings led to lower equity valuations. In an attempt to stimulate economic growth, the Federal Reserve lowered overnight interest rates twice during the quarter by a total of 50 basis points to 3.50%. Fixed income markets benefited from these interest rate reductions.

      Economic growth in Europe continued to slow as domestic demand declined, prompting the European Central Bank to lower the benchmark lending rate by 25 basis points to 4.25% in August 2001. In Japan, lower levels of corporate investment and consumer spending, as well as declines in export demand, resulted in further negative economic growth. Other Asian economies continued to experience slowdowns reflecting lower domestic demand and declining exports.

Results of Operations

      The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in U.S. and global economic and market conditions. As a result, period-to-period comparisons may not be meaningful. In particular, a continuing decline in the volume of equity underwritings and mergers and acquisitions activity may adversely affect the future results of our Underwriting and Financial Advisory businesses. In addition, our Trading and Principal Investments business may be adversely affected by a continuing decline in customer

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  Overview

      The following table sets forth a summary of our financial results:

Financial Overview

		Three Months								Nine Months
		Ended August								Ended August
		2001				2000				2001				2000
Net revenues		$	3,661			$	4,527			$	12,384			$	13,175
Pre-tax earnings			767				1,373				2,972				4,110
Net earnings			468				824				1,813				2,466
Diluted earnings per share			0.87				1.62				3.33				4.85

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      The following table sets forth the net revenues, operating expenses and pre-tax earnings of our segments:

Results by Segment

				Three Months								Nine Months
				Ended August								Ended August
				2001				2000				2001				2000
Global Capital		Net revenues		$	2,337			$	3,436			$	8,127			$	9,753
Markets		Operating expenses			1,960				2,211				6,432				6,389
		Pre-tax earnings		$	377			$	1,225			$	1,695			$	3,364
Asset Management		Net revenues		$	1,324			$	1,091			$	4,257			$	3,422
and Securities Services		Operating expenses			849				841				2,684				2,362
		Pre-tax earnings		$	475			$	250			$	1,573			$	1,060
Total		Net revenues		$	3,661			$	4,527			$	12,384			$	13,175
		Operating expenses(1)			2,894				3,154				9,412				9,065
		Pre-tax earnings		$	767			$	1,373			$	2,972			$	4,110

(1)	Includes the amortization of employee initial public offering awards that has not been allocated to our segments.

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     Net revenues in our segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, the underlying positions.

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  Global Capital Markets

      The components of the Global Capital Markets segment are set forth below:

      Investment Banking. Goldman Sachs provides a broad range of investment banking services to a diverse group of corporations, financial institutions, governments and individuals. Our investment banking activities are divided into two categories:

	•	Financial Advisory. Financial Advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs; and
	•	Underwriting. Underwriting includes public offerings and private placements of equity and debt securities.

      Trading and Principal Investments. Our Trading and Principal Investments business facilitates transactions with a diverse group of corporations, financial institutions, governments and individuals and takes proprietary positions through market making in and trading of fixed income and equity products, currencies, commodities, and swaps and other derivatives. In addition, we engage in floor-based market making as a specialist on U.S. equities and options exchanges. Trading and Principal Investments is divided into three categories:

	•	FICC. We make markets in and trade fixed income products, currencies and commodities, structure and enter into a wide variety of derivative transactions, and engage in proprietary trading and arbitrage activities;
	•	Equities. We make markets in, act as a specialist for, and trade equities and equity-related products, structure and enter into equity derivative transactions, and engage in proprietary trading and equity arbitrage; and
	•	Principal Investments. Principal Investments primarily represents net revenues from our merchant banking investments.

      Net revenues from Principal Investments do not include management fees and the increased share of the income and gains from our merchant banking funds to which Goldman Sachs is entitled when the return on investments exceeds certain threshold returns to fund investors. These management fees and increased shares of income and gains are included in the net revenues of Asset Management and Securities Services.

