**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

 

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

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**For the quarter endedSeptember 30, 2002**

 

**Commission FileNumber: 1-6862**

** **

**Credit Suisse First Boston(USA), Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                  |   | **13-1898818**                       |
|---------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |   | (I.R.S. employer identification no.) |
|                                                          |   |                                 |
| **Eleven Madison Avenue  New York, N.Y.**                     |   | **10010**                            |
| (Address of principal executive offices)                      |   | (Zip Code)                           |
|                                                          |   |                                 |
| **(212) 325-2000**                                       |
| (Registrant’s telephone number, including area code)     |

 

**The Registrant meets the conditions set forth inGeneral Instruction H (1) (a) and (b) of Form 10-Q andis 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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days: Yes ý  No o

 

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

 

 

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**CREDIT SUISSE FIRST BOSTON (USA), INC.**

 

**QuarterlyReport on Form 10-Q for the Quarter Ended September 30, 2002**

 

**TABLE OFCONTENTS**

 
| PART I  | FINANCIAL  INFORMATION |
|---------|------------------------|
|    | Item 1.                | Financial Statements |
|    |                   | Condensed  Consolidated Statements of Financial Condition as of September 30, 2002  and December 31, 2001 (Unaudited) |
|    |                   | Condensed  Consolidated Statements of Income for the three and nine months ended September 30, 2002 and 2001  (Unaudited) |
|    |                   | Condensed  Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended  September 30, 2001 and 2002 (Unaudited) |
|    |                   | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001  (Unaudited) |
|    |                   | Notes  to Condensed Consolidated Financial Statements (Unaudited) |
|    |                   | Independent  Accountants’ Review Report |
|    | Item  2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|    | Item  3.               | Quantitative  and Qualitative Disclosures about Market Risk |
|    | Item 4.                | Controls and  Procedures |
|    |                   |   |
| PART II | OTHER INFORMATION      |
|    | Item 1.                | Legal Proceedings |
|    | Item 2.                | Omitted Pursuant to General  Instruction H |
|    | Item 3.                | Omitted Pursuant to General  Instruction H |
|    | Item 4.                | Omitted Pursuant to General  Instruction H |
|    | Item  5.               | Other Information |
|    | Item 6.                | Exhibits and Reports  on Form 8-K |
|    | Signature              |
|    | Certifications         |

 

1

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**Part I**

**FINANCIAL INFORMATION**

**ITEM 1: FINANCIAL STATEMENTS**

 

### **CREDIT SUISSE FIRST BOSTON (USA), INC. ANDSUBSIDIARIES**

**CondensedConsolidated Statements of Financial Condition**

**(Unaudited)**

**(In millions)**

** **
|                                                                                                           |   | **September 30,********2002** |    | **December 31,********2001** |   |
|----------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|
|                                                                                                           |   |                               |    |                              |   |
| **ASSETS**                                                                                                     |   |                               |    |                              |   |
| Cash and cash equivalents                                                                                      |   | $                                  | 1,501   |                              | $      | 1,666 |   |
| Cash and securities segregated for regulatory  purposes or deposited with clearing organizations               |   | 6,524                              |    | 6,407                             |   |
| Collateralized short-term financings:                                                                          |   |                               |    |                              |   |
| Securities purchased under agreements to resell                                                                |   | 54,567                             |    | 43,961                            |   |
| Securities borrowed                                                                                            |   | 67,947                             |    | 68,232                            |   |
| Receivables:                                                                                                   |   |                               |    |                              |   |
| Customers                                                                                                      |   | 3,820                              |    | 4,740                             |   |
| Brokers, dealers and other                                                                                     |   | 10,199                             |    | 11,497                            |   |
| Financial instruments owned:                                                                                   |   |                               |    |                              |   |
| U.S. government and agencies (includes securities  pledged as collateral of $25,285 and $21,639, respectively) |   | 29,123                             |    | 30,836                            |   |
| Corporate debt (includes securities pledged as  collateral of $10,491 and$9,765,  respectively)                |   | 13,761                             |    | 13,420                            |   |
| Mortgage whole loans (includes loans pledged as  collateral of $6,499 and$4,997,  respectively)                |   | 9,624                              |    | 6,846                             |   |
| Equities (includes securities pledged as collateral  of $6,233 and $5,917, respectively)                       |   | 9,382                              |    | 11,142                            |   |
| Commercial paper                                                                                               |   | 995                                |    | 582                               |   |
| Private equity and other long-term investments                                                                 |   | 808                                |    | 963                               |   |
| Derivatives contracts                                                                                          |   | 3,452                              |    | 3,077                             |   |
| Other                                                                                                          |   | 1,771                              |    | 2,085                             |   |
| Net deferred tax asset                                                                                         |   | 1,665                              |    | 2,200                             |   |
| Office facilities at cost (net of accumulated  depreciation and amortization of$979 and $683, respectively)    |   | 714                                |    | 759                               |   |
| Goodwill and other intangible assets                                                                           |   | 333                                |    | 249                               |   |
| Loans receivable from parent and affiliates                                                                    |   | 16,521                             |    | 7,631                             |   |
| Other assets and deferred amounts                                                                              |   | 1,818                              |    | 2,027                             |   |
|                                                                                                           |   |                               |    |                              |   |
| Total Assets                                                                                                   |   | $                                  | 234,525 |                              | $      | 218,320 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

2

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### **CREDIT SUISSE FIRST BOSTON (USA), INC. ANDSUBSIDIARIES**

**CondensedConsolidated Statements of Financial Condition (continued)**

**(Unaudited)**

**(In millions, except sharedata)**

 
|                                                                                                                                                                                                |   | **September 30,********2002** |    | **December 31,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                                |   |                          |    |                        |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      |   |                          |    |                        |   |
| Commercial paper and short-term borrowings                                                                                                                                                          |   | $                             | 10,366  |                        | $      | 9,287 |   |
| Collateralized short-term financings:                                                                                                                                                               |   |                          |    |                        |   |
| Securities sold under agreements to repurchase                                                                                                                                                      |   | 111,450                       |    | 96,101                      |   |
| Securities loaned                                                                                                                                                                                   |   | 22,085                        |    | 27,105                      |   |
| Payables:                                                                                                                                                                                           |   |                          |    |                        |   |
| Customers                                                                                                                                                                                           |   | 9,577                         |    | 11,593                      |   |
| Brokers, dealers and other                                                                                                                                                                          |   | 10,268                        |    | 12,816                      |   |
| Financial instruments sold not yet purchased:                                                                                                                                                       |   |                          |    |                        |   |
| U.S. government and agencies                                                                                                                                                                        |   | 25,273                        |    | 20,888                      |   |
| Corporate debt                                                                                                                                                                                      |   | 3,067                         |    | 3,402                       |   |
| Equities                                                                                                                                                                                            |   | 2,438                         |    | 3,063                       |   |
| Derivatives contracts                                                                                                                                                                               |   | 2,690                         |    | 2,957                       |   |
| Other                                                                                                                                                                                               |   | 396                           |    | 345                         |   |
| Obligation to return securities received as  collateral                                                                                                                                             |   | 561                           |    | 1,034                       |   |
| Accounts payable and accrued expenses                                                                                                                                                               |   | 3,581                         |    | 5,256                       |   |
| Other liabilities                                                                                                                                                                                   |   | 1,222                         |    | 1,922                       |   |
| Long-term borrowings                                                                                                                                                                                |   | 23,521                        |    | 15,663                      |   |
|                                                                                                                                                                                                |   |                          |    |                        |   |
| Total liabilities                                                                                                                                                                                   |   | 226,495                       |    | 211,432                     |   |
|                                                                                                                                                                                                |   |                          |    |                        |   |
| Stockholders’ Equity:                                                                                                                                                                          |   |                          |    |                        |   |
| Preferred stock, 50,000,000 shares authorized:                                                                                                                                                      |   |                          |    |                        |   |
| Series B Preferred Stock, at $50.00 per share  liquidation preference  (88,500 and  90,000 shares issued and outstanding at September 30, 2002 and  December 31, 2001, respectively) |   | 4                             |    | 5                           |   |
| Common Stock ($0.10 par value; 50,000 shares  authorized; 1,100 shares issued and outstanding                                                                                                       |   | —                        |    | —                      |   |
| Paid-in capital                                                                                                                                                                                     |   | 6,525                         |    | 6,064                       |   |
| Retained earnings                                                                                                                                                                                   |   | 1,562                         |    | 891                         |   |
| Accumulated other comprehensive loss                                                                                                                                                                |   | (61                           | )       | (72                         | )      |
| Total stockholders’ equity                                                                                                                                                                     |   | 8,030                         |    | 6,888                       |   |
| Total Liabilities and Stockholders’ Equity                                                                                                                                                     |   | $                             | 234,525 |                        | $      | 218,320 |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

3

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

**CondensedConsolidated Statements of Income**

**(Unaudited)**

**(In millions)**

 
|                                                                                                                  |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                  |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                                                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Revenues:                                                                                                             |   |                                  |   |                                 |   |   |   |   |   |
| Principal transactions-net                                                                                            |   | $                                     | (233   | )                                    | $      | 0 |   | $ | (73 | ) | $ | 1,291 |   |
| Investment banking and advisory                                                                                       |   | 600                                   |   | 682                                  |   | 2,271 |   | 2,620 |   |
| Commissions                                                                                                           |   | 365                                   |   | 357                                  |   | 1,140 |   | 1,135 |   |
| Interest and dividends, net of interest expense of  $1,448, $2,471, $4,263 and $8,920, respectively                   |   | 580                                   |   | 293                                  |   | 1,545 |   | 727 |   |
| Other                                                                                                                 |   | (14                                   | )      | 9                                    |   | 537 |   | 198 |   |
|                                                                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Total net revenues                                                                                                    |   | 1,298                                 |   | 1,341                                |   | 5,420 |   | 5,971 |   |
|                                                                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Expenses:                                                                                                             |   |                                  |   |                                 |   |   |   |   |   |
| Employee compensation and benefits                                                                                    |   | 761                                   |   | 1,243                                |   | 2,825 |   | 3,858 |   |
| Occupancy and equipment rental                                                                                        |   | 153                                   |   | 180                                  |   | 443 |   | 519 |   |
| Brokerage, clearing and exchange fees                                                                                 |   | 77                                    |   | 91                                   |   | 221 |   | 237 |   |
| Communications                                                                                                        |   | 62                                    |   | 75                                   |   | 180 |   | 228 |   |
| Professional fees                                                                                                     |   | 52                                    |   | 83                                   |   | 161 |   | 277 |   |
| Merger-related costs                                                                                                  |   | 78                                    |   | 90                                   |   | 260 |   | 378 |   |
| Other operating expenses                                                                                              |   | 62                                    |   | 184                                  |   | 298 |   | 523 |   |
|                                                                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Total expenses                                                                                                        |   | 1,245                                 |   | 1,946                                |   | 4,388 |   | 6,020 |   |
|                                                                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss) before provision (benefit) for income  taxes, and cumulative effect of a change in accounting principle |   | 53                                    |   | (605                                 | )      | 1,032 |   | (49 | ) |
| Income tax provision (benefit)                                                                                        |   | 18                                    |   | (207                                 | )      | 361 |   | (22 | ) |
| Income (loss) before cumulative effect of a change  in accounting principle                                           |   | 35                                    |   | (398                                 | )      | 671 |   | (27 | ) |
| Cumulative effect of a change in accounting  principle, net of tax provision of $0.3                                  |   | —                                |   | —                               |   | — |   | 1 |   |
|                                                                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Net income (loss)                                                                                                     |   | $                                     | 35     |                                 | $      | (398 | ) | $ | 671 |   | $ | (26 | ) |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

4

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

**CondensedConsolidated Statements of Changes in Stockholders’ Equity**

**Nine Months EndedSeptember 30, 2001 and September 30, 2002**

**(Unaudited)**

**(In millions)**

 
|                                                                            |   | **Preferred********Stock** |   | **CSFB********(USA)********Common********Stock** |   | **CSFB*direct*********Common********Stock** |   | **Paid-in********Capital** |   | **Retained********Earnings** |   | **Accumulated********Other********Comprehensive********Income (Loss)** |   | **Total** |   |
|---------------------------------------------------------------------------------|--------|----------------------------|--------|--------------------------------------------------|--------|---------------------------------------------|--------|----------------------------|--------|------------------------------|--------|------------------------------------------------------------------------|--------|-----------|--------|
|                                                                            |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Balances at December 31, 2000                                              |   | $                          | 375    |                                             | $      | —                                      |   | $                          | 2      |                         | $      | 5,072                                                                  |   | $         | 1,064  |   | $ | (7 | ) | $ | 6,506 |   |
| Net loss                                                                        |   | —                     |   | —                                           |   | —                                      |   | —                     |   | (26                          | )      | —                                                                 |   | (26       | )      |
| Foreign currency translation adjustment                                         |   | —                     |   | —                                           |   | —                                      |   | —                     |   | —                       |   | (1                                                                     | )      | (1        | )      |
| Change in accounting principle (SFAS 133)                                  |   | —                     |   | —                                           |   | —                                      |   | —                     |   | —                       |   | (1                                                                     | )      | (1        | )      |
|                                                                            |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Total comprehensive loss                                                        |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   | (28       | )      |
|                                                                            |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Capital contribution of Credit Suisse First Boston  Capital Holdings, Inc. |   | —                     |   | —                                           |   | —                                      |   | 34                         |   | —                       |   | —                                                                 |   | 34        |   |
| Retirement of CSFB*direct*  stock                                               |   | —                     |   | —                                           |   | (2                                          | )      | 2                          |   | —                       |   | —                                                                 |   | —    |   |
| Dividends:                                                                      |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Preferred stock                                                                 |   | —                     |   | —                                           |   | —                                      |   | —                     |   | (15                          | )      | —                                                                 |   | (15       | )      |
| CSG Share Plan activity                                                         |   | —                     |   | —                                           |   | —                                      |   | 643                        |   | —                       |   | —                                                                 |   | 643       |   |
| Tax benefit on CSG Share Plan activity                                          |   | —                     |   | —                                           |   | —                                      |   | 41                         |   | —                       |   | —                                                                 |   | 41        |   |
|                                                                            |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Balances at September 30, 2001                                             |   | $                          | 375    |                                             | $      | —                                      |   | $                          | — |                         | $      | 5,792                                                                  |   | $         | 1,023  |   | $ | (9 | ) | $ | 7,181 |   |
|                                                                            |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Balances at December 31, 2001                                              |   | $                          | 5      |                                             | $      | —                                      |   | $                          | — |                         | $      | 6,064                                                                  |   | $         | 891    |   | $ | (72 | ) | $ | 6,888 |   |
| Net income                                                                      |   | —                     |   | —                                           |   | —                                      |   | —                     |   | 671                          |   | —                                                                 |   | 671       |   |
| Foreign currency translation adjustment                                         |   | —                     |   | —                                           |   | —                                      |   | —                     |   | —                       |   | 6                                                                      |   | 6         |   |
| Decrease in pension liability, net of tax expense  of $3                        |   | —                     |   | —                                           |   | —                                      |   | —                     |   | —                       |   | 5                                                                      |   | 5         |   |
|                                                                            |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Total comprehensive income                                                      |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   | 682       |   |
| Repurchase of Series B Preferred Stock                                          |   | (1                         | )      | —                                           |   | —                                      |   | —                     |   | —                       |   | —                                                                 |   | (1        | )      |
| CSG Share Plan activity                                                         |   | —                     |   | —                                           |   | —                                      |   | 465                        |   | —                       |   | —                                                                 |   | 465       |   |
| Tax expense on CSG Share Plan activity                                          |   | —                     |   | —                                           |   | —                                      |   | (4                         | )      | —                       |   | —                                                                 |   | (4        | )      |
|                                                                            |   |                       |   |                                             |   |                                        |   |                       |   |                         |   |                                                                   |   |      |   |
| Balances at September 30, 2002                                             |   | $                          | 4      |                                             | $      | —                                      |   | $                          | — |                         | $      | 6,525                                                                  |   | $         | 1,562  |   | $ | (61 | ) | $ | 8,030 |   |

See accompanying notes tocondensed consolidated financial statements (unaudited).