      Substantially all of our inventory is marked-to-market daily and, therefore, its value and our net revenues are subject to fluctuations based on market movements. In addition, net revenues derived from our principal investments in privately held concerns and in real estate may fluctuate significantly depending on the revaluation or sale of these investments in any given period.

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      The following table sets forth the net revenues of our Global Capital Markets segment:

Global Capital Markets Net Revenues

		Three Months								Nine Months
		Ended August								Ended August
		2001				2000				2001				2000
Financial Advisory		$	638			$	673			$	1,689			$	1,968
Underwriting			464				648				1,350				2,183
Investment Banking			1,102				1,321				3,039				4,151
FICC			1,107				872				3,180				2,522
Equities			573				763				2,488				2,707
Principal Investments			(445	)			480				(580	)			373
Trading and Principal Investments			1,235				2,115				5,088				5,602
Total		$	2,337			$	3,436			$	8,127			$	9,753

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  Three Months Ended August 2001 versus August 2000

      Net revenues in Global Capital Markets decreased 32% to $2.34 billion. Operating expenses decreased 11%, primarily due to decreased compensation and benefits commensurate with lower net revenue levels, partially offset by the inclusion of Spear, Leeds & Kellogg (“SLK”). Pre-tax earnings were $377 million compared to $1.23 billion in 2000.

      Net revenues in Investment Banking were $1.10 billion, 17% lower than the third quarter of 2000. Net revenues in Financial Advisory were $638 million compared to $673 million for the same 2000 period, reflecting lower levels of worldwide activity in mergers and acquisitions. Net revenues in our Underwriting business were $464 million, down from $648 million for the same 2000 period, primarily reflecting a slowdown in equity new issue activity. Our investment banking backlog declined significantly during the quarter reflecting lower equity market valuations, reduced merger activity and continued market uncertainty.

      Net revenues in Trading and Principal Investments were $1.24 billion compared to $2.12 billion for the third quarter of 2000. FICC net revenues of $1.11 billion were 27% higher than the same 2000 period due to strong performances across many of our businesses, particularly fixed income derivatives, leveraged finance and commodities. Net revenues in Equities of $573 million were down from $763 million for the third quarter of 2000, primarily due to reduced customer flow and market volatility, the impact of decimalization and lower net revenues in equity arbitrage. Net revenues from SLK, which were not included in the third quarter of 2000, partially offset these reductions. Principal Investments experienced negative net revenues of $445 million due to mark-to-market losses on both private and public investments, primarily in the high technology and telecommunications sectors.

  Nine Months Ended August 2001 versus August 2000

      Net revenues in Global Capital Markets decreased 17% to $8.13 billion. Operating expenses remained essentially unchanged as higher costs related to the inclusion of SLK as well as incremental non-compensation expenses associated with growth in employment levels during 2000 were offset by decreased compensation and benefits commensurate with lower net revenue levels. Pre-tax earnings were $1.70 billion compared to $3.36 billion in 2000.

      Investment Banking net revenues decreased 27% to $3.04 billion. The net revenue reduction was primarily due to declines in the communications, media and entertainment, high technology

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      Net revenues in Trading and Principal Investments decreased 9% to $5.09 billion. FICC net revenues grew 26% to $3.18 billion, primarily due to increases in our currencies, commodities and global corporate bond businesses. Net revenues in Equities decreased 8% to $2.49 billion primarily due to lower customer activity, reduced market volatility and the impact of decimalization, partially offset by the contribution from SLK. Principal Investments experienced negative net revenues of $580 million due to mark-to-market losses on both private and public investments, primarily in the high technology and telecommunications sectors, partially offset by gains from real estate dispositions.

  Asset Management and Securities Services

      The components of the Asset Management and Securities Services segment are set forth below:

	•	Asset Management. Asset Management generates management fees by providing investment advisory services to a diverse client base of institutions and individuals;
	•	Securities Services. Securities Services includes prime brokerage, financing services and securities lending, and our matched book businesses, all of which generate revenues primarily in the form of fees or interest rate spreads; and
	•	Commissions. Commissions include clearing and agency transactions for clients on major stock, options and futures exchanges and revenues from the increased share of the income and gains derived from our merchant banking funds.