5

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

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

**(In millions)**

 
|                                                                                               |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                               |   | **2002**                              |   | **2001** |   |
| Cash flows from operating activities:                                                              |   |                                  |   |   |   |
| Net income (loss)                                                                                  |   | $                                     | 671    |   | $ | (26 | ) |
| Adjustments to reconcile net income (loss) to net  cash (used in) provided byoperating activities: |   |                                  |   |   |   |
| Net pre-tax gain on sale of certain broker-dealer  subsidiaries                                    |   | (528                                  | )      | — |   |
| Depreciation and amortization                                                                      |   | 125                                   |   | 153 |   |
| CSG Share Plan activity                                                                            |   | 465                                   |   | 643 |   |
| Deferred taxes                                                                                     |   | 175                                   |   | (156 | ) |
| Net change in the fair value of private equity and  other long-term investments                    |   | 57                                    |   | 210 |   |
| Other, net                                                                                         |   | 7                                     |   | (2 | ) |
| (Increase) decrease in operating assets:                                                           |   |                                  |   |   |   |
| Cash and securities segregated for regulatory  purposes or deposited with clearing organizations   |   | (117                                  | )      | (1,045 | ) |
| Securities borrowed                                                                                |   | 285                                   |   | 9,292 |   |
| Receivables from customers                                                                         |   | 920                                   |   | 3,960 |   |
| Receivables from brokers, dealers and other                                                        |   | 1,298                                 |   | (11,503 | ) |
| Financial instruments owned                                                                        |   | (120                                  | )      | (1,743 | ) |
| Other assets and deferred amounts                                                                  |   | 445                                   |   | 539 |   |
| Increase (decrease) in operating liabilities:                                                      |   |                                  |   |   |   |
| Securities loaned                                                                                  |   | (5,020                                | )      | (12,278 | ) |
| Payables to customers                                                                              |   | (2,016                                | )      | (51 | ) |
| Payables to brokers, dealers and other                                                             |   | (2,548                                | )      | 7,463 |   |
| Financial instruments sold not yet purchased                                                       |   | 3,209                                 |   | (1,085 | ) |
| Obligation to return securities received as  collateral                                            |   | (473                                  | )      | 942 |   |
| Accounts payable and accrued expenses                                                              |   | (1,675                                | )      | (3,274 | ) |
| Other liabilities                                                                                  |   | (700                                  | )      | 658 |   |
|                                                                                               |   |                                  |   |   |   |
| Net cash (used in) operating activities                                                            |   | $                                     | (5,540 | ) | $ | (7,303 | ) |

 

Seeaccompanying notes to condensed consolidated financial statements (unaudited).

 

 

6

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

**CondensedConsolidated Statements of Cash Flows (continued)**

**(Unaudited)**

**(In millions)**

 
| Cash flows from investing activities:                                                                   |   |   |   |    |   |
|---------------------------------------------------------------------------------------------------------|--------|--------|--------|---------|--------|
| Net (payments for) proceeds from:                                                                       |   |   |   |    |   |
| Capital contribution of Credit Suisse First Boston  Capital Holdings, Inc                          |   | $      | — |    | $      | 34 |   |
| Loans receivable from parent and affiliates                                                             |   | (8,890 | )      | (2,823  | )      |
| Purchases of private equity and other long-term  investments                                            |   | (149   | )      | (317    | )      |
| Sales of private equity and other long-term  investments                                                |   | 247    |   | 268     |   |
| Office facilities                                                                                       |   | (71    | )      | 92      |   |
| Sale of certain broker-dealer subsidiaries                                                              |   | 674    |   | —  |   |
| Purchase of subsidiary                                                                                  |   | (70    | )      | —  |   |
| Other assets                                                                                            |   | (35    | )      | (157    | )      |
|                                                                                                    |   |   |   |    |   |
| Net cash (provided by) investing activities                                                             |   | (8,294 | )      | (2,903  | )      |
|                                                                                                    |   |   |   |    |   |
| Cash flows from financing activities:                                                                   |   |   |   |    |   |
| Net proceeds from (payments for):                                                                       |   |   |   |    |   |
| Short-term financings                                                                                   |   | 1,079  |   | (11,618 | )      |
| Securities sold under agreements to repurchase, net  of securities purchased under agreements to resell |   | 4,743  |   | 21,105  |   |
| Redemption of preferred trust securities                                                                |   | — |   | (200    | )      |
| Repurchase of Series B Preferred Stock                                                                  |   | (1     | )      | —  |   |
| Senior notes                                                                                            |   | 5,868  |   | 2,363   |   |
| Global floating-rate notes                                                                              |   | — |   | (350    | )      |
| Medium-term notes                                                                                       |   | 2,082  |   | 2,427   |   |
| Structured borrowings                                                                                   |   | (87    | )      | (21     | )      |
| Other long-term debt                                                                                    |   | (5     | )      | (16     | )      |
| Subordinated loan agreements                                                                            |   | — |   | (4,150  | )      |
| Cash dividends                                                                                          |   | — |   | (15     | )      |
| Other assets                                                                                            |   | (10    | )      | (15     | )      |
|                                                                                                    |   |   |   |    |   |
| Net cash provided by financing activities                                                               |   | 13,669 |   | 9,510   |   |
|                                                                                                    |   |   |   |    |   |
| Decrease in cash and cash equivalents                                                                   |   | (165   | )      | (696    | )      |
| Cash and cash equivalents at beginning of period                                                        |   | 1,666  |   | 2,758   |   |
|                                                                                                    |   |   |   |    |   |
| Cash and cash equivalents at end of period                                                              |   | $      | 1,501  |    | $      | 2,062 |   |
|                                                                                                    |   |   |   |    |   |
| Supplemental statement of cash flows information:                                                       |   |   |   |    |   |
| Supplemental schedule of noncash investing and  financing activities:                                   |   |   |   |    |   |
| Capital contribution of Madison Purchasing Corp.                                                        |   |   |   |    |   |
| Fair value of assets contributed                                                                        |   | $      | 432    |    |   |   |
| Less: liabilities assumed                                                                               |   | 432    |   |    |   |
| Capital contribution of Madison Purchasing Corp.                                                        |   | $      | — |    |   |   |
|                                                                                                    |   |   |   |    |   |
| Capital contribution of Credit Suisse First Boston  Capital Holdings, Inc.                         |   |   |   |    |   |
| Fair value of assets contributed                                                                        |   |   |   | $       | 67     |   |
| Less: liabilities assumed                                                                               |   |   |   | 33      |   |
| Capital contribution of Credit Suisse First Boston  Capital Holdings, Inc.                         |   |   |   | $       | 34     |   |

 

See accompanying notes tocondensed consolidated financial statements (unaudited).

 

7

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

**Notes toCondensed Consolidated Financial Statements (Unaudited)**

**September 30, 2002**

 

**1.  Summary ofSignificant Accounting Policies**

 

Credit Suisse First Boston (USA), Inc.,formerly known as Donaldson, Lufkin & Jenrette, Inc., and subsidiaries (the“Company”), is a leading integrated investment bank serving institutional,corporate, government and individual clients. The Company provides clients witha broad range of products and services that includes securities underwriting,sales and trading, investment banking, financial advisory services, privateequity investments, investment research, full-service brokerage services,financial services outsourcing solutions, and derivatives and risk managementproducts.

 

The condensed consolidated financial statements include Credit SuisseFirst Boston (USA), Inc. and its subsidiaries. All significant intercompany balances and transactions havebeen eliminated. The Company is a wholly owned subsidiary of Credit SuisseFirst Boston, Inc. (“CSFBI”) and was acquired on November 3, 2000(the “Acquisition”). No adjustments of the historical carrying values of theCompany’s assets and liabilities to reflect the Acquisition by CSFBI wererecorded in the Company’s historical consolidated financial statements.Similarly, although the Acquisition gave rise to goodwill, none of thisgoodwill was “pushed down” to the Company. For further discussion of theAcquisition, see the Company’s Annual Report on Form 10-K for the yearended December 31, 2001.

 

Certain financial information that is normally included in annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America but is not required forinterim reporting purposes has been condensed or omitted. These condensedconsolidated financial statements reflect, in the opinion of management, alladjustments (consisting of normal, recurring accruals) that are necessary for afair presentation of the condensed consolidated statements of financialcondition and income for the interim periods presented.

 

The results of operations for interim periods are not necessarilyindicative of results for the entire year. These condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2001.

 

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

 

Residential mortgage whole loans held for trading purposes are carriedat fair value in the condensed consolidated statements of financial condition,with changes in fair value included in principal transactions-net in thecondensed consolidated statements of income. Mortgage whole loans held for sale are carried at the lower of aggregatecost or fair value in the condensed consolidated statements of financialcondition. The amount by which aggregate cost exceeds fair value is reflectedin principal transactions-net in the condensed consolidated statements ofincome.

 

In June 2001, the Financial Accounting Standards Board (the “FASB”)issued Statement of Financial Accounting Standards No. 141, “BusinessCombinations” (“SFAS 141”), which requires that all business combinationsinitiated after June 30, 2001 be accounted for under the purchase methodof accounting. The pooling of interest method is not permitted. The Companypreviously adopted SFAS 141 for all business combinations initiated after June30, 2001. Effective January 1, 2002, the Company adopted the remainingprovisions of SFAS 141.

 

In June 2001, the FASB issued Statement of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), whichrequires that goodwill and indefinite-lived intangible assets be reviewedannually for impairment instead of being amortized to earnings. Intangibleassets that do not have indefinite lives will continue to be amortized overtheir useful lives and reviewed for impairment. Effective January 1, 2002, theCompany adopted SFAS 142. The Company completed the transitionalimpairment test of goodwill as of January 1, 2002 and determined that there wasno impairment to goodwill and no effect on the Company’s consolidated financialcondition or results of operations as of January 1, 2002.  There have been no events or circumstancesoccurring subsequent to the transitional impairment test that would more likelythan not have resulted in the fair value of the Company’s reporting units beingbelow their respective carrying values. See note 15 for more information on goodwill and identifiable intangibleassets.

 

8

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In June 2001, the FASB issued Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations”(“SFAS 143”), which addresses the financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. This statement is effective for fiscalyears beginning after June 15, 2002. Management believes that the adoptionof SFAS 143 will not have a significant impact on the Company’s consolidated financialcondition or results of operations.

 

In October 2001, the FASB issued Statement of Financial AccountingStandards No. 144, “Accounting for Impairment or Disposal of Long-LivedAssets” (“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” bemeasured at the lower of carrying amount or fair value less cost to sell andalso broadens the reporting requirements for discontinued operations. EffectiveJanuary 1, 2002, the Company adopted SFAS 144. There was no impact on theCompany’s consolidated financial condition or results of operations as a result of adopting SFAS 144.

 

In April 2002, the FASB issued Statement of Financial AccountingStandards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishmentof Debt”, an amendment of that statement, FASB Statement No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and FASBStatement No. 44.  SFAS 145 amends FASBStatement No. 13, “Accounting for Leases” to eliminate an inconsistency betweenthe required accounting for sale-leaseback transactions and the requiredaccounting for certain lease modifications that have economic effects that aresimilar to sale-leaseback transactions. The statement is effective for fiscalyears beginning after May 15, 2002. Management is evaluating the impact ofadopting SFAS 145.

 

In May 2002, the FASB issued an ExposureDraft, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5,57, and 107”.  This proposedinterpretation would require additional disclosures to be made by aguarantor in its financial statements about its obligations under certain ofits guarantees. It also would require a guarantor to recognize, at theinception of a guarantee, a liability for the fair value of the obligations ithas undertaken in issuing the guarantee. Managementis evaluating the impact of adopting the proposed interpretation, which isexpected to be issued in November 2002.

 

In June 2002, the FASB issued Statement of Financial AccountingStandards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which requirescompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than at the date of a commitment to an exit ordisposal plan.  Examples of costscovered by the standard include lease termination costs and certain employeeseverance costs that are associated with restructurings, discontinuedoperations, plant closings, or other exit or disposal activities. The statementis effective for exit or disposal activities initiated after December 31,2002.  Management is evaluating theimpact of adopting SFAS 146.

 

In June 2002, the FASB issued an ExposureDraft, “Consolidation of Certain Special-Purpose Entities - an Interpretationof ARB No. 51”.  This proposedinterpretation would address consolidation by business enterprises ofspecial-purpose entities (“SPEs”) to which the usual condition forconsolidation described in Accounting Research Bulletin No. 51, *Consolidated Financial Statements,*doesnot apply because the SPEs have no voting interests or otherwise are notsubject to control through ownership of voting interests. If the proposedinterpretation were adopted, off balance sheet treatment would be eliminatedfor many transactions that were structured by companies under currentaccounting guidance. The FASB is currently reconsidering its proposed guidance,and the Company is monitoring the FASB’s deliberations.

 

In October 2002, the FASB issued an Exposure Draft, “Accounting forStock-Based Compensation - Transition and Disclosure”, which would amend Statement of Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation”.  This proposedinterpretation would provide transition alternatives for companies who havevoluntarily elected to adopt a fair-value based methodology with respect toemployee stock options.  It would alsorequire additional and more frequent disclosures related to such stockoptions.  The Company currently accounts for stockoptions using the intrinsic value-based method in Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees”, rather than thefair value-based method in SFAS 123. Management is evaluating the impact of adopting SFAS 123 and theproposed interpretation.

 

9

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In October 2002, the FASB issued Statement of Financial AccountingStandards No. 147 “Acquisitions of Certain Financial Institutions” (“SFAS147”).  This statement provides guidanceon accounting for the acquisition of a financial institution and applies toacquisitions of all financial institutions except mutual enterprises.  Paragraph 5 of this statement, which relatesto the application of the purchase method of accounting, is effective if thedate of acquisition is on or after October 1, 2002.  The provisions related to accounting for the impairment or disposalof certain long-term assets were effective October 1, 2002.  Transition provisions from previouslyrecognized unidentifiable intangible assets were effective October 1, 2002 withearlier application permitted. Management believes that the adoption of SFAS 147 will not have asignificant impact on the Company’s consolidated financial condition or resultsof operations.

 

The Company accounts for income taxes under the provisions of Statementof Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS109”). Under SFAS 109, deferred income taxes are recorded for the future taxconsequences of events that have been recognized in the financial statements ortax returns, based upon enacted tax laws and rates.  Deferred tax assets are recognized subject to management’sjudgment that realization is more likely than not.

 

On January 31, 2002, the Companyacquired the assets of Holt Value Associates, L.P., a leading provider ofindependent research and valuation services to asset managers, which wasintegrated with CSFB*Edge*, theCompany’s online research and valuation database service.

 

In the first quarter of 2002, the Company sold three of itsbroker-dealers, CSFB*direct* LLC,DLJ*direct* Ltd. and Autranet,LLC.  As a result, the Company recordeda pre-tax gain of $528 million in the quarter ended March 31, 2002.

 

On September 30, 2002, CSFBI contributed all of the issued andoutstanding shares of Madison Purchasing Corp. (“MMP”) to the Company in orderto achieve certain administrative efficiencies.  MMP is engaged in the business of purchasing and owningleasehold improvements, furniture and fixtures, and technology assets.  Simultaneouswith the contribution of MMP to the Company, MMP was merged with DonaldsonLeasing Corp., a subsidiary of the Company. MMP is the surviving entity.

 

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

 

**2.  Merger-RelatedCosts**

 

Merger-related costs represent retention awards related to theAcquisition, which are being expensed over the vesting period. The vestingperiod is generally three years. The remaining retention awards of$261 million at September 30, 2002 are expected to be charged againstearnings in the following periods:

 

|                           |   | **Amounts to  be Charged** |   |
|--------------------------------|--------|----------------------------|--------|
|                           |   | **(In millions)**          |   |
| 2002 (remaining 3 months) |   | $                          | 76     |   |
| 2003                           |   | 165                        |   |
| 2004                           |   | 20                         |   |
| Total                          |   | $                          | 261    |   |

 

10

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**3.  Related PartyTransactions**

 

Credit Suisse Group (“CSG”), indirectlythrough CSFBI, owns all of the Company’s outstanding voting common stock. TheCompany is involved in significant financing and other transactions, and hassignificant related party balances with Credit Suisse First Boston, a Swissbank subsidiary of CSG and an indirect parent of the Company, and certain ofits subsidiaries and affiliates. The Company enters into these transactions inthe ordinary course of business and believes that these transactions are onmarket terms that could be obtained from unrelated third parties.

 

The following table sets forth related party assets and liabilities:

 
|                                                              |   | **September 30,********2002** |   | **December 31,********2001** |   |
|-------------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                                              |   | **(In millions)**                  |   |
| Securities purchased under agreements to resell                   |   | $                                  | 4,551  |                              | $      | 2,740 |   |
| Securities borrowed                                               |   | 1,959                              |   | 1,552                             |   |
| Receivables from brokers, dealers and other                       |   | 1,359                              |   | 0                                 |   |
| Derivatives contracts                                             |   | 1,715                              |   | 710                               |   |
| Taxes receivable (included in other assets and  deferred amounts) |   | 19                                 |   | 8                                 |   |
| Loans receivable from parents and affiliates                      |   | 16,521                             |   | 7,631                             |   |
| Total Assets                                                      |   | $                                  | 26,124 |                              | $      | 12,641 |   |
|                                                              |   |                               |   |                              |   |
| Securities sold under agreements to repurchase                    |   | $                                  | 16,271 |                              | $      | 13,994 |   |
| Securities loaned                                                 |   | 10,517                             |   | 12,604                            |   |
| Short-term borrowings                                             |   | 8,604                              |   | 7,136                             |   |
| Payables to brokers, dealers and other                            |   | 1,329                              |   | 2,172                             |   |
| Derivatives contracts                                             |   | 630                                |   | 709                               |   |
| Taxes payable (included in other liabilities)                     |   | 420                                |   | 959                               |   |
| Intercompany payables (included in other  liabilities)            |   | 537                                |   | 598                               |   |
| Total Liabilities                                                 |   | $                                  | 38,308 |                              | $      | 38,172 |   |

 

Included in the condensed consolidatedstatements of income are revenues and expenses resulting from varioussecurities trading, investment banking and financing activities with certainaffiliates, as well as fees for administrative services performed by theCompany under the terms of various service level arrangements. Service levelfees are treated as a reduction of other operating expenses in the condensedconsolidated statements of income.

 

The following table sets forth related party revenues and expenses:

 
|                     |   | **Nine Months Ended**              |   |
|--------------------------|--------|------------------------------------|--------|
|                     |   | **September 30,********2002** |   | **September 30,********2001** |   |
|                     |   | **(In millions)**                  |   |
| Commissions              |   | $                                  | (19    | ) | $ | (28 | ) |
| Interest income          |   | 290                                |   | 418 |   |
| Total Revenues           |   | $                                  | 271    |   | $ | 390 |   |
|                     |   |                               |   |   |   |
| Interest expense         |   | $                                  | 517    |   | $ | 1,551 |   |
| Other operating expenses |   | (135                               | )      | (107 | ) |
| Total Expenses           |   | $                                  | 382    |   | $ | 1,444 |   |

 

Pursuant to an agreement, the Company sold at cost, without recourse, toCSFBI, the right, title and interest in certain assets with an aggregate valueof $352.7 million and $216.2 million for the nine and twelve months endedSeptember 30, 2002 and December 31, 2001, respectively.

 

11

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The CSG Share Plan (the “Plan”) provides for equity-based awards to theCompany’s employees based on CSG shares. Pursuant to the Plan, employees of theCompany may be granted, as compensation, stock or other equity-based awards.The provisions of the Plan include a provision to deliver CSG shares to theemployees as compensation for services performed. To the extent that CSFBI doesnot require reimbursement from the Company for these awards, amounts are considereda capital contribution to the Company and credited to paid-in capital.

 

As part of its securitization activities, the Company sells residentialand commercial mortgage loans to an affiliate at market value. The affiliatethen securitizes these assets. For the nine months ended September 30,2002 and 2001, the Company sold $15.0 billion and $9.7 billion, respectively,of residential and commercial mortgage loans to an affiliate.

 

**4.  Income Taxes**

 

The Company is included in a consolidated federal income tax return andcombined 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 willbe paid by CSFBI to the Company to the extent that such credits are for taxbenefits that have been utilized in the consolidated federal or combined stateand local income tax return. CSFBI allocated current tax expense of $186 millionand $134 million to the Company for the nine months ended September 30,2002 and 2001, respectively. Prior to the Acquisition, the Company filed itsown U.S. consolidated federal income tax return.

 

Income taxes included in the condensedconsolidated statements of income include the following:

 
|                                       |   | **Nine Months Ended**    |   |
|--------------------------------------------|--------|--------------------------|--------|
|                                       |   | **September  30,  2002** |   | **September  30,  2001** |   |
|                                       |   | **(In  millions)**       |   |
| Current:                                   |   |                     |   |   |   |
| U.S. Federal                               |   | $                        | 183    |   | $ | 152 |   |
| Foreign                                    |   | 4                        |   | 3 |   |
| State and local                            |   | (1                       | )      | (21 | ) |
| Total current                              |   | 186                      |   | 134 |   |
|                                       |   |                     |   |   |   |
| Deferred:                                  |   |                     |   |   |   |
| U.S. Federal                               |   | 175                      |   | (156 | ) |
| Total deferred                             |   | 175                      |   | (156 | ) |
|                                       |   |                     |   |   |   |
| Total provision (benefit) for income taxes |   | $                        | 361    |   | $ | (22 | ) |

 

12

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Thefollowing table summarizes the difference between the “expected” tax provision,which is computed by applying the statutory tax rate to income before provisionfor income taxes, and the actual provision for income taxes, which is computedby using the effective tax rate for the nine months ended September 30,2002 and 2001:

 
|                                                     |   | **Nine Months Ended**                 |   |
|----------------------------------------------------------|--------|---------------------------------------|--------|
|                                                     |   | **September 30, 2002**           |   | **September 30, 2001** |   |
|                                                     |   | **Amount**                            |   | **Percent of  Pre-tax********Income** |   | **Amount** |   | **Percent of********Pre-tax********Income** |   |
|                                                     |   | **(In millions, except percentages)** |   |
| Computed “expected” tax provision (benefit)    |   | $                                     | 361    |   | 35.0 | % | $ | (17 | ) | (35.0 | )% |
| Increase (decrease) due to:                              |   |                                  |   |   |   |   |   |   |   |
| Entertainment expense                                    |   | 5                                     |   | 0.4 |   | 8 |   | 17.5 |   |
| Dividend exclusion                                       |   | (17                                   | )      | (1.7 | ) | (27 | ) | (56.9 | ) |
| Goodwill and intangibles                                 |   | —                                |   | — |   | 7 |   | 14.3 |   |
| State and local taxes, net of federal income tax effects |   | (1                                    | )      | (0.1 | ) | (14 | ) | (28.3 | ) |
| Other                                                    |   | 13                                    |   | 1.4 |   | 21 |   | 42.8 |   |
| Provision (benefit) for (from) income taxes              |   | $                                     | 361    |   | 35.0 | % | $ | (22 | ) | (45.6 | )% |

 

Deferredtax assets and deferred tax liabilities are generated by the followingtemporary differences:

 
|                                                                         |   | **September 30,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(In millions)**            |   |
| Deferred tax assets:                                                         |   |                         |   |                        |   |
| Inventory                                                                    |   | $                            | 253    |                        | $      | 136 |   |
| Investments                                                                  |   | 243                          |   | 191                         |   |
| Other liabilities and accrued expenses, primarily compensation and  benefits |   | 1,326                        |   | 1,630                       |   |
| Office facilities                                                            |   | 18                           |   | 21                          |   |
| Net operating loss carryforward                                              |   | —                       |   | 373                         |   |
| State and local taxes                                                        |   | 46                           |   | 62                          |   |
| Total deferred tax assets                                                    |   | 1,886                        |   | 2,413                       |   |
| Deferred tax liabilities:                                                    |   |                         |   |                        |   |
| Inventory                                                                    |   | 70                           |   | 74                          |   |
| Investments                                                                  |   | 63                           |   | 51                          |   |
| Office facilities                                                            |   | 7                            |   | 2                           |   |
| Other                                                                        |   | 35                           |   | 24                          |   |
| Total deferred tax liabilities                                               |   | 175                          |   | 151                         |   |
| Deferred tax assets net of deferred tax liabilities                          |   | 1,711                        |   | 2,262                       |   |
| Valuation allowance for state and local taxes                                |   | (46                          | )      | (62                         | )      |
| Net deferred tax asset                                                       |   | $                            | 1,665  |                        | $      | 2,200 |   |

 

Management has determined that the realization of the recognized grossdeferred tax asset of $1.9 billion and $2.4 billion at September 30, 2002and December 31, 2001, respectively, is more likely than not based onanticipated future taxable income. In addition, for federal income tax purposes,the Company has planning strategies available that may enhance its ability toutilize these tax benefits. However, if estimates of future taxable income arereduced, the amount of the deferred tax asset considered realizable could alsobe reduced. Further, due to uncertainty concerning the Company’s ability togenerate the necessary amount and mix of state and local taxable income infuture periods, the Company continues to maintain a valuation allowance againstits deferred state and local tax asset in the amount of $46 million and $62million, at September 30, 2002 and December 31, 2001, respectively.

 

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**5.  Transfers andServicing of Financial Assets**

 

As of September 30, 2002 and December 31, 2001, the fair marketvalue of assets that the Company pledged to counterparties was $170.6 billionand $143.5 billion, respectively, of which $48.5 billion and $42.3 billion,respectively, was included in financial instruments owned. The Company has alsoreceived similar assets as collateral where it has the right to re-pledge orsell the assets. As of September 30, 2002 and December 31, 2001, thefair market value of the assets pledged to the Company was $165.2 billion and$135.2 billion, respectively. The Company routinely re-pledges or lends theseassets to third parties.

 

As part of the Company’s securitization activities, commercial andresidential mortgages are sold to qualified special-purpose entities (“QSPEs”)and securitized. Beneficial interests in those entities are sold to investors.The investors and the securitization entities have no recourse to the Company’sassets. For the nine months ended September 30, 2002, the Companysecuritized $3.3 billion in residential and commercial mortgages and recognizeda net loss on these transactions of $21.0 million. For the nine months endedSeptember 30, 2001, the Company securitized $202.3 million inresidential mortgages, and recognized a net loss on these transactions of$0.7 million.  These losses excludenet interest revenues earned on commercial and residential mortgages prior tosecuritization and any underwriting gains or losses.  In addition, for the nine months ended September 30, 2002 and2001, the Company sold to an affiliate $15.0 billion and $9.7 billion, respectively,of residential and commercial mortgages, which were subsequently securitized.The Company’s primary broker-dealer subsidiary acting as underwriter had unsoldpositions of $879.0 million and $225.0 million at September 30, 2002 and 2001,respectively, associated with these transactions.

 

**6.  Borrowings**

 

Short-termborrowings are generally demand obligations with interest approximating thefederal funds rate, LIBOR or other money market indices. Such borrowings aregenerally used to facilitate the securities settlement process, to financesecurities inventories, and to finance securities purchased by customers onmargin.

 

AtSeptember 30, 2002 and December 31, 2001, there were no borrowingssecured by Company-owned securities.

 

TheCompany has two commercial paper programs exempt from registration under theSecurities Act of 1933, which allow the Company to issue up to $7.0 billion incommercial paper. At September 30, 2002 and December 31, 2001, $1.4billion and $1.2 billion, respectively, of commercial paper was outstandingunder these programs.

 

Thefollowing table sets forth the Company’s long-term borrowings: 

 
|                                                              |   | **September 30,  2002** |   | **December 31,  2001** |   |
|-------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                              |   | **(In millions)**            |   |
| Senior notes 4.68% – 8.00%, due various dates through 2032   |   | $                            | 13,416 |                        | $      | 7,548 |   |
| Medium-term notes 2.54%-7.49%, due various dates through 2032     |   | 9,895                        |   | 7,813                       |   |
| Structured borrowings 7.06%-7.34%, due various dates through 2014 |   | 210                          |   | 297                         |   |
| Other                                                             |   | —                       |   | 5                           |   |
| Total long-term borrowings                                        |   | $                            | 23,521 |                        | $      | 15,663 |   |
| Current maturities of long-term borrowings                        |   | $                            | 4,914  |                        | $      | 4,028 |   |

 

In May 2002, the Company replaced its $3.5 billion revolving creditfacility with a new 364-day $3.0 billion revolving credit facility available tothe Company as borrower.  Proceeds fromborrowings under this facility can be used for general corporate purposes, andthe facility is guaranteed by CSG. The facility contains customary covenantsthat the Company believes will not impair its ability to obtain funding. AtSeptember 30, 2002, no borrowings were outstanding under this facility.

 

14

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Under the Company’s currently effective $10 billion shelf registrationstatement on file with the Securities and Exchange Commission, which allows theCompany to issue from time to time senior and subordinated debt securities andwarrants to purchase such securities, the Company had at November 13, 2002,approximately $8.5 billion available for issuance. During the nine months endedSeptember 30, 2002, under this and predecessor shelf registration statements,the Company issued both medium-term notes and longer-dated fixed incomesecurities to extend the maturity profile of the Company’s debt. In the ninemonths ended September 30, 2002, the Company issued $2.75 billion 61⁄2% notes due2012, $1.75 billion 53⁄4% notes due 2007, $1.0 billion 71/8%notes due 2032 and $3.0 billion in medium-term notes off current andpredecessor shelf registration statements, and $822 million in Euro medium-termnotes under the Company’s $5 billion program established in July 2001.

 

Forthe nine months ended September 30, 2002 and 2001, interest paid on allborrowings and financing arrangements was $3.4 billion and $7.9 billion,respectively. At September 30, 2002 and December 31, 2001, theCompany had entered into interest rate and currency swaps on $13.3 billionand $3.3 billion, respectively, of its senior and medium-term notes.  See note 10 for more discussion onderivatives.

 

**7.  Private Equity andOther Long-term Investments**

 

Privateequity and other long-term investment activities include direct investments andinvestments in partnerships that make private equity and related investments invarious portfolio companies and funds. The Company’s subsidiaries, acting asgeneral partner, manage many private equity partnerships.  When the investment performance on privateequity partnerships managed by the Company’s subsidiaries exceeds specificthresholds, the Company receives carried interest gains, primarily onrealizations.  Carried interest gainsare based on the cumulative investment performance over the life of eachpartnership.  The Company would berequired to return carried interest gains previously distributed by thepartnerships if the investment underperforms following the prior distributionof carried interest gains.

 

Privateequity and other long-term investments are carried at estimated fair value inthe condensed consolidated financial statements, and are primarily in unlistedor illiquid equity or equity-related securities. At September 30, 2002 andDecember 31, 2001, the Company had investments of $0.8 billion and $1.0billion, respectively, and had commitments to invest up to an additional $2.0billion and $1.7 billion, respectively. The cost of these investments was $1.1billion and $1.2 billion at September 30, 2002 and December 31, 2001,respectively. Changes in net unrealized (depreciation) appreciation arisingfrom changes in fair value or upon realization are reflected in principaltransactions-net in the condensed consolidated statements of income.

** **

**8.  Net Capital**

 

TheCompany’s principal wholly owned subsidiaries, Donaldson, Lufkin &Jenrette Securities Corporation (“DLJSC”) and Credit Suisse First BostonCorporation (“CSFB Corp.”), are registered broker-dealers, registered futurescommission 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, whichconforms to the Uniform Net Capital Rule pursuant to Rule 15c3-1 of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Under thealternative method permitted by this rule, the required net capital may not beless than two percent of aggregate debit balances arising from customertransactions or four percent of segregated funds, whichever is greater. If amember 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 netcapital is less than five percent of aggregate debit balances, the NYSE mayprevent the firm from expanding its business and declaring cash dividends. AtSeptember 30, 2002, DLJSC’s and CSFB Corp.’s net capital of approximately$1.2 billion and $3.6 billion, respectively, was 26.0 percent and 168.9percent, respectively, of aggregate debit balances and in excess of the minimumrequirement by approximately $1.1 billion and $3.5 billion, respectively. TheCompany’s broker-dealer lite entity, Credit Suisse First Boston Capital LLC, isalso subject to the uniform net capital rule, but calculates its net capitalrequirements under Appendix F of SEC Rule 15c3-1.  The Company’s London broker-dealersubsidiaries are subject to capital requirements of the Financial ServicesAuthority. Certain othersubsidiaries are also subject to capital adequacy requirements.  At September 30, 2002, the Company andits subsidiaries complied with all applicable regulatory capital adequacyrequirements.

 

15

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**9.  Cash andSecurities Segregated Under Federal and Other Regulations**

 

Incompliance with the Commodities Exchange Act, the Company segregates fundsdeposited by customers and funds accruing to customers as a result ofcontracts. As of September 30, 2002 and December 31, 2001, cash andsecurities aggregating $1.4 billion and $1.0 billion, respectively, weresegregated or secured in separate accounts on behalf of customers.

 

Inaccordance with the Securities and Exchange Commission’s no action letter datedNovember 3, 1998, the Company computed a reserve requirement for the proprietaryaccounts of introducing broker-dealers. As of September 30, 2002 andDecember 31, 2001, securities aggregating $40.5 million and $40.4 million,respectively, were segregated on behalf of introducing broker-dealers.

 

Inaddition, U.S. Treasury securities with a market value of $5.1 billion and $5.3billion, as of September 30, 2002 and December 31, 2001,respectively, were segregated in a special reserve bank account to benefitcustomers as required by Rule 15c3-3 of the Securities and Exchange Commission.