      The following table sets forth the net revenues of our Asset Management and Securities Services segment:

Asset Management and Securities Services Net Revenues

		Three Months								Nine Months
		Ended August								Ended August
		2001				2000				2001				2000
Asset Management		$	380			$	327			$	1,105			$	987
Securities Services			295				234				863				724
Commissions			649				530				2,289				1,711
Total		$	1,324			$	1,091			$	4,257			$	3,422

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      Our assets under supervision consist of assets under management and other client assets. Assets under management typically generate fees based on a percentage of their value and include our mutual funds, separate accounts managed for institutional and individual investors, our merchant banking funds and other alternative investment funds. Other client assets consist of assets in brokerage accounts of primarily high-net-worth individuals, on which we earn commissions. Substantially all assets under supervision are valued as of calendar month-end.

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      The following table sets forth our assets under supervision:

Assets Under Supervision

		As of August 31,								As of November 30,
		2001				2000				2000				1999
Assets under management		$	324,909			$	307,851			$	293,842			$	258,045
Other client assets			153,293				273,090				197,876				227,424
Total		$	478,202			$	580,941			$	491,718			$	485,469

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  Three Months Ended August 2001 versus August 2000

      Net revenues in Asset Management and Securities Services increased 21% to $1.32 billion. Operating expenses remained essentially unchanged. Pre-tax earnings were $475 million compared to $250 million in 2000.

      Asset Management net revenues of $380 million increased 16% compared to last year’s third quarter, primarily reflecting a 9% increase in average assets under management. Strong net inflows of $16 billion during the quarter, primarily in money markets, were partially offset by declines in asset values due to depreciation in global equity markets. Securities Services net revenues of $295 million increased 26% over the same 2000 period, primarily due to the inclusion of SLK, increased spreads in our fixed income matched book and increased customer balances in securities lending. Commissions increased 22% compared to the same period last year to $649 million, reflecting the contribution from SLK’s clearing and execution business and increased customer flow in equity derivatives, partially offset by the effect of decreased activity in our global shares businesses.

  Nine Months Ended August 2001 versus August 2000

      Net revenues in Asset Management and Securities Services increased 24% to $4.26 billion, due to the inclusion of SLK as well as growth in all businesses. Operating expenses increased 14%, principally due to the inclusion of SLK. Pre-tax earnings were $1.57 billion compared to $1.06 billion in 2000.

      Net revenues in Asset Management increased 12%, primarily due to a 10% increase in average assets under management. Securities Services net revenues increased 19%, primarily due to the inclusion of SLK’s securities and margin lending business and increased spreads in our fixed income matched book. Commissions increased 34%, primarily due to the inclusion of SLK’s clearing and execution business and revenues from the increased share of income and gains from our merchant banking funds, partially offset by the effect of decreased activity in our global shares businesses.

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Operating Expenses

      The following table sets forth our operating expenses and number of employees:

Operating Expenses and Employees

		Three Months								Nine Months
		Ended August								Ended August
		2001				2000				2001				2000
Compensation and benefits			$1,794				$2,263			$	6,068			$	6,587
Amortization of employee initial public offering and acquisition awards			112				102				371				314
Brokerage, clearing and exchange fees			218				136				619				419
Market development			90				126				316				343
Communications and technology			145				111				451				304
Depreciation and amortization			160				112				439				301
Amortization of goodwill and other intangible assets			66				7				192				21
Occupancy			142				116				453				312
Professional services and other			167				181				503				464
Total non-compensation expenses			988				789				2,973				2,164
Total operating expenses			$2,894				$3,154			$	9,412			$	9,065
Employees at period end(1)			23,494				18,666

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(1)	Excludes employees of Goldman Sachs’ property management subsidiaries. Substantially all of the costs of these employees are reimbursed to Goldman Sachs by the real estate investment funds to which these companies provide property management services.