 

**10.  DerivativesContracts**

 

TheCompany uses derivatives contracts for both trading and hedging purposes.  These derivatives include options, forwards,futures and swaps.  Most of theCompany’s derivatives transactions are accounted for as trading positions.

 

***HedgingDerivatives***

 

The Company manages its interest rate exposure on its fixed-rate debt byusing interest rate swaps that qualify for hedge accounting under Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”). These financial instruments are accountedfor as fair value hedges, with changes in fair value included in other revenuesin the condensed consolidated statements of income.

 

The effectiveness of hedging relationships is evaluated usingquantitative measures of correlation. If a hedge relationship is not found tobe highly effective, it no longer qualifies as a hedge and any subsequent gainsor losses attributable to the hedged item cease to be recognized, while thesubsequent changes in the derivative instrument’s fair value are recognized inearnings, in each reporting period.  Thegains and losses related to the ineffective component of the fair value hedgeswere not material for the three months and nine months ended September 30, 2002and September 30, 2001.

 

Other derivatives used for hedging purposes that do not qualify ashedges under SFAS 133 are carried at fair value with changes in value includedin principal transactions-net in the condensed consolidated statements ofincome.  For the nine months endedSeptember 30, 2002 and 2001, the Company recognized an after-tax (loss) gain of$(4.6) million and $3.9 million, respectively, for these derivatives.

 

***TradingDerivatives***

 

*Options*

 

The Company writes option contracts specifically designed to meetcustomer needs or for hedging purposes. These options do not expose the Companyto credit risk because the Company, not its counterparty, is obligated toperform. At the beginning of the contract period, the Company receives a cashpremium. During the contract period, the Company bears the risk of unfavorablechanges in the value of the financial instruments underlying the options(“market risk”). To manage this market risk, the Company purchases or sellscash or derivative financial instruments on a proprietary basis. Such purchasesand sales may include debt and equity securities, forward and futures contractsand options.

 

The Company also purchases options for trading purposes. With purchasedoptions, the Company gets the right, for a fee, to buy or sell the underlyinginstrument at a fixed price on or before a specified date. The underlyinginstruments for these options include fixed income securities, equities,foreign currencies and interest rate instruments or indices. The counterpartiesto these purchases are reviewed to determine whether they are creditworthy.

 

16

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*Forwards and Futures*

 

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

 

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

 

Because forward contracts are subject to the financial reliability ofthe counterparty, the Company is exposed to credit risk. To monitor this creditrisk, the Company limits transactions with specific counterparties, reviewscredit limits and adheres to internally established credit extension policies.For futures contracts and options on futures contracts, the change in themarket 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 changein the market value for a single day.

 

*Swaps*

 

The Company’s swap agreements consist primarily of interest rate andequity swaps. Interest rate swaps are contractual agreements to exchangeinterest rate payments based on agreed notional amounts and maturity.  Equity swaps are contractual agreements toreceive the appreciation or depreciation in value based on a specific strikeprice on an equity instrument in exchange for paying another rate, which isusually based on index or interest rate movements.  Swaps are reported at fair value.

 

***Quantitative Disclosures for AllDerivatives***

 

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

 
|              |   | **September 30, 2002** |   | **December 31, 2001** |   |
|-------------------|--------|-----------------------------|--------|----------------------------|--------|
|              |   | **Assets**                  |   | **Liabilities**            |   | **Assets** |   | **Liabilities** |   |
|              |   | **(In millions)**           |
| Options           |   | $                           | 989    |                       | $      | 1,481 |   | $ | 968 |   | $ | 1,010 |   |
| Forward contracts |   | 728                         |   | 717                        |   | 1,652 |   | 1,647 |   |
| Futures contracts |   | 11                          |   | 32                         |   | 103 |   | 20 |   |
| Swaps             |   | 1,724                       |   | 460                        |   | 354 |   | 280 |   |
| Total             |   | $                           | 3,452  |                       | $      | 2,690 |   | $ | 3,077 |   | $ | 2,957 |   |

 

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

 

**11.  FinancialInstruments With Off Balance Sheet Risk**

 

In the normal course of business, the Company’s customer, trading andclearance activities include executing, settling and financing varioussecurities and financial instrument transactions. To execute thesetransactions, the Company purchases and sells (including “short sales”) securities,and purchases and sells forward contracts for mortgage-backed securities andforeign currencies and financial futures contracts. If the customer orcounterparty to the transaction is unable to fulfill its contractualobligations, and margin requirements are not sufficient to cover losses, theCompany may be exposed to off balance sheet risk. In these situations, theCompany may be required to purchase or sell financial instruments at prevailingmarket prices, which may not fully cover the obligations of its customers orcounterparties. This risk is limited by requiring customers and counterpartiesto maintain margin collateral that complies with regulatory and internalguidelines. Additionally, with respect to the Company’s clearance activities,introducing brokers are required to guarantee the performance of theircustomers to meet contractual obligations.

 

17

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As part of the Company’s financing and securities settlement activities,the Company uses securities as collateral to support various secured financingsources. If the counterparty does not meet its contractual obligation to returnsecurities used as collateral, the Company may be exposed to the risk ofreacquiring the securities at prevailing market prices to satisfy itsobligations. The Company controls this risk by monitoring the market value ofsecurities pledged each day and by requiring collateral levels to be adjustedin the event of excess market exposure.

 

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

 

The settlement of the above transactions is not expected to have amaterial adverse effect on the Company’s consolidated financial condition.

 

**12.  Concentrations ofCredit Risk**

 

As a securities broker and dealer, the Company is engaged in varioussecurities trading and brokerage activities servicing a diverse group ofdomestic and foreign corporations, governments, and institutional andindividual investors. A substantial portion of the Company’s transactions areexecuted with and on behalf of institutional investors, including other brokersand dealers, mortgage brokers, commercial banks, U.S. agencies, mutual funds,hedge funds and other financial institutions. These transactions are generallycollateralized. Credit risk is the potential for loss resulting from thedefault by a counterparty of its obligations. Exposure to credit risk isgenerated by securities and currency settlements, contracting derivatives andforward transactions with customers and dealers, and the holding in inventoryof bonds and/or loans. The Company uses various means to manage its creditrisk. The creditworthiness of all counterparties is analyzed at the outset of acredit relationship with the Company. These counterparties are subsequentlyreviewed on a periodic basis. The Company sets a maximum exposure limit foreach counterparty, as well as for groups or classes of counterparties.Furthermore, the Company enters into master netting agreements when feasibleand demands collateral from certain counterparties or for certain types ofcredit transactions.

 

The Company’s customer securities activities are transacted either incash 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 activitiesby requiring customers to maintain margin collateral to comply with variousregulatory and internal guidelines. The Company monitors required margin levelseach day and requires customers to deposit additional collateral, or reducepositions, when necessary.

 

**13.  Commitments andContingent Liabilities**

 

The Company had commitments of approximately $2.0 billion and $1.7billion at September 30, 2002 and December 31, 2001, respectively, toinvest in or on a side-by-side basis with partnerships that make private equityand related investments in various portfolio companies or other private equityfunds.

 

The Company was contingently liable for letters of credit aggregatingapproximately $960 million and $588 million at September 30, 2002 andDecember 31, 2001, respectively. These letters of credit satisfy variouscollateral requirements.

 

The Company has commitments to providefunding to various third parties in the form of standby repurchase agreements,funding guarantees, and other financial guarantees.  At September 30, 2002 and December 31, 2001, these commitments totaled$1,907 million and $174 million, respectively.

 

As of September 30, 2002 and December 31, 2001, the Companyhad commitments to enter into securities purchased under agreements to reselland securities sold under agreements to repurchase of approximately $1.2billion and $3.0 billion, respectively. See “Contractual Obligations andContingent Commitments” in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 2 of this report.

 

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**14.  Industry SegmentData**

 

The Company operates and manages its businesses through three operatingsegments: the Investment Banking and Private Equity Division (“IBD”), theSecurities Division, consisting of Equity and Fixed Income, and the FinancialServices Division.

 

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

 

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

 

In the Securities Division:

 

•                  The Equity business trades, conducts researchon, originates and distributes equity securities and equity-relatedderivatives.

 

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

 

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

 

The following table sets forth the netrevenues from external sources, net interdivision revenues, net interestrevenue (expense), total expenses and income (loss) of the Company’s divisions:

 
|                                            |   | **IBD**           |   | **Securities** |   | **Financial  Services** |   | **Elimination  & Other** |   | **Total** |   |
|-------------------------------------------------|--------|-------------------|--------|----------------|--------|-------------------------|--------|------------------------------|--------|-----------|--------|
|                                            |   | **(In millions)** |   |
| **Three months ended September 30, 2002:** |   |              |   |           |   |                    |   |                         |   |      |   |
| Net revenues from external sources              |   | $                 | 302    |           | $      | 322                     |   | $                            | 234    |      | $      | (140 | ) | $ | 718 |   |
| Net interdivision revenues                      |   | —            |   | —         |   | 3                       |   | (3                           | )      | —    |   |
| Net interest revenue (expense)                  |   | 15                |   | 542            |   | 32                      |   | (9                           | )      | 580       |   |
| Total expenses                                  |   | 393               |   | 550            |   | 239                     |   | 63                           |   | 1,245     |   |
| Income (loss) *                                 |   | $                 | (76    | )              | $      | 314                     |   | $                            | 30     |      | $      | (215 | ) | $ | 53 |   |
| **Three months ended September 30, 2001:** |   |              |   |           |   |                    |   |                         |   |      |   |
| Net revenues from external sources              |   | $                 | 342    |           | 429    |                    | 247    |                         | $      | 30        |   | $ | 1,048 |   |
| Net interdivision revenues                      |   | —            |   | —         |   | 21                      |   | (21                          | )      | —    |   |
| Net interest revenue (expense)                  |   | 16                |   | 234            |   | 56                      |   | (13                          | )      | 293       |   |
| Total expenses                                  |   | 600               |   | 866            |   | 312                     |   | 168                          |   | 1,946     |   |
| Income (loss) *                                 |   | $                 | (242   | )              | $      | (203                    | )      | $                            | 12     |      | $      | (172 | ) | $ | (605 | ) |
| **Nine months ended September 30, 2002:**  |   |              |   |           |   |                    |   |                         |   |      |   |
| Net revenues from external sources              |   | $                 | 1,240  |           | $      | 1,515                   |   | $                            | 766    |      | $      | 354 |   | $ | 3,875 |   |
| Net interdivision revenues                      |   | —            |   | —         |   | 19                      |   | (19                          | )      | —    |   |
| Net interest revenue (expense)                  |   | 31                |   | 1,451          |   | 100                     |   | (37                          | )      | 1,545     |   |
| Total expenses                                  |   | 1,284             |   | 2,071          |   | 769                     |   | 264                          |   | 4,388     |   |
| Income (loss) *                                 |   | $                 | (13    | )              | $      | 895                     |   | $                            | 116    |      | $      | 34 |   | $ | 1,032 |   |
| **Nine months ended September 30, 2001:**  |   |              |   |           |   |                    |   |                         |   |      |   |
| Net revenues from external sources              |   | $                 | 1,484  |           | $      | 2,593                   |   | $                            | 823    |      | $      | 344 |   | $ | 5,244 |   |
| Net interdivision revenues                      |   | —            |   | —         |   | 74                      |   | (74                          | )      | —    |   |
| Net interest revenue (expense)                  |   | (32               | )      | 508            |   | 195                     |   | 56                           |   | 727       |   |
| Total expenses                                  |   | 1,758             |   | 2,583          |   | 997                     |   | 682                          |   | 6,020     |   |
| Income (loss) *                                 |   | $                 | (306   | )              | $      | 518                     |   | $                            | 95     |      | $      | (356 | ) | $ | (49 | ) |

 

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*    Before income taxes and thecumulative effect of a change in accounting principle.

 

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The Company allocates to its divisions a pro rata share of certaincentrally managed costs such as leased facilities and equipment costs, employeebenefits and certain general overhead expenses based upon specified amounts,usage criteria or agreed rates, and allocates interest expense based upon thetype of asset. The division allocation of some costs, such as incentivebonuses, has been estimated.

 

The following table is a reconciliation of the Company’s reportedrevenues and income before provision for income taxes and cumulative effect ofa change in accounting principle to the Company’s consolidated totals:

 
|                                                                                                             |   | **Three  Months Ended****September 30,** |   | **Nine  Months Ended****September 30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                             |   | **2002**                                      |   | **2001**                                     |   | **2002** |   | **2001** |   |
|                                                                                                             |   | **(In millions)**                             |   |
| **Revenues**:                                                                                                    |   |                                          |   |                                         |   |   |   |   |   |
| Total net revenues for reported divisions                                                                        |   | $                                             | 1,450  |                                         | $      | 1,345 |   | $ | 5,122 |   | $ | 5,645 |   |
| Elimination and Other(1)                                                                                         |   | (152                                          | )      | (4                                           | )      | 298 |   | 326 |   |
| Total consolidated net revenues                                                                                  |   | $                                             | 1,298  |                                         | $      | 1,341 |   | $ | 5,420 |   | $ | 5,971 |   |
| **Income before provision for income taxes, and  cumulative effect of a change in accounting principle:**        |   |                                          |   |                                         |   |   |   |   |   |
| Total income (loss) for reported divisions                                                                       |   | $                                             | 268    |                                         | $      | (433 | ) | $ | 998 |   | $ | 307 |   |
| Elimination and Other(1)                                                                                         |   | (215                                          | )      | (172                                         | )      | 34 |   | (356 | ) |
| Total income (loss) before provision for income taxes and cumulative  effect of a change in accounting principle |   | $                                             | 53     |                                         | $      | (605 | ) | $ | 1,032 |   | $ | (49 | ) |

 

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(1)          TheCompany has not allocated merger-related costs because none of these costsrepresents normal operating costs. These costs are included in theElimination & Other category. Also included in this category are: (1)intercompany accounts/interdivisional revenue charges that are eliminated inconsolidation and other revenues and expenses that are not directlyattributable to the Company’sdivisions; (2) the results for the broker-dealers CSFB*direct* LLC, DLJ*direct* Ltd. and Autranet, LLC up to the time of, andthe gain resulting from, their sale in the first quarter of 2002; and (3) thegain of approximately $179 million from the assignment of the lease and thesale of leasehold improvements of the Company's former headquarters at 277 ParkAvenue during the first quarter of 2001. All accounting policies of the divisions are the same as those describedin the summary of significant accounting policies.

 

The Company’s principal operations arelocated in the United States. The Company maintains sales offices in Europe,Latin America and Asia. The Company’s foreign revenues are not significant.

 

**15.  Goodwill andIdentifiable Intangible Assets**

 

On January 1, 2002, the Company adopted SFAS 142, whichaddresses the initial recognition and measurement of intangible assets acquiredoutside a business combination and the recognition and measurement of goodwilland other intangible assets subsequent to acquisition. Under the new standard,goodwill and indefinite-lived assets are reviewed annually for impairmentinstead of being amortized to earnings. Intangible assets that do not haveindefinite lives will continue to be amortized over their useful lives andreviewed for impairment.

 

As of September 30, 2002 andDecember 31, 2001, there was $303 million and $249 million ofgoodwill, respectively, included in goodwill and other intangible assets in thecondensed consolidated statements of financial condition. ThroughDecember 2001, goodwill was amortized over a 20-year life on astraight-line basis.  At September 30,2002, the Company had identifiable intangible assets of $30 million, primarilysoftware and customer lists, which are being amortized over useful livesranging from 5 to 20 years.

 

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The Company completed the transitionalimpairment test of goodwill as of January 1, 2002 and determined that there wasno impairment to goodwill and no effect on the Company’s consolidated financialcondition or results of operations as of January 1, 2002. There have been no events or circumstancesoccurring subsequent to the transitional impairment test that would more likelythan not have resulted in the fair value of the Company’s reporting units beingbelow their respective carrying values.

 

The following table sets forth reported net income, as adjusted toexclude goodwill amortization expense:

 
|                          |   | **Three Months Ended  September 30,** |   | **Nine  Months Ended****September 30,** |   |
|-------------------------------|--------|--------------------------------------------|--------|----------------------------------------------|--------|
|                          |   | **2002**                                   |   | **2001**                                     |   | **2002** |   | **2001** |   |
|                          |   | **(In millions)**                          |   |
| Net income (loss) as reported |   | $                                          | 35     |                                         | $      | (398 | ) | $ | 671 |   | $ | (26 | ) |
| Net income (loss) as adjusted |   | $                                          | 35     |                                         | $      | (390 | ) | $ | 671 |   | $ | (3 | ) |

 

On January 31, 2002, the Company acquired the assets of Holt ValueAssociates, L.P., a leading provider of independent research and valuationservices to asset managers, which was integrated with CSFB*Edge*, the Company’s online research andvaluation database service. This acquisition was accounted for as a purchase.In connection with the acquisition, the Company recorded approximately$54 million of goodwill and $30 million of intangible assets relatingprimarily to software and customer lists.

 

**16.  Legal Proceedings**

 

Certain significant legalproceedings and matters have been previously disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2001, Quarterly Reports onForm 10-Q for the three months ended March 31, 2002 and June 30, 2002, orCurrent Reports on Form 8-K previously filed in 2002.  The following is an update of such proceedings.

 

***In re Issuer Plaintiff InitialPublic Offering Fee Antitrust Litigation***

 

On September 25, 2002, the U.S.District Court for the Southern District of New York denied the defendants’motion to dismiss the consolidated complaint that alleges that the defendantbroker/dealers conspired to fix the “fee” paid for underwriting initial publicofferings (“IPOs”) by setting the underwriters’ discount or “spread” at 7%, inviolation of the federal antitrust laws.

 

***Litigation and Inquiries Relating to Enron***

 

## ***NewPower Holdings, Inc. Litigation***

 

On July 31, 2002, plaintiffs filed aconsolidated complaint alleging violations of the federal securities laws dueto alleged material misrepresentations in, and omissions of material fact from,the registration statement and prospectus issued in connection with NewPower’sOctober 5, 2000 IPO, and for alleged misrepresentations and omissions regardingNewPower after the IPO.  One of ourformer employees, who was a director of NewPower, is also named as a defendantin the consolidated complaint.

 

*Tittle v. Enron Corp., et al.*

 

On October 1, 2002, plaintiffsfiled a motion to certify the putative class in this matter.

 

*Newby v. Enron Corp., et al.*

 

On October 1, 2002, plaintiffsfiled a motion to certify the putative class in this matter.

 

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*The Retirement Systems of Alabama v. Merrill Lynch & Co., et al.*

 

This matter has been remanded toAlabama state court, and on July 18, 2002, CSFB Corp. moved to dismissplaintiff’s third amended complaint.  OnAugust 19, 2002, the Court denied all defendants’ motions to dismiss.

 

*Hudson Soft Co., Ltd., et al. v. Credit Suisse First Boston Corp., etal.*

 

On September 29, 2002, a first amendedcomplaint was filed alleging violations of the Racketeer Influenced and CorruptOrganizations Act, or RICO, in connection with various offerings ofcredit-linked notes and violations of the federal securities laws for allegedmisstatements and omissions of material fact regarding the financial conditionof Enron in connection with various offerings of credit-linked notes.

 

*Brazos Electric Power Cooperative, Inc. v. Ponderosa Pine Energy,L.L.C., et al.*

 

On August 14,2002, plaintiff filed a motion to remand this action to Texas state court, andon September 6, 2002, certain defendants opposed plaintiff’s motion toremand.  On August 28, 2002, CSFB Corp.and certain other defendants moved to transfer the case to the U.S. District Courtfor the Southern District of New York.

 

*Public Employees Retirement System of Ohio, et al. v. Fastow, et al.*

 

On September 4, 2002, certain executives anddirectors of Enron, Arthur Andersen, the law firm of Vinson & Elkins,L.L.P., CSFB Corp. and certain other investment banks were named in an actionfiled in the Court of Common Pleas of Franklin County, Ohio by four retirementsystems in the State of Ohio.  Thecomplaint alleges violations of the Texas Securities Act, as well as violationsof statutory and common law due to alleged misstatements and omissions ofmaterial fact from certain registration statements and prospectuses issued inconnection with the sales of certain Enron debt securities and common stock,alleged material misstatements and omissions regarding the financial condition ofEnron, and alleged conspiracy in connection with the dissemination of suchstatements and omissions.  On September27, 2002, this action was removed to the U.S. District Court for the SouthernDistrict of Ohio.

 

*Washington State Investment Board, et al. v. Lay, et al.*

 

On September 9, 2002, certain executives anddirectors of Enron, Arthur Andersen and certain partners, executives andemployees of Arthur Andersen, the law firms of Vinson & Elkins, L.L.P. andKirkland & Ellis, and CSFB Corp. and certain other investment banks, werenamed in a putative class action filed in the U.S. District Court for theSouthern District of Texas by purchasers of Enron publicly traded equity anddebt securities between September 9, 1997 and October 18, 1998.  The complaint alleges violations of thefederal securities laws for alleged misstatements and omissions of materialfact regarding the financial condition of Enron, alleged misstatements andomissions of material fact in connection with various registration statementsand prospectuses issued in connection with the sale of certain Enron securitiesand alleged controlling person liability. CSFB Corp. has been named only in connection with the claims under thefederal securities laws for alleged misstatements and omissions of materialfact regarding the financial condition of Enron and for controlling personliability.  On October 16, 2002, thisaction was consolidated with the *Newby* action.

 

*Variable AnnuityLife Ins. Co. v. Credit Suisse First Boston, Inc., et al.*

 

On September 27, 2002, CSFBI,CSFB Corp., the Company, DLJSC, and certain other investment banks were namedin an action filed in the U.S. District Court for the Southern District ofTexas by certain investment funds and fund owners that purchased senior securednotes issued by Osprey Trust and Osprey I, Inc. in 1999 and 2000.  The first amended complaint, filed onSeptember 30, 2002, alleges violations of state and federal securities laws,civil conspiracy, common law fraud and deceit, and negligent misrepresentationin connection with alleged misstatements and omissions of material factregarding the Osprey notes and alleged misstatements and omissions of materialfact in connection with various registration statements and prospectuses issuedin connection with the sale of the Osprey notes.

 

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*Town of Rocky Hillv. Connecticut Resources Recovery Authority, et al.*

 

On October 2, 2002, theConnecticut Resources Recovery Authority, or the CRRA, and certain officers anddirectors of the CRRA, Connecticut Governor John Rowland, the RepublicanGovernors Association, certain executives, directors and employees of Enron,certain lobbyists, and CSFB Corp. and certain other investment banks were namedin a putative class action filed in the Superior Court for the JudicialDistrict of Hartford, Connecticut, by the Town of Rocky Hill, Connecticut, onbehalf of itself and other municipalities in the State of Connecticut.  The complaint alleges violations of theConnecticut Unfair Trade Practices Act, common law conspiracy, aiding andabetting CRRA and its officers and directors in a breach of fiduciary duty,theft, unjust enrichment and fraud in connection with certain transactionsbetween the CRRA and Enron.

 

*Abbey National TreasuryServices plc v. Credit Suisse First Boston Corp., et al.*

 

On October 11, 2002, CSFB Corp.,CSG, Credit Suisse First Boston, the Company, CSFBI, Credit Suisse First Boston(Europe) Limited and certain other investment banks, Arthur Andersen, AndersenWorldwide, SC, Marlin Water Trust and Marlin Water Capital Corp. were named ina complaint filed in the U.S. District Court for the Southern District of Texasand in the U.S. District Court for the Southern District of New York by apurchaser of senior secured notes issued by Marlin Water Trust II.  The complaints allege violations of stateand federal securities laws, common law fraud, and negligent misrepresentationin connection with alleged misstatements and omissions of material factregarding the financial condition of Enron in connection with the sale ofMarlin Water Trust II senior secured notes.

 

*OCM Opportunities Fund III, L.P. and OCM Opportunities Fund IV, L.P. v.Citigroup, Inc., et al.*

 

On October 15, 2002, CSFBI, theCompany, CSFB Corp., DLJSC and certain other investment banks were named in acomplaint filed in Los Angeles Superior Court in the State of California bycertain investment funds that purchased Enron and/or Enron-relatedsecurities.  The complaint allegesviolations of various state statutes for alleged trading based on insideinformation regarding the financial condition of Enron and Enron-relatedentities and for alleged misstatements and omissions of material fact regardingthe financial condition of Enron and certain Enron-related entities.

 

*Inquiries*

 

The Company continues to cooperate withvarious governmental and regulatory agencies conducting investigationsregarding certain transactions and business relationships with Enron and itsaffiliates, including certain Enron-related special-purpose entities.

 

***Litigationand Inquiries Relating to IPO Allocation and Research***

 

A number of putativeclass action lawsuits have been filed against CSFB Corp. in the wake ofpublicity surrounding various governmental and regulatory investigations intothe practices of equity research analysts. The complaints generally assert claims under Section 10(b) of theExchange Act and Rule 10b-5 promulgated thereunder, and Section 20(a) of theExchange Act.

 

CSFB Corp. has received requestsfor information from a U.S. Congressional committee and various governmentaland regulatory agencies as part of their investigations into the practice knownas “spinning” in connection with the allocation of IPOs.

 

On October 21, 2002, the Commonwealth ofMassachusetts through the Office of the Secretary filed a civil administrativecomplaint against CSFB Corp. relating to equity research and IPO allocationpractices.

 

The Company continues to cooperate withvarious U.S. Congressional committees and governmental and regulatory agenciesreviewing equity research and/or IPO allocation practices.

 

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The Company is involved in a number ofjudicial, regulatory and arbitration proceedings (including those describedabove and actions that have been separately described in previous filings)concerning matters arising in connection with the conduct of its businesses.Some of the actions have been brought on behalf of various classes of claimantsand seek damages of material and indeterminate amounts. The Company believes,based on currently available information and advice of counsel, that theresults of such proceedings, in the aggregate, will not have a material adverseeffect on the Company’s financial condition but might be material to operatingresults for any particular period, depending, in part, upon the operatingresults for such period.  The Companyintends to defend itself vigorously against all of the claims asserted in thesematters.

 

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Independent Accountants’ Review Report

 

 

The Board of Directors andStockholders

Credit Suisse First Boston(USA), Inc.:

 

We have reviewed the accompanying condensedconsolidated statement of financial condition of Credit Suisse First Boston(USA), Inc. and subsidiaries (formerly known as Donaldson, Lufkin &Jenrette, Inc. and subsidiaries), (the “Company”), as of September 30, 2002,and the related condensed consolidated statements of income for the three andnine-month periods ended September 30, 2002 and 2001, and the related condensedconsolidated statements of changes in stockholders’ equity and cash flows forthe nine-month periods ended September 30, 2002 and 2001.  These condensed consolidated financialstatements are the responsibility of the Company’s management.

 

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

 

Based on our review, we are not aware of anymaterial modifications that should be made to the condensed consolidatedfinancial statements referred to above for them to be in conformity withaccounting principles generally accepted in the United States of America.

 

We have previously audited, in accordancewith auditing standards generally accepted in the United States of America, theconsolidated statement of financial condition of Credit Suisse First Boston(USA), Inc. and subsidiaries as of December 31, 2001, and the relatedconsolidated statements of operations, changes in stockholders’ equity, and cashflows for the year ended December 31, 2001 (not presented herein); and in ourreport dated January 31, 2002, we expressed an unqualified opinion on thoseconsolidated financial statements.  Inour opinion, the information set forth in the accompanying condensedconsolidated statement of financial condition as of December 31, 2001, isfairly stated, in all material respects, in relation to the consolidatedstatement of financial condition from which it has been derived.

 
| /s/ KPMG LLP        |   |
|---------------------|--------|
| New York,  New York |
| November 14,  2002  |

 

25

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

 

**ITEM 2:**  ***Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

We are a leading integrated investment bank serving institutional,corporate, government and individual clients. We are part of the Credit SuisseFirst Boston business unit, which we call CSFB, of Credit Suisse Group, or CSG,and our results do not necessarily reflect the overall performance of CSFB orCSG.  When we use the terms “we” and“our” and the “Company”, we mean Credit Suisse First Boston (USA), Inc., aDelaware corporation, and its consolidated subsidiaries.

 

The Company’s principal operations arelocated in the United States. The Company maintains sales offices in Europe,Latin America and Asia. The Company’s foreign revenues are not significant.

 

# **BUSINESS ENVIRONMENT**

 

Our principal business activities, investmentbanking and private equity, securities underwriting, sales and trading, andintroducing brokerage services, are, by their nature, highly competitive andsubject to general market conditions that include volatile trading markets andfluctuations in the volume of market activity. Consequently, our results have been, and are likely to continue to be,subject to wide fluctuations reflecting the impact of many factors beyond ourcontrol, including securities market conditions, the level and volatility ofinterest rates, competitive conditions and the size and timing of transactions.

 

The U.S. and global economies continued toslump during the third quarter of 2002. Accounting scandals, weak corporate earnings, anxiety over a possiblewar with Iraq, and fear of a double-dip recession led to sharp declines inthe  stock markets worldwide.  To address the accounting issues and restoreinvestor confidence, the U.S. Congress passed the Sarbanes-Oxley Act of 2002,which initiated broad reforms in accounting and corporate governance, includingthe implementation of various certification requirements.

 

The dollar value of global debt and equityissuances in the third quarter of 2002 was down 9.0% from the correspondingquarter of 2001.  For the nine-monthperiod ended September 30, 2002, the decline was 1.4% compared to 2001, and, excludingglobal asset-backed and global mortgage-backed securities, the decline was13.3% for the period. The seven initial public offerings (“IPOs”) filed by U.S.issuers during the third quarter represents the fewest since 1980.  IPO proceeds are currently at their lowestlevel since 1992.  Despite the favorableinterest rate environment for the nine months ended September 30, 2002,the dollar value of U.S. investment-grade corporate debt and U.S. high-yield corporatedebt issuances also declined 11.7% compared to the same period in 2001.  Proceeds from U.S. asset-backed and U.S.mortgage-backed securities were up 19.4% and 36.2%, respectively, for thenine-month periods ended September 30, 2002 and 2001.  Based on the number of transactions, it was the worst quarter forworldwide mergers and acquisitions in five years.

 

The third quarter of 2002 experienced asell-off in the U.S. equity markets. The Dow Jones Industrial Average, the Standard & Poor’s 500 Index(“S&P”), the NASDAQ Composite, and the Russell 2000 were down 17.9%, 17.6%,19.9%, and 21.7%, respectively.  Inaddition, 69% of the trading sessions ended up or down 1% from the previousday’s close. The S&P index last experienced such volatility in 1987, whenthe figure was 66%.  For the twelve-monthperiod ended September 30, 2002, mutual fund outflows exceeded inflows forthe first time in 15 years.

 

The slide in the equity markets and mixedeconomic data, along with the expectation of a rate cut by the Federal Reserve,drove the yield on the two-year Treasury note to its lowest level in 30 yearsand the yield on the ten-year Treasury note to its lowest point since1958.  While real estate, constructionand auto sales continued to benefit from low interest rates, manufacturing,business investment and employment figures remained weak.  Due to the continuing economic weakness, theFederal Reserve left its targeted federal funds rate unchanged in 2002 untilNovember 6, when it lowered rates by 50 basis points.

 

**CRITICAL ACCOUNTING POLICIES**

 

For a discussion of the Company’s accounting policies that may involve ahigh degree of judgment and complexity, refer to “Management’s Discussion andAnalysis of Financial Condition and Results of Operations - Critical AccountingPolicies” in our Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

26

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**RESULTS OF OPERATIONS**

 

The following table sets forth the Company’snet revenues, total expenses, income (loss) before provision (benefit) fromincome taxes and cumulative effect of a change in accounting principle, and netincome (loss):

 
|                                                                                                                      |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                      |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                                                                                                      |   | **(In millions)**                     |   |
| Net revenues                                                                                                              |   | $                                     | 1,298  |                                 | $      | 1,341 |   | $ | 5,420 |   | $ | 5,971 |   |
|                                                                                                                      |   |                                  |   |                                 |   |   |   |   |   |
| Total expenses                                                                                                            |   | 1,245                                 |   | 1,946                                |   | 4,388 |   | 6,020 |   |
|                                                                                                                      |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss) before provision (benefit) for income taxes, and the  cumulative effect of a change in accounting principle |   | 53                                    |   | (605                                 | )      | 1,032 |   | (49 | ) |
|                                                                                                                      |   |                                  |   |                                 |   |   |   |   |   |
| Net income (loss)                                                                                                         |   | $                                     | 35     |                                 | $      | (398 | ) | $ | 671 |   | $ | (26 | ) |

 

The Company recorded net income of $35million and $671 million for the quarter and nine-month period ended September30, 2002, respectively, versus net losses of $398 million and $26 million inthe comparable 2001 periods, primarily due to lower expenses.  The improved results in net income for thenine months ended September 30, 2002 included a pre-tax gain of $528 millionfrom the sale of three of the Company’s broker-dealers, CSFB*direct* LLC, DLJ*direct* Ltd. and Autranet, LLC, during the first quarterof 2002.  Net income for the nine-monthperiod ended September 30, 2001 included a pre-tax gain of approximately $179million from the assignment of the lease and the sale of leasehold improvementsof our former headquarters at 277 Park Avenue during the first quarter of 2001.