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  Three Months Ended August 2001 versus August 2000

      Operating expenses decreased 8% to $2.89 billion. Compensation and benefits expense decreased 21% to $1.79 billion. The ratio of compensation and benefits to net revenues was 49% in the third quarter of 2001 compared to 50% in the same prior year quarter. Employment levels increased 26%, reflecting growth in our businesses in 2000 and the inclusion of SLK. Expenses associated with our temporary staff and consultants were $168 million, a decrease of 8%, reflecting expense reduction initiatives implemented in 2001.

      Non-compensation-related expenses were $988 million, 25% above the same prior year period. In addition to the inclusion of SLK, the growth in these expenses compared to last year was primarily due to growth in employment levels during 2000, partially offset by the effect of expense reduction initiatives implemented in 2001. Brokerage, clearing and exchange fees increased 60%, primarily due to the inclusion of SLK. Market development expenses decreased 29%, principally due to lower levels of travel and entertainment, and advertising costs. Communications and technology expenses increased 31% due to the inclusion of SLK and higher telecommunications and market data costs associated with higher employment levels. Depreciation and amortization expenses increased 43%, primarily due to additional technology and telecommunications equipment expenditures and leasehold improvements. Amortization of goodwill and other intangible assets increased significantly due to the acquisition of SLK. Occupancy expenses increased 22%, reflecting additional global office space to accommodate increased employment levels. Professional services and other expenses decreased 8% due to decreased professional fees partially offset by the inclusion of SLK.

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  Nine Months Ended August 2001 versus August 2000

      Operating expenses were $9.41 billion. Compensation and benefits expense decreased 8% to $6.07 billion. The ratio of compensation and benefits to net revenues was 49% for the nine months ended August 2001 compared to 50% in the prior year. Expenses associated with our temporary staff and consultants were $573 million, an increase of 28%, reflecting global expansion in 2000.

      Non-compensation-related expenses were $2.97 billion, 37% above the same prior year period. In addition to the inclusion of SLK, the growth in these expenses compared to last year was primarily due to growth in employment levels during 2000, partially offset by the effect of expense reduction initiatives implemented in 2001. Brokerage, clearing and exchange fees increased 48%, primarily due to the inclusion of SLK. Market development expenses decreased 8%, primarily due to reduced travel and entertainment and advertising costs, partially offset by the inclusion of SLK. Communications and technology expenses increased 48%, reflecting higher telecommunications and market data costs associated with higher employment levels and the inclusion of SLK. Depreciation and amortization expenses increased 46%, primarily due to additional technology equipment expenditures, leasehold improvements and telecommunications equipment. Amortization of goodwill and other intangible assets increased significantly as a result of the acquisition of SLK. Occupancy expenses increased 45%, reflecting additional global office space to accommodate increased employment levels. Professional services and other expenses increased 8%, primarily due to the inclusion of SLK.

  Provision for Taxes

      The provision for taxes for the quarter and nine months ended August 2001 was $299 million and $1.16 billion, respectively. The effective tax rate for the quarter and the nine months ended August 2001 was 39%, in line with fiscal 2000.

Subsequent Event

      Goldman Sachs’ liquidity, facilities and overall financial condition were not materially affected by the terrorist attacks against the United States on September 11, 2001. Our primary operational, trade settlement and other information systems have been functioning throughout the crisis. The attacks have already caused, and may continue to cause, additional weakness in the business and economic environment. Management continues to evaluate the effect of these events on our fourth quarter results of operations.

Liquidity

      Management believes that one of the most important issues for a company in the financial services sector is access to liquidity. Accordingly, Goldman Sachs has established a comprehensive structure to oversee its liquidity and funding policies. For a description of our liquidity policies, see our Annual Report on Form 10-K for the fiscal year ended November 24, 2000.