 

Net revenues decreased $43 million, or 3%, to$1.3 billion for the three-month period ended September 30, 2002 and $551million, or 9%, to $5.4 billion for the nine-month period ended September 30, 2002,primarily due to depressed market conditions that led to declines in equity netrevenues and investment banking net revenues from reduced merger andacquisition and equity underwriting activity. These declines were partially offset by gains in fixed income products,which benefited from the low interest rate environment.  Net revenues, excluding the gains from thesale of the CSFB*direct*, DLJ*direct* and Autranet businesses and theassignment and sale of leasehold improvements, declined 16% for the nine monthsended September 30, 2002 compared to the nine months ended September 30, 2001.

 

The Company’s net revenues and net income forthe three- and nine-month periods ended September 30, 2002 benefited fromdecreased financing costs reflecting the low interest rates in theperiods.  The Company’s results andthose of the Fixed Income business of the Securities Division reflect certainunhedged positions for which the related risk is hedged at the CSFB level.  These unhedged positions producedsignificant gains in the nine-month period ended September 30, 2002.

 

Expenses decreased for the three- andnine-month periods ended September 30, 2002 from comparable periods in 2001 asa result of reduced headcount and continuing cost-reduction efforts.

 

The Company’s businesses are materially affected by conditions in thefinancial markets and economic conditions generally. Unpredictable or adversemarket and economic conditions may adversely affect our results of operations.See “Business - Certain Factors That May Affect Our Business” in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2001.

 

**Results by Segment**

 

The discussion of net revenues is presentedby segment.  The Company operates andmanages its businesses through three operating segments: the Investment Bankingand Private Equity Division (“IBD”), the Securities Division, consisting ofEquity and Fixed Income, and the Financial Services Division.  Such divisions are managed based on types ofproducts and services offered and their related client bases. The Companyevaluates the performance of its divisions based primarily on income (loss)before income taxes and cumulative effect of a change in accounting principle.

 

For divisional reporting of net revenues and expenses, equity capitalmarket underwriting fees are shared between IBD and the Equity business of theSecurities Division and debt capital market underwriting fees are sharedbetween IBD and the Fixed Income business of the Securities Division.  Beginning in 2002, prime banking stock loanfees are shared between the Equity business of the Securities Division and theFinancial Services Division.

 

27

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The coststructure of each of our divisions is broadly similar to that of the Company asa whole, and, consequently, the discussion of expenses is presented on aCompany-wide basis.  The Companyallocates to its divisions a pro rata share of certain centrally managed costs,such as leased facilities and equipment costs, employee benefits and certaingeneral overhead expenses based upon specified amounts, usage criteria oragreed rates, and allocates interest expense based upon the type of asset. Thedivision allocation of some costs, such as incentive bonuses, has beenestimated.  The timing and magnitude ofchanges in our incentive bonus accrual can have a significant effect on ouroperating results for a given period.

 

***Investment Banking***

 

IBDraises and invests capital and provides financial advice to companiesthroughout the United States and abroad. Through IBD, the Company manages andunderwrites offerings of securities, arranges private placements, providesclient advisory and other services, pursues private equity investments in avariety of areas, and provides venture capital to companies.

 

The followingtable sets forth the net revenues, total expenses and loss before benefit fromincome taxes, and the cumulative effect of a change in accounting principle forIBD: 

 
|                                                                                                  |   | **Three Months Ended  September 30** |   | **Nine Months Ended  September 30** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                                  |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
|                                                                                                  |   | **(In millions)**                    |   |
| Net revenues                                                                                          |   | $                                    | 317    |                                | $      | 358 |   | $ | 1,271 |   | $ | 1,452 |   |
| Total expenses                                                                                        |   | 393                                  |   | 600                                 |   | 1,284 |   | 1,758 |   |
|                                                                                                  |   |                                 |   |                                |   |   |   |   |   |
| Loss before benefit from income taxes, and the  cumulative effect of a change in accounting principle |   | $                                    | (76    | )                                   | $      | (242 | ) | $ | (13 | ) | $ | (306 | ) |

 

*Three-Month Period Ended September 30, 2002 Versus September 30, 2001*

 

Net revenuesfor IBD were $317 million and $358 million for the three months ended September30, 2002 and 2001, respectively, a decrease of 11%.  The decrease reflects the significant decline in underwriting andmerger and acquisition activity.  Thedecline in net revenues was partially offset by improved private equity netrevenues.  Net revenues for the thirdquarter of 2001 included writedowns of various private equity investments dueto unfavorable market conditions.

 

*Nine-Month Period Ended September 30, 2002 Versus September 30, 2001*

 

Net revenuesfor IBD were $1.3 billion and $1.5 billion for the nine months ended September30, 2002 and 2001, respectively, a decrease of 12%.  IBD revenues from merger and acquisition activity were downsharply, reflecting the reduced industry activity from the already low levelsof the first nine months of 2001.  Thiswas partially offset by an increase in underwriting revenue from fixed incomeproducts.  The low interest rateenvironment also contributed to lower interest expenses to fund our privateequity business.

 

***Securities Division***

 

The SecuritiesDivision consists of the Equity and Fixed Income businesses.  The Equity business trades, conductsresearch on, originates and distributes equity securities and equity-relatedderivatives. The Fixed Income business trades, conducts research on, originatesand distributes fixed income securities and fixed income-related derivatives,and places private debt instruments.

 

28

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The followingtable sets forth the net revenues, total expenses and income (loss) beforeprovision (benefit) for income taxes, and the cumulative effect of a change inaccounting principle for the Securities Division:

 
|                                                                                                                      |   | **Three Months Ended  September 30** |   | **Nine Months Ended  September 30** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                      |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
|                                                                                                                      |   | **(In millions)**                    |   |
| Fixed income products net revenues                                                                                        |   | $                                    | 619    |                                | $      | 331 |   | $ | 1,894 |   | $ | 1,561 |   |
| Equity products net revenues                                                                                              |   | 245                                  |   | 332                                 |   | 1,072 |   | 1,540 |   |
| Total net revenues                                                                                                        |   | 864                                  |   | 663                                 |   | 2,966 |   | 3,101 |   |
| Total expenses                                                                                                            |   | 550                                  |   | 866                                 |   | 2,071 |   | 2,583 |   |
| Income (loss) before provision (benefit) for income  taxes, and the cumulative effect of a change in accounting principle |   | $                                    | 314    |                                | $      | (203 | ) | $ | 895 |   | $ | 518 |   |

* *

*Three-Month Period Ended September 30, 2002 Versus September 30, 2001*

 

Net revenuesfor the Securities Division were $864 million and $663 million for the threemonths ended September 30, 2002 and 2001, respectively, an increase of30%.  Fixed Income net revenuesincreased 87% to $619 million. Equity net revenues declined 26% to $245million. The Securities Division net revenues benefited from decreased financingcosts reflecting the low interest rates in the period.

 

Fixed Incomenet revenues increased primarily due to improved results from high-yield andinvestment-grade debt, mortgages and other securitization products and certainstructured repurchase agreement transactions. A weakened broader corporate bond market led to increased volatility,higher transaction volumes and wider credit spreads, which createdmarket-making opportunities in high-yield and investment grade products andgenerated higher net revenues.  Netrevenues from mortgages and other securitization products increased as lowerinterest rates led to higher levels of refinancing, increased trading volumeand increased securitization volume. Mortgages and other securitization products also benefited from theweakness in the stock market, which increased demand for higher quality fixedincome securities.  Repurchase agreementnet revenues benefited from large spread differences in certain term trades.

 

Equity netrevenues decreased due to lower revenues from both cash and equity derivativesproducts.  These decreases were due inpart to the overall decline in the U.S. equity markets and declining newissues, which reduced transaction flows and lowered demand for derivativesproducts.

 

*Nine-Month Period Ended September 30, 2002 Versus September 30, 2001*

 

Net revenuesfor the Securities Division were $3.0 billion and $3.1 billion for the ninemonths ended September 30, 2002 and 2001, respectively, a decrease of 4%.  Fixed Income net revenues increased 21% to$1.9 billion. Equity net revenues declined 30% to $1.1 billion.  The Securities Division net revenuesbenefited from decreased financing costs reflecting the low interest rates inthe period.

 

Fixed Incomenet revenues increased primarily due to improved results from investment-grade debttrading and higher net revenues in mortgages and asset-backed products.  Increased investment-grade debt net revenuesreflected increased volatility and volumes as the broader corporate bond marketweakened due to the poor credit environment. Net revenues from mortgages and other securitization products increasedas lower interest rates led to higher origination, refinancing andsecuritization volumes.  Mortgages andother securitization products also benefited from increased demand for higherquality fixed income securities following the downgrades of various bondissuers and the decline in the equity markets.

 

Equity netrevenues decreased due to lower trading revenues from both cash and equityderivatives products.  These decreaseswere due in part to the overall decline in the U.S. equity markets anddeclining new issues, which reduced transaction flows and lowered demand forderivatives products.

 

29

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***Financial Services Division***

 

The FinancialServices Division provides a broad array of services to individualhigh-net-worth investors and the financial intermediaries that represent them.This division also provides introducing broker services, clearing, research andtrading services.

 

The followingtable sets forth the net revenues, total expenses and income before provisionfor income taxes, and the cumulative effect of a change in accounting principlefor the Financial Services Division:

 
|                                                                                                     |   | **Three Months Ended  September 30** |   | **Nine Months Ended  September 30** |   |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                                     |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
|                                                                                                     |   | **(In millions)**                    |   |
| Net revenues                                                                                             |   | $                                    | 269    |                                | $      | 324 |   | $ | 885 |   | $ | 1,092 |   |
| Total expenses                                                                                           |   | 239                                  |   | 312                                 |   | 769 |   | 997 |   |
| Income before provision for income taxes, and the  cumulative effect of a change in accounting principle |   | $                                    | 30     |                                | $      | 12 |   | $ | 116 |   | $ | 95 |   |

 

*Three-Month Period Ended September 30, 2002 Versus September 30, 2001*

 

Net revenuesfor the Financial Services Division were $269 million and $324 million for thethree months ended September 30, 2002 and 2001, respectively, a decrease of 17%.  The decrease reflects lower transactionvolumes that reduced clearing fees and commission revenues and declining marginbalances due to the weak equity markets.

 

*Nine-Month Period Ended September 30, 2002 Versus September 30, 2001*

 

Net revenuesfor the Financial Services Division were $0.9 billion and $1.1 billion for thenine months ended September 30, 2002 and 2001, respectively, a decrease of19%.  The decrease reflects lowertransaction volumes that reduced clearing fees and commission revenues anddeclining margin balances due to the weak equity markets.

* *

**Expenses**

 

The followingtable sets forth employee compensation and benefits expenses, other expensesand total expenses of the Company:

 
|                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                               |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                               |   | **(In millions)**                     |   |
| Employee compensation and benefits |   | $                                     | 761    |                                 | $      | 1,243 |   | $ | 2,825 |   | $ | 3,858 |   |
| Other expenses                     |   | 484                                   |   | 703                                  |   | 1,563 |   | 2,162 |   |
|                               |   |                                  |   |                                 |   |   |   |   |   |
| Total expenses                     |   | $                                     | 1,245  |                                 | $      | 1,946 |   | $ | 4,388 |   | $ | 6,020 |   |

 

***Three-Month and Nine-Month Periods EndedSeptember 30, 2002 Versus September 30, 2001***

 

Total expensesdeclined $0.7 billion, or 36%, to $1.2 billion for the third quarter of 2002from the comparable period in 2001. Total expenses declined $1.6 billion, or 27%, to $4.4 billion for thenine months ended September 30, 2002 from the comparable period in 2001.  The decreases were principally due to CSFB’scontinuing cost-reduction efforts as well as the Company’s sale of the CSFB*direct*, DLJ*direct* and Autranet businesses in the first quarter of 2002.

 

Employeecompensation and benefits decreased 39% and 27% for the quarter and nine monthsended September 30, 2002 from the comparable periods in 2001, primarily as aresult of reduced headcount and lower bonus accruals in the third quarter.  As is normal in the financial servicesindustry, a significant portion of compensation expense is a bonus amountrewarded shortly after year-end. Bonuses are estimated and recorded throughout the year based upon anumber of factors, including the profitability of each business division andmarket conditions.  From time to time,we guarantee certain minimum compensation levels to attract new employees or toretain existing employees.  Consistentwith industry practice, certain of these guarantees are multiyear.  As a result of changes in senior management,weak market conditions and efforts to promote greater teamwork across divisionsand product areas, certain of these guarantees were renegotiated in 2001.  A portion of our non-cash incentivecompensation consists of awards of CSG shares under a CSG stock plan, optionsto acquire shares and units, the value of which is tied to the return on equityof CSFB over a three-year period.

 

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Other expensesprincipally consists of occupancy and equipment rental; brokerage, clearing andexchange fees; communications; professional fees and merger-related costs.  Other expenses decreased 31% and 28% for thequarter and nine months ended September 30, 2002 from the comparable periods in2001.  Each principal component of otherexpenses decreased for the quarter and nine months ended September 30, 2002,primarily as a result of reduced headcount, lower levels of business activityand continuing cost-reduction efforts.

 

In October2002, CSFB announced a new cost-reduction initiative with a goal of reducingCSFB operating expenses by an additional $500 million.  The majority of the cost savings areexpected to come from headcount reductions across the business unit of 5% to7%.  A substantial portion of theanticipated expense reduction should benefit the Company.  The costs to the Company of implementing theinitiative will be incurred in the fourth quarter.

 

# ***Provisionfor Taxes***

 

The provisionfor income taxes for the three months and nine months ended September 30, 2002was $18 million and $361 million, respectively.  The effective tax rate changed from a benefit of 45.6% for thefirst nine months of 2001 to an expense of 35.0% for the first nine months endedSeptember 30, 2002.  The change in theeffective tax rate was due primarily to tax benefits received in the prior yearfrom dividend income exclusions and state and local taxes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

#### **Liquidity Management Oversight**

 

TheCompany believes that maintaining access to liquidity is fundamental for firmsoperating in the financial services industry and has therefore established acomprehensive process for the management and oversight of its liquidity,funding and capital strategies. The Capital Allocation and Risk ManagementCommittee (“CARMC”) has primary oversight responsibility for these functionaldisciplines. CARMC periodically reviews and approves our liquidity managementpolicies and targets, in addition to reviewing our liquidity position and otherkey risk indicators. The Corporate Treasury department is responsible for themanagement of liquidity, long-term funding and capital as well as relationshipswith creditor banks. It also maintains regular contact with both rating agenciesand regulators on liquidity and capital issues. See “Liquidity Risk” in“Business - Certain Factors that May Affect Our Business” in our Annual Reporton Form 10-K for the year ended December 31, 2001.

 

**Balance Sheet**

 

Significantportions of our assets are highly liquid, with the majority consisting ofsecurities inventories and collateralized receivables, which fluctuatedepending on the levels of proprietary trading and customer business.Collateralized receivables consist primarily of securities purchased underagreements to resell and securities borrowed, both of which are primarilysecured by U.S. government and agency securities, and marketable corporate debtand equity securities. In addition, we have significant receivables fromcustomers and brokers, dealers and others that turn over frequently. To meetclient needs as a securities dealer, we may carry significant levels of tradinginventories.

 

Inaddition to these liquid assets, as part of our investment banking and fixedincome market activities, we also maintain positions in less liquid assets,including mortgage whole loans, leveraged funds, high-yield debt securities andprivate equity investments. These assets may be relatively illiquid at times,including periods of market stress. We typically fund less liquid assets suchas private equity investments with long-term borrowings and stockholders’equity.  Mortgage whole loans andhigh-yield debt are generally financed with short-term unsecured financing orreverse repurchase agreements.

 

Becauseof changes relating to customer needs, economic and market conditions andproprietary trading and other strategies, our total assets or the individualcomponents of our total assets may vary significantly from period to period. AtSeptember 30, 2002 and December 31, 2001, our total assets were$234.5 billion and $218.3 billion, respectively.

 

**Funding Sources and Strategy**

 

The majority of our assets are funded by collateralized short-termborrowings, which include securities sold under agreements to repurchase andsecurities loaned. Other significant funding sources include commercial paper,short-term borrowings from affiliates, payables to customers, brokers, dealersand others, long-term borrowings and stockholders’ equity. Short-term fundingis generally obtained at rates related to the federal funds rate, LIBOR orother money market indices, while long-term funding is generally obtained atfixed and floating rates related to U.S. Treasury securities or LIBOR.Depending upon prevailing market conditions, other borrowing costs arenegotiated. We continually aim to broaden our funding base by geography,investor and funding instrument.