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  The Balance Sheet

      Goldman Sachs maintains a highly liquid balance sheet that fluctuates significantly between financial statement dates. The following table sets forth our total assets, adjusted assets, leverage ratios and book value per share:

		As of
		August				November
		2001				2000
		($ in billions, except
		per share amounts)
Total assets		$	302			$	290
Adjusted assets(1)			223				217
Leverage ratio(2)			16.8	x			17.5	x
Adjusted leverage ratio(3)			12.4	x			13.1	x
Book value per share(4)		$	35.67			$	32.18

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(1)	Adjusted assets represent total assets less securities purchased under agreements to resell, certain securities borrowed transactions and the increase in total assets related to certain provisions of Statement of Financial Accounting Standards (“SFAS”) No. 125 and SFAS No. 140.
(2)	Leverage ratio equals total assets divided by shareholders’ equity.
(3)	Adjusted leverage ratio equals adjusted assets divided by shareholders’ equity.
(4)	Book value per share was based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 503.5 million as of August 2001 and 513.7 million as of November  2000.

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     As of August 2001 and November 2000, we held approximately $2.38 billion and $2.74 billion, respectively, in high-yield debt and emerging market securities. As of August 2001 and November 2000, we held approximately $2.83 billion in bank loans. These assets may be relatively illiquid during times of market stress. We seek to diversify our holdings of these assets by industry and by geographic location.

      As of August 2001 and November 2000, the aggregate carrying value of our principal investments held directly or through our merchant banking funds was approximately $2.76 billion and $3.52 billion, respectively. These carrying values were comprised of corporate principal investments with an aggregate carrying value of approximately $1.77 billion and $2.51 billion, respectively, and real estate investments with an aggregate carrying value of approximately $991 million and $1.01 billion, respectively.

  Credit Ratings

      The following table sets forth our credit ratings as of August 2001:

		Short-Term Debt				Long-Term Debt
Fitch			F1+				AA-
Moody’s Investors Service			P-1				A1
Standard & Poor’s(1)			A-1+				A+

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(1)	On July 16, 2001, Standard & Poor’s affirmed Goldman Sachs’ credit ratings but revised its outlook from “stable” to “negative”.

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  Long-Term Debt

      As of August 2001, our consolidated long-term borrowings were $30.28 billion. Substantially all of these borrowings were unsecured and consisted principally of senior borrowings with maturities extending to 2024. The weighted average maturity of our long-term borrowings as of August 2001 was approximately 5 years. A substantial portion of our long-term borrowings are swapped into U.S. dollar obligations with short-term floating rates of interest in order to minimize our exposure to interest rates and foreign exchange movements.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

      For a description of our risk management policies and procedures, see Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended November 24, 2000 and the information incorporated by reference therein.

      VaR. VaR is the potential loss in value of Goldman Sachs’ trading positions due to adverse market movements over a defined time horizon with a specified confidence level.

      For the VaR numbers reported below, a one-day time horizon and a 95% confidence level were used. This means that there is a one in 20 chance that daily trading net revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. Thus, shortfalls from expected trading net revenues on a single trading day greater than the reported VaR would be anticipated to occur, on average, about once a month. Shortfalls on a single day can exceed reported VaR by significant amounts. Shortfalls can also accumulate over a longer time horizon such as a number of consecutive trading days.

      The VaR numbers below are shown separately for interest rate, currency, equity and commodity products, as well as for our overall trading positions. These VaR numbers include the underlying product positions and related hedges, which may include positions in other product areas. For example, the hedge of a foreign exchange forward may include an interest rate futures position and the hedge of a long corporate bond position may include a short position in the related equity.

      The modeling of the risk characteristics of our trading positions involves a number of assumptions and approximations. While management believes that these assumptions and approximations are reasonable, there is no uniform industry methodology for estimating VaR, and different assumptions and/or approximations could produce materially different VaR estimates.

      We use historical data to estimate our VaR and, to better reflect current asset volatilities, these historical data are weighted to give greater importance to more recent observations. Given its reliance on historical data, VaR is most effective in estimating risk exposures in markets in which there are no sudden fundamental changes or shifts in market conditions. An inherent limitation of VaR is that past changes in market risk factors, even when weighted toward more recent observations, may not produce accurate predictions of future market risk. VaR is calculated assuming a normal distribution and different distributional assumptions could produce a materially different VaR. Moreover, VaR calculated for a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day.