 

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The majority of our unsecured funding originates largely from twosources: we borrow from affiliates and we issue debt securities directly to themarket. We lend funds as needed to our operating subsidiaries and affiliates onboth a senior and subordinated basis, the latter typically to meet capitalrequirements in regulated subsidiaries. We generally try to ensure that loansto our operating subsidiaries and affiliates have maturities equal to orshorter than the maturities of our market borrowings. Additionally, wegenerally fund investments in subsidiaries with capital contributions.

 

**Liquidity Planning and Measurement**

 

We maintain a large secondary source of liquidity, principally throughour broker-dealers and various other operating subsidiaries. We havehistorically been able to access significant liquidity through the securedfunding markets (securities sold under agreements to repurchase, securitiesloaned and other collateralized financing arrangements), even in periods ofmarket stress. We continually monitor overall liquidity by tracking the extentto which unencumbered marketable assets and other alternative unsecured fundingsources exceed both contractual obligations and anticipated contingentcommitments.

 

The principal measure we use to monitor our liquidity position is the“liquidity barometer”, which estimates the period over which the adjustedmarket value of unencumbered assets plus committed revolving credit facilitiesexceeds the aggregate value of our maturing unsecured liabilities plusanticipated contingent commitments. The adjusted market value of unencumberedassets includes a reduction from market value, or “haircut”, reflecting theamount that could be realized by pledging an asset as collateral to athird-party lender in a secured funding transaction. Contingent commitmentsinclude such things as letters of credit, guarantees and credit rating-relatedcollateralization requirements. Our objective, as mandated by CARMC, is toensure that the liquidity barometer equals or exceeds 365 days. We believethat this will enable us to carry out our business plans during extendedperiods of market stress, while minimizing, to the extent possible, disruptionsto our business.

 

**Contractual Obligations and Contingent Commitments**

 

We have contractual obligations to make future payments under long-termdebt and long-term non-cancelable lease and other agreements and havecontingent commitments under a variety of commercial arrangements as describedin the notes to our condensed consolidated financial statements.

 

The following table sets forth our long-term contractual obligations asof September 30, 2002:

 

**ContractualObligations**

 
|                          |   | **Less than 1  year** |   | **1-2  years** |   | **3-4  years** |   | **Over  4 years** |   | **Total** |   |
|-------------------------------|--------|-----------------------|--------|----------------|--------|----------------|--------|-------------------|--------|-----------|--------|
|                          |   | **(In millions)**     |   |
| Long-term debt                |   | $                     | 4,914  |           | $      | 2,055          |   | $                 | 5,554  |      | $      | 10,998 |   | $ | 23,521 |   |
| Operating leases              |   | 179                   |   | 358            |   | 344            |   | 1,776             |   | 2,657     |   |
|                          |   |                  |   |           |   |           |   |              |   |      |   |
| Total contractual obligations |   | $                     | 5,093  |           | $      | 2,413          |   | $                 | 5,898  |      | $      | 12,774 |   | $ | 26,178 |   |
|                               |        |                       |        |                |        |                |        |                   |        |           |        |  |  |  |  |  |  |

 

Our long-term borrowings are unsecured. As of September 30, 2002and December 31, 2001, the weighted average maturity of our long-termborrowings was approximately 5.4 years and 4.0 years, respectively. Ourlease obligations are primarily for our principal offices in New York City andour other office locations.

 

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The following table sets forth our short-term unsecured borrowings atSeptember 30, 2002 and December 31, 2001:

 

**Short-TermBorrowings**

 
|                     |   | **September 30,  2002** |   | **December 31,  2001** |   |
|--------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                     |   | **(In millions)**       |   |
| Bank loans               |   | $                       | 373    |                        | $      | 951 |   |
| Commercial paper(1)      |   | 1,389                   |   | 1,200                       |   |
| Loans from affiliates(2) |   | 8,604                   |   | 7,136                       |   |
|                     |   |                    |   |                        |   |
| Total                    |   | $                       | 10,366 |                        | $      | 9,287 |   |

 

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(1)          Reflects amounts outstanding at September 30, 2002 andDecember 31, 2001 under our $7.0 billion commercial paper programs.

(2)          We have significant financing transactions with Credit Suisse FirstBoston, a Swiss bank subsidiary of CSG and an indirect parent of the Company,and certain of its subsidiaries and affiliates. See “Related PartyTransactions”.

 

The following table sets forth our contingent commitments atSeptember 30, 2002:

 

**Contingent Commitments**

** **
|                         |   | **Less than  1 year**                                         |   | **1-2 years** |   | **3-4 years** |   | **Over 4 years** |   | **Total amounts  committed** |   |
|------------------------------|--------|---------------------------------------------------------------|--------|---------------|--------|---------------|--------|------------------|--------|------------------------------|--------|
|                         |   | **Amount of Commitment Expiration Per Period  (In millions)** |   |
| Standby letters of credit(1) |   | $                                                             | 960    |          | $      | —        |   | $                | — |                         | $      | — |   | $ | 960 |   |
| Private equity(2)            |   | —                                                        |   | 6             |   | 264           |   | 1,713            |   | 1,983                        |   |
| Other(3)                     |   | 24                                                            |   | 78            |   | —        |   | 1,805            |   | 1,907                        |   |
|                         |   |                                                          |   |          |   |          |   |             |   |                         |   |
| Total contingent commitments |   | $                                                             | 984    |          | $      | 84            |   | $                | 264    |                         | $      | 3,518 |   | $ | 4,850 |   |

 

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(1)          Because commitments associated with lettersof credit may expire unused, the amounts shown do not necessarily reflectactual future cash funding requirements.

(2)          We have commitments to invest in various partnerships that make privateequity and related investments in various portfolio companies or other privateequity funds.

(3)          We have commitments to provide funding to various third parties in theform of standby repurchase agreement lines, funding guarantees, and otherfinancial guarantees.

 

Total contingent commitments were $4.9 billion and $2.5 billion atSeptember 30, 2002 and December 31, 2001, respectively.  

 

We issue guarantees to customers of certain of our consolidatedsubsidiaries with respect to obligations of such subsidiaries incurred in theordinary course of their business. The underlying obligations for theseguarantees are reflected in our condensed consolidated financial statements,and, therefore, the guarantees do not create any incremental liability.

 

We also issue from time to time a limited number of guarantees inrespect of affiliated sister company obligations incurred in the ordinarycourse of business. These sister company obligations are not reflected in ourfinancial statements but are reflected in the financial statements of ourultimate parent companies, Credit Suisse First Boston and CSG.  These guarantees are included in the tableabove in “Other”.

 

As of September 30, 2002 and December 31, 2001, we had commitmentsto enter into securities purchased under agreements to resell and securitiessold under agreements to repurchase of $1.2 billion and $3.0 billion, respectively.See note 13 of the condensed consolidated financial statements for moreinformation on our commitments and contingent liabilities.

 

**Revolving Credit Facility**

 

We maintain a committed revolving credit facility with various banksthat, if drawn upon, would bear interest at short-term rates, such as thefederal funds rate or LIBOR. In May 2002, we replaced our $3.5 billionrevolving credit facility with a new 364-day $3.0 billion revolving creditfacility available to the Company as borrower. Proceeds from borrowings under this facility can be used for generalcorporate purposes, and CSG guarantees the facility. The facility containscustomary covenants that we believe will not impair our ability to obtainfunding. At September 30, 2002, no borrowings were outstanding under thisfacility.

 

33

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**Long-term Funding**

 

We issue long-term debt through U.S. and Euro medium-term note programs,as well as syndicated and privately placed offerings around the world.

 

Under the Company’s currently effective $10 billion shelfregistration statement on file with the Securities and Exchange Commission,which allows the Company to issue from time to time senior and subordinateddebt securities and warrants to purchase such securities, the Company had atNovember 13, 2002 approximately $8.5 billion available for issuance. During thenine months ended September 30, 2002, under this and predecessor shelfregistration statements, the Company issued both medium-term notes and longer-datedfixed income securities to extend the maturity profile of the Company’s debt.In the nine months ended September 30, 2002, the Company issued $2.75 billion61⁄2% notes due 2012, $1.75 billion 53⁄4% notes due 2007, $1.0 billion 71/8% notes due 2032, $3.0 billion in medium-termnotes off current and predecessor shelf registration statements, and $822million in Euro medium-term notes under the Company’s $5 billion programestablished in July 2001.

 

**Credit Ratings**

 

Our access to the debt capital markets and our borrowing costs dependsignificantly on our credit ratings. These ratings are assigned by agencies,which may raise, lower or withdraw their ratings or place us on “creditwatch”with positive or negative implications at any time. Credit ratings areimportant to us when competing in certain markets and when seeking to engage inlonger-term transactions, including over-the-counter derivatives. We believeagencies consider several factors in determining our credit ratings, includingsuch things as earnings performance, business mix, market position, financialstrategy, level of capital, risk management policies and practices andmanagement team, in addition to the broader outlook for the financial servicesindustry.

 

A reduction in our credit ratings could limit our access to capitalmarkets, increase our borrowing costs, require us to provide additionalcollateral and allow counterparties to terminate transactions under certain ofour trading and collateralized financing contracts. This, in turn, could reduceour liquidity and negatively impact our operating results and financialposition. Our liquidity planning takes into consideration those contingentevents associated with a reduction in our credit ratings.

 

At November 13, 2002, our ratings and ratings outlooks were as follows:

 
|                               |   | **Long-Term Debt** |   | **Commercial Paper** |   |                 |   |
|------------------------------------|--------|--------------------|--------|----------------------|--------|----------------------|--------|
|                               |   |               |   |                 |   |                 |   |
| Fitch(1)                           |   | AA-                |   | F-1+                 |   | Negative Outlook     |   |
| Moody’s                       |   | Aa3                |   | P-1                  |   | Negative Outlook     |   |
| Standard & Poor’s(2) |   | AA-                |   | A-1+                 |   | CreditWatch Negative |   |

 

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(1)          On October 2, 2002, Fitch Ratingschanged the ratings outlook for our AA- long-term debt rating to negative fromstable.

(2)          On October 2, 2002, Standard &Poor’s Ratings Services placed on CreditWatch with negative implications ourAA- long-term debt rating and our A-1+ short-term debt rating.

 

**Capital Resources**

 

Certain of our businesses are capital intensive. In addition to normaloperating requirements, capital is required to cover financing and regulatorycharges on securities inventories, private equity investments and investmentsin fixed assets. Our overall capital needs are regularly reviewed to ensurethat our capital base can appropriately support the anticipated needs of ourbusiness divisions as well as the regulatory capital requirements of oursubsidiaries. Based upon these analyses, we believe that our capitalization isadequate for current operating levels.

 

34

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***Regulated Subsidiaries***

 

Our principal wholly owned subsidiaries, Donaldson, Lufkin &Jenrette Securities Corporation (“DLJSC”) and Credit Suisse First BostonCorporation (“CSFB Corp.”), are registered broker-dealers, registered futurescommission 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, whichconforms to the Uniform Net Capital Rule pursuant to Rule 15c3-1 of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Under thealternative method permitted by this rule, the required net capital may not beless than two percent of aggregate debit balances arising from customertransactions or four percent of segregated funds, whichever is greater. If amember 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 netcapital is less than five percent of aggregate debit balances, the NYSE mayprevent the firm from expanding its business and declaring cash dividends. AtSeptember 30, 2002, DLJSC’s and CSFB Corp.’s net capital of approximately$1.2 billion and $3.6 billion, respectively, was 26.0 percent and 168.9percent, respectively, of aggregate debit balances and in excess of the minimumrequirement by approximately $1.1 billion and $3.5 billion, respectively. Ourbroker-dealer lite entity, Credit Suisse First Boston Capital LLC, is alsosubject to the uniform net capital rule, but calculates its net capitalrequirements under Appendix F of SEC Rule 15c3-1. TheCompany’s London-based broker-dealer subsidiaries are subject to capitalrequirements of the Financial Services Authority. Certain other subsidiaries are also subject tocapital adequacy requirements. At September 30, 2002, our subsidiariescomplied with all applicable regulatory capital adequacy requirements.

 

**Cash Flows**

 

Our consolidated statements of cash flows classify cash flow into threebroad categories: cash flows from operating activities, investing activitiesand financing activities.  Thesestatements should be read in conjunction with “Related Party Transactions” aswell as note 3 to the condensed consolidated financial statements.

 

***Nine Months Ended September 30, 2002 and 2001***

 

At September 30, 2002 and 2001, cash and cash equivalents totaled$1.5 billion and $2.1 billion, respectively, a decrease of $0.2 billion and$0.7 billion, respectively, compared to December 31, 2001 and 2000.

 

Net cash used in operating activities totaled $5.5 billion and$7.3 billion for the nine months ended September 30, 2002 and 2001,respectively. In the first nine months of 2002, there were decreases in assetsof $2.7 billion, including decreases in securities borrowed of $0.3 billion,receivables from customers of $0.9 billion, receivables from brokers, dealersand others of $1.3 billion, and other assets and deferred amounts of $0.4 billion.  These decreases were partially offset byincreases in financial instruments owned of $0.1 billion and cash andsecurities segregated for regulatory purposes or deposited with clearingorganizations of $0.1 billion. Liabilities decreased $9.2 billion as a result of decreases in securitiesloaned of $5.0 billion, payablesto customers of $2.0 billion, payables to brokers, dealers and other of $2.5billion, accounts payable and accrued expenses of $1.7 billion, obligations toreturn securities received as collateral of $0.5 billion and other liabilitiesof $0.7 billion.  These decreaseswere partially offset by increases in financial instruments sold not yetpurchased of $3.2 billion.  During the nine months ended September 30,2001 net cash used in operations decreased $7.3 billion due primarily to thedecrease in liabilities from operating activities.

 

For the first nine months of 2002 and 2001, net cash provided byinvesting activities was $8.3 billion and $2.9 billion, respectively, dueprimarily to an increase in loans receivable from the Company’s parent andaffiliates.

 

In the first nine months of 2002 and 2001, net cash provided byfinancing activities totaled $13.7 billion and $9.5 billion,respectively. During the nine months ended September 30, 2002, there was anincrease in net short-term financings of $1.1 billion, a net increase of$5.9 billion of senior notes, a net increase in medium-term notes of $2.1billion and an increase in securities sold under agreements to repurchase, netof securities purchased under agreements to resell of  $4.7 billion.  During thenine months ended September 30, 2001, there were increases in securities soldunder agreements to repurchase, net of securities purchased under agreements toresell of $21.1 billion, net increases in senior notes of  $2.4 billion, and net increases inmedium-term notes of $2.4 billion. These increases were offset in part by decreases in short-term financingsof $11.6 billion and subordinated loan agreements of $4.2 billion.

 

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**RELATEDPARTY TRANSACTIONS**

 

CSG, through CSFBI, owns all of the Company’s outstanding voting commonstock. The Company is involved in significant financing and other transactions,and has significant related party balances, with Credit Suisse First Boston, aSwiss bank subsidiary of CSG and an indirect parent of the Company, and certainof its subsidiaries and affiliates. The Company enters into these transactionsin the ordinary course of business and believes that these transactions are onmarket terms that could be obtained from unrelated third parties.

 

The following table sets forth related party assets and liabilities:

 
|                                                              |   | **September 30,  2002** |   | **December 31,**

**2001** |   |
|-------------------------------------------------------------------|--------|------------------------------|--------|---------------------------------|--------|
|                                                              |   | **(In millions)**            |   |
| Securities purchased  under agreements to resell                  |   | $                            | 4,551  |                            | $      | 2,740 |   |
| Securities borrowed                                               |   | 1,959                        |   | 1,552                           |   |
| Receivables from brokers, dealers and other                       |   | 1,359                        |   | 0                               |   |
| Derivatives contracts                                             |   | 1,715                        |   | 710                             |   |
| Taxes receivable (included in other assets and  deferred amounts) |   | 19                           |   | 8                               |   |
| Loans receivable from parent and affiliates                       |   | 16,521                       |   | 7,631                           |   |
| Total Assets                                                      |   | $                            | 26,124 |                            | $      | 12,641 |   |
|                                                              |   |                         |   |                            |   |
| Securities sold under agreements to repurchase                    |   | $                            | 16,271 |                            | $      | 13,994 |   |
| Securities loaned                                                 |   | 10,517                       |   | 12,604                          |   |
| Short-term borrowings                                             |   | 8,604                        |   | 7,136                           |   |
| Payables to brokers, dealers and other                            |   | 1,329                        |   | 2,172                           |   |
| Derivatives contracts                                             |   | 630                          |   | 709                             |   |
| Taxes payable (included in other liabilities)                     |   | 420                          |   | 959                             |   |
| Intercompany payables (included in other  liabilities)            |   | 537                          |   | 598                             |   |
| Total Liabilities                                                 |   | $                            | 38,308 |                            | $      | 38,172 |   |

 

Included in the condensed consolidated statements of income are revenuesand expenses resulting from various securities trading, investment banking andfinancing activities with certain affiliates, as well as fees foradministrative services performed by the Company under the terms of variousservice level fee arrangements. Service level fees are treated as a reductionof other operating expenses in the condensed consolidated statements of income.