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      The following table sets forth the daily VaR for substantially all of our trading positions:

Daily VaR

		As of								Three Months Ended
										August 2001
		August				May
		2001				2001				Average				High				Low
Risk Categories
Interest rates		$	17			$	17			$	21			$	29			$	16
Currency rates			18				12				15				19				9
Equity prices			19				20				20				38				17
Commodity prices			9				12				10				13				6
Diversification effect(1)			(26	)			(24	)			(30	)
Firmwide		$	37			$	37			$	36				48				30

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

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     The following chart presents the daily VaR for substantially all of our trading positions during the nine months ended August 2001:

Firmwide VaR

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  Trading Net Revenues Distribution

      Substantially all of our inventory positions are marked-to-market on a daily basis and changes are recorded in net revenues. The following chart sets forth the frequency distribution for substantially all of our daily trading net revenues for the quarter ended August 2001:

Daily Trading Net Revenues

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      As part of our overall risk control process, daily trading net revenues are compared with VaR calculated as of the end of the prior business day. Trading losses incurred on a single day did not exceed our 95% one-day VaR during the quarter ended August 2001.

  Nontrading Risk

      The market risk on our nontrading financial instruments, including our merchant banking investments, is measured using a sensitivity analysis that estimates the potential reduction in our net revenues associated with a 10% decline in the S&P 500. This sensitivity analysis is based on certain assumptions regarding the relationship between changes in the fair value of the individual nontrading financial instruments. Different assumptions could produce materially different risk estimates. As of August 2001, the sensitivity of our nontrading market risk to a 10% decline in the S&P 500 was $155 million.

  Derivative Contracts

      We utilize replacement cost as a measure of derivative credit risk. Replacement cost, as reported in “Financial instruments owned, at fair value” on the condensed consolidated statements of financial condition, represents amounts receivable from various counterparties, net of any unrealized losses, where management believes a legal right of setoff exists under an enforceable netting agreement. Replacement cost for purchased option contracts is the market value of the contract. We control our credit risk through an established credit approval process, by monitoring counterparty limits, obtaining collateral where appropriate and, in some cases, entering into enforceable netting agreements.

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      The following table sets forth the distribution, by credit rating, of substantially all of our exposure with respect to over-the-counter derivatives as of August 2001, after taking into consideration the effect of netting agreements. The categories shown reflect our internally determined public rating agency equivalents.

Over-the-Counter Derivative Credit Exposure

														Percentage
										Exposure				of Exposure
						Collateral				Net of				Net of
Credit Rating Equivalent		Exposure				Held (2)				Collateral				Collateral
AAA / Aaa		$	3,709			$	97			$	3,612				15	%
AA / Aa2			7,499				1,454				6,045				25
A / A2			9,795				544				9,251				38
BBB / Baa2			4,004				576				3,428				14
BB / Ba2 or lower			2,311				701				1,610				7
Unrated(1)			812				694				118				1
		$	28,130			$	4,066			$	24,064				100	%

      Over-the-counter derivative credit exposure, net of collateral, by maturity is set forth below:

														5 Years				Exposure
		0 - 6				6 - 12				1 - 5				or				Net of
Credit Rating Equivalent		Months				Months				Years				Greater				Collateral
AAA / Aaa		$	243			$	97			$	805			$	2,467			$	3,612
AA / Aa2			2,189				419				1,271				2,166				6,045
A / A2			1,710				914				2,109				4,518				9,251
BBB / Baa2			1,049				344				1,292				743				3,428
BB / Ba2 or lower			575				236				545				254				1,610
Unrated(1)			59				12				43				4				118
		$	5,825			$	2,022			$	6,065			$	10,152			$	24,064

(1)	In lieu of making an individual assessment of the credit of unrated counterparties, we make a determination that the collateral held in respect of such obligations is sufficient to cover a substantial portion of our exposure. In making this determination, we take into account various factors, including legal uncertainties and market volatility.
(2)	Collateral is usually received under agreements entitling Goldman Sachs to require additional collateral upon specified increases in exposure or the occurrence of adverse credit events.