 

The following table sets forth related party revenues and expenses:

 
|                     |   | **Nine Months Ended**        |   |
|--------------------------|--------|------------------------------|--------|
|                     |   | **September 30,  2002** |   | **September 30,  2001** |   |
|                     |   | **(In millions)**            |   |
| Commissions              |   | $                            | (19    | ) | $ | (28 | ) |
| Interest income          |   | 290                          |   | 418 |   |
| Total Revenues           |   | $                            | 271    |   | $ | 390 |   |
|                     |   |                         |   |   |   |
| Interest expense         |   | $                            | 517    |   | $ | 1,551 |   |
| Other operating expenses |   | (135                         | )      | (107 | ) |
| Total Expenses           |   | $                            | 382    |   | $ | 1,444 |   |

 

Pursuant to an agreement, the Company sold atcost, without recourse, to CSFBI the right, title and interest in certainassets with an aggregate value of $352.7 million and $216.2 million for the nineand twelve months ended September 30, 2002 and December 31, 2001,respectively.

 

The CSG Share Plan (the “Plan”) provides forequity-based awards to the Company’s employees based on CSG shares. Pursuant tothe Plan, employees of the Company may be granted, as compensation, stock orother equity-based awards. The provisions of the Plan include a provision todeliver CSG shares to the employees as compensation for services performed. Tothe extent that CSFBI does not require reimbursement from the Company for theseawards, amounts are considered a capital contribution to the Company andcredited to paid-in capital.

 

As part of its securitization activities, the Company sells residentialand commercial mortgage loans to an affiliate at

 

36

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market value. The affiliate then securitizes these assets. For the ninemonths ended September 30, 2002 and 2001, the Company sold $15.0 billionand $9.7 billion, respectively, of residential and commercial mortgage loans toan affiliate.

 

See “Derivatives” and “Off Balance Sheet Transactions” as well asnote 3 to the condensed consolidated financial statements for furtherdiscussions of transactions with affiliated companies.

** **

**DERIVATIVES**

 

We enter into various transactions involving derivatives. We usederivatives contracts for both trading and hedging purposes.  These derivatives include options, forwards,futures and swaps. In general, derivatives are contractual agreements that derivetheir values from the performance of underlying assets, interest or currencyexchange rates, or a variety of indices. Most of our derivatives transactionsare accounted for as trading positions.

 

**Hedging Derivatives**

 

We manage our interest rate exposure on our fixed-rate debt by usinginterest rate swaps that qualify for hedge accounting under Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”). These financial instruments are accountedfor as fair value hedges, with changes in fair value included in other revenuesin the condensed consolidated statements of income.

 

The effectiveness of hedging relationships isevaluated using quantitative measures of correlation. If a hedge relationshipis not found to be highly effective, it no longer qualifies as a hedge and anysubsequent gains or losses attributable to the hedged item cease to berecognized, while the subsequent changes in the derivative instrument’s fairvalue are recognized in earnings, in each reporting period.  The gains and losses related to theineffective component of the fair value hedges were not material for the threemonths and nine months ended September 30, 2002 and September 30, 2001.

 

Other derivatives used for hedging purposes that do not qualify as hedgesunder SFAS 133 are carried at fair value with changes in fair value included inprincipal transactions-net in the condensed consolidated statements ofincome.  For the nine months endedSeptember 30, 2002 and 2001, we recognized an after-tax (loss) gain of $(4.6)million and $3.9 million, respectively, for these derivatives.

 

***Trading Derivatives***

 

***Options***

 

We write option contracts specifically designed to meet customer needsor for hedging purposes.  These optionsdo not expose us to credit risk because we, not our counterparty, are obligatedto perform. At the beginning of the contract period, we receive a cash premium.During the contract period, we bear the risk of unfavorable changes in thevalue of the financial instruments underlying the options (“market risk”). Tomanage this market risk, we purchase or sell cash or derivative financialinstruments on a proprietary basis. Such purchases and sales may include debtand equity securities, forward and futures contracts and options.

 

We also purchase options for trading purposes. With purchased options,we get the right, for a fee, to buy or sell the underlying instrument at afixed price on or before a specified date. The underlying instruments for theseoptions include fixed income securities, equities, foreign currencies andinterest rate instruments or indices. The counterparties to these purchases are reviewed to determine whetherthey are creditworthy.

 

***Forwards and Futures***

 

We enter into forward purchases and sales contracts for mortgage-backedsecurities and foreign currencies. In addition, we enter into futures contractson equity-based indices and other financial instruments as well as options onfutures contracts.

 

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

 

Because forward contracts are subject to thefinancial reliability of the counterparty, we are exposed to credit risk. Tomonitor this credit risk, we limit transactions with specific counterparties,review credit limits and adhere to internally established credit extensionpolicies. For futures contracts and options on futures contracts, the change inthe market value is settled with the exchanges in cash each day. As a result,the credit risk with the futures exchanges is limited to the net positivechange in the market value for a single day.

 

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***Swaps***

 

Our swap agreements consist primarily of equity and interest rate swaps.Equity swaps are contractual agreements to receive the appreciation ordepreciation in value based on a specific strike price on an equity instrumentin exchange for paying another rate, which is usually based on index orinterest rate movements. Interest rate swaps are contractual agreements toexchange interest rate payments based on agreed notional amounts and maturity.Swaps are reported at fair value.

 

#### **Quantitative Disclosures for All Derivatives**

 

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

 
|              |   | **September 30, 2002** |   | **December 31, 2001** |   |
|-------------------|--------|-----------------------------|--------|----------------------------|--------|
|              |   | **Assets**                  |   | **Liabilities**            |   | **Assets** |   | **Liabilities** |   |
|              |   | **(In millions)**           |   |
| Options           |   | $                           | 989    |                       | $      | 1,481 |   | $ | 968 |   | $ | 1,010 |   |
| Forward contracts |   | 728                         |   | 717                        |   | 1,652 |   | 1,647 |   |
| Futures contracts |   | 11                          |   | 32                         |   | 103 |   | 20 |   |
| Swaps             |   | 1,724                       |   | 460                        |   | 354 |   | 280 |   |
| Total             |   | $                           | 3,452  |                       | $      | 2,690 |   | $ | 3,077 |   | $ | 2,957 |   |

 

These amounts are included as derivatives contracts in financialinstruments owned/sold not yet purchased in the condensed consolidatedstatements of financial condition.

 

#### **Derivatives With Related Parties**

 

Included below are derivatives transactions with related partiesconsisting primarily of interest rate, foreign exchange and credit defaultswaps. The fair values of derivatives outstanding at September 30, 2002and December 31, 2001 with related parties were as follows:

 
|              |   | **September 30, 2002** |   | **December 31, 2001** |   |
|-------------------|--------|-----------------------------|--------|----------------------------|--------|
|              |   | **Assets**                  |   | **Liabilities**            |   | **Assets** |   | **Liabilities** |   |
|              |   | **(In millions)**           |   |
| Options           |   | $                           | 98     |                       | $      | 329 |   | $ | 157 |   | $ | 383 |   |
| Forward contracts |   | 109                         |   | 99                         |   | 212 |   | 117 |   |
| Swaps             |   | 1,508                       |   | 202                        |   | 341 |   | 209 |   |
| Total             |   | $                           | 1,715  |                       | $      | 630 |   | $ | 710 |   | $ | 709 |   |

 

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***Sources and Maturities of OTC Derivatives***

 

The following table sets forth the distributions, by maturity, ofsubstantially all of our exposure with respect to OTC derivatives as ofSeptember 30, 2002 after taking into account the effect of netting agreements.Fair values were determined on the basis of pricing models and other valuationmethods. 

 
|              |   | **AssetsFair Value at September 30, 2002**      |       |
|-------------------|--------|------------------------------------------------------|------------|
|              |   |                                                 |       |
|              |   | **Maturity  Less  Than 1 Year**                      |       | **Maturity  1-3  Years** | ** ** | **Maturity  4-5  Years** | ** ** | **Maturity  Over 5  Years** | ** ** | **Total Fair  Value** | ** ** |
|              |   | **(In  millions)**                                   | ** ** |
| Options           |   | $                                                    | 170        |   | $ | 282 |   | $ | 27 |   | $ | 41 |   | $ | 520 |   |
| Forward contracts |   | 705                                                  |       | 21 |   | 2 |   | — |   | 728 |   |
| Swaps             |   | 155                                                  |       | 428 |   | 200 |   | 941 |   | 1,724 |   |
| Total             |   | $                                                    | 1,030      |   | $ | 731 |   | $ | 229 |   | $ | 982 |   | $ | 2,972 |   |
|              |   |                                                 |       |   |   |   |   |   |   |   |   |
|              |   | **LiabilitiesFair Value at September 30, 2002** |       |
|              |   |                                                 |       |
|              |   | **Maturity  Less  Than 1 Year**                      |       | **Maturity  1-3  Years** | ** ** | **Maturity  4-5  Years** | ** ** | **Maturity  Over 5  Years** | ** ** | **Total Fair  Value** | ** ** |
|              |   | **(In  millions)**                                   | ** ** |
| Options           |   | $                                                    | 309        |   | $ | 399 |   | $ | 165 |   | $ | 33 |   | $ | 906 |   |
| Forward contracts |   | 696                                                  |       | 21 |   | — |   | — |   | 717 |   |
| Swaps             |   | 97                                                   |       | 173 |   | 54 |   | 136 |   | 460 |   |
| Total             |   | $                                                    | 1,102      |   | $ | 593 |   | $ | 219 |   | $ | 169 |   | $ | 2,083 |   |

 

**PRIVATE EQUITY ACTIVITIES**

 

Private equity and other long-term investment activities include directinvestments and investments in partnerships that make private equity andrelated investments in various portfolio companies and funds. The Company’ssubsidiaries, acting as general partner, manage many private equitypartnerships.  When the investmentperformance on private equity partnerships managed by the Company’ssubsidiaries exceeds specific thresholds, the Company receives carried interestgains, primarily on realizations. Carried interest gains are based on the cumulative investmentperformance over the life of each partnership. The Company would be required to return carried interest gainspreviously distributed by the partnerships if the investment underperformsfollowing the prior distribution of carried interest gains.

 

Private equity and other long-term investments are carried at estimatedfair value in the condensed consolidated financial statements and are primarilyin unlisted or illiquid equity or equity-related securities. AtSeptember 30, 2002 and December 31, 2001, the Company had investmentsof $0.8 billion and $1.0 billion, respectively, and had commitments to investup to an additional $2.0 billion and $1.7 billion, respectively. The cost ofthese investments was $1.1 billion and $1.2 billion at September 30, 2002and December 31, 2001, respectively. Changes in net unrealized (depreciation)appreciation arising from changes in fair value or upon realization arereflected in principal transactions-net in the condensed consolidatedstatements of income. The Company managed or advised funds and proprietaryequity portfolios with total committed capital of $20.1 billion and $20.7billion at September 30, 2002 and December 31, 2001, respectively.

 

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**HIGH-YIELD DEBT AND MORTGAGE WHOLE LOANS AND OTHERNON-INVESTMENT-GRADE DEBT**

 

We underwrite, trade and hold high-yield debt, mortgage whole loans,loan participations, foreign sovereign debt and other non-investment-gradedebt. Due to credit considerations, liquidity of secondary trading markets andvulnerability to general economic conditions, these securities and loansgenerally involve greater risk than investment-grade securities. We recordhigh-yield debt and residential mortgage whole loans held for trading purposesat fair value, mortgage whole loans held for sale at the lower of cost or fairvalue, loan participations at the lower of cost or fair value and foreignsovereign and other non-investment-grade debt at fair value. Timing of thesecuritization of our mortgage whole loan inventory will impact the size of ourpositions at any given time. The following summarizes our positions in theseinstruments at:

 
|                            |   | **September 30, 2002** |   | **December 31, 2001** |   |
|---------------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                            |   | **Long**                    |   | **Short**                  |   | **Long** |   | **Short** |   |
|                            |   | **(In millions)**           |   |
|                            |   |                        |   |                       |   |   |   |   |   |
| High-yield debt                 |   | $                           | 1,222  |                       | $      | 619 |   | $ | 895 |   | $ | 731 |   |
| Mortgage whole loans            |   | 9,624                       |   | —                     |   | 6,846 |   | — |   |
| Loan participations             |   | 128                         |   | —                     |   | 162 |   | — |   |
| Other non-investment-grade debt |   | 24                          |   | 10                         |   | 187 |   | — |   |
| Total                           |   | $                           | 10,998 |                       | $      | 629 |   | $ | 8,090 |   | $ | 731 |   |

 

**OFF BALANCE SHEET ARRANGEMENTS**

 

In the ordinary course of business, we sellcommercial and residential mortgage whole loans to special-purpose vehicles(“SPVs”). These SPVs are set up by our subsidiaries and affiliates tosecuritize mortgage whole loans.  Ourprincipal broker-dealer subsidiary, CSFB Corp., underwrites asset-backedsecurities for the SPVs. These SPVs are qualified special-purpose entities(“QSPEs”) under Statement of Financial Accounting Standards No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities,” a replacement of FASB Statement No. 125 (“SFAS 140”).As more fully described below under “Accounting Developments”, SFAS 140sets forth specific guidelines to distinguish transfers of financial assetsthat are sales from transfers that are secured borrowings. An SPV that is aQSPE is not required to be consolidated in the transferor’s financialstatements. For an SPV to qualify as a QSPE, certain conditions must be metsuch as being an entity demonstratively distinct from the transferor, withlimits on permitted activities, assets it can hold and permitted sales,exchanges, puts or distribution of its assets. Because our securitization SPVshave been structured to qualify as QSPEs, the related assets and liabilitiesare not consolidated into our financial statements.

 

As part of the Company’s securitizationactivities, commercial and residential mortgages are sold to QSPEs andsecuritized. Beneficial interests in those entities are sold to investors. Theinvestors and the securitization entities have no recourse to the Company’sassets. For the nine months ended September 30, 2002, the Companysecuritized $3.3 billion in residential and commercial mortgages and recognizeda net loss on these transactions of $21.0 million. For the nine months endedSeptember 30, 2001, the Company securitized $202.3 million inresidential mortgages and recognized a net loss on these transactions of$0.7 million.  These losses excludenet interest revenues earned on commercial and residential mortgages prior tosecuritization and any underwriting gains or losses.  In addition, for the nine months ended September 30, 2002 and2001, the Company sold to an affiliate $15.0 billion and $9.7 billion,respectively, of residential and commercial mortgages, which were subsequentlysecuritized. The Company’s primary broker-dealer subsidiary acting asunderwriter has unsold positions of $879.0 million and $225.0 million atSeptember 30, 2002 and 2001, respectively, associated with these transactions.

 

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**ACCOUNTING DEVELOPMENTS**

 

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 businesscombinations initiated after June 30, 2001 be accounted for under thepurchase method of accounting. The pooling of interest method is not permitted.The Company previously adopted SFAS 141 for all business combinations initiatedafter June 30, 2001. Effective January 1, 2002, the Company adopted theremaining provisions of SFAS 141.

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets”(“SFAS 142”), which requires that goodwill and indefinite-lived intangibleassets be reviewed annually for impairment instead of being amortized toearnings. Intangible assets that do not have indefinite lives will continue tobe amortized over their useful lives and reviewed for impairment. EffectiveJanuary 1, 2002, the Company adopted SFAS 142. The Company completed thetransitional impairment test of goodwill as of January 1, 2002 and determinedthat there was no impairment to goodwill and no effect on the Company’sconsolidated financial condition or results of operations as of January 1,2002.  There have been no events or circumstances occurring subsequent to thetransitional impairment test that would more likely than not have resulted inthe fair value of the Company’s reporting units being below their respectivecarry values. See note 15 of the condensed consolidated financialstatements for more information on goodwill and identifiable intangible assets.

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations”(“SFAS 143”), which addresses