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PART II: OTHER INFORMATION

Item 1: Legal Proceedings

      The following supplements and amends our discussion set forth under Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended November 24, 2000, as updated by our Quarterly Reports on Form 10-Q for the quarters ended February 23, 2001 and May 25, 2001.

   Antitrust Matters

      On September 28, 2001, in the lawsuit alleging a conspiracy to fix at 7% the discount that underwriting syndicates receive from issuers of shares in certain offerings, defendants moved to dismiss the complaints filed by the issuer plaintiffs.

   Matters Relating to Municipal Securities

      On September 26, 2001, the Florida federal court approved the settlement.

  AMF Securities Litigation

      On July 30, 2001, AMF Bowling, Inc. filed for protection under the U.S. bankruptcy laws.

   Research Independence Matters

      The Goldman Sachs Group, Inc. is among numerous financial services firms that have been named as defendants in a purported class action filed in the U.S. District Court for the Southern District of New York on August 2, 2001 on behalf of purchasers on and after August 1, 1998 of internet and information technology securities for which the defendants issued research reports. The complaint alleges that the defendants violated the federal securities anti-fraud laws by failing to disclose that (i) they caused their analysts to issue recommendations in order to obtain investment banking business, (ii) they and their analysts bought recommended shares at low prices before they were sold to the public, and (iii) they did not maintain proper compliance procedures. The complaint also contends that defendants’ alleged conduct constituted a breach of fiduciary duty to the class. The complaint seeks an unspecified amount of damages. The Goldman Sachs Group, Inc. and its affiliates have, together with other financial services firms, received requests for information from various governmental agencies in connection with their review of research independence issues. Goldman Sachs is cooperating with the requests.

Item 5: Other Information

Cautionary Statement Pursuant to The Private Securities

      We have included in this Form 10-Q filing, and from time to time our management may make, statements which may constitute “forward-looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in our specific forward-looking statements include, but are not limited to, the following:

	•	the continuing impact on the global economy of the September 11, 2001 terrorist attacks;
	•	the impact of changes in international political conditions, including as a result of the September 11, 2001 terrorist attacks;

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	•	continuing softness or further declines in equity underwritings and mergers and acquisitions activities;
	•	continuing softness or further declines in general economic conditions or the global financial markets;
	•	continuing declines in equity trading volumes and in market volatility;
	•	the impact of decimalization;
	•	losses due to unidentified or unanticipated risks;
	•	competitive pressure;
	•	a lack of liquidity, i.e., ready access to funds, for use in our business; and
	•	losses caused by financial or other problems experienced by third parties.

      Additional information regarding these and other important factors that could cause actual results to differ from those in our forward-looking statements is contained in our Form 10-K for our fiscal year ended November 24, 2000, under Item 1 “Business — Certain Factors That May Affect Our Business.” The September 11, 2001 terrorist attacks may increase the likelihood that one or more of these important factors may occur.

      Statements about our investment banking transaction backlog also may constitute forward-looking statements. Such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues that we expect to earn from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline in general economic conditions, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. Many of these factors may be more likely to occur as a result of the September 11, 2001 terrorist attacks. Other important factors that could adversely affect our investment banking transactions are contained in our Form 10-K for our fiscal year ended November 24, 2000, under Item 1 “Business — Certain Factors That May Affect Our Business.”

Item 6: Exhibits and Reports on Form 8-K

      (a)  Exhibits:

12.1          Statement re computation of ratios of earnings to fixed charges.

15.1          Letter re Unaudited Interim Financial Information.

      (b)  Reports on Form 8-K:

      On September 26, 2001, Group Inc. filed a Current Report on Form 8-K reporting its net earnings for its fiscal third quarter ended August 31, 2001.

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SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE GOLDMAN SACHS GROUP, INC.

	By:	/s/ DAVID A. VINIAR

	Name: David A. Viniar
	Title: Chief Financial Officer

	By:	/s/ SARAH G. SMITH

	Name: Sarah G. Smith
	Title: Principal Accounting Officer

Date: October 10, 2001

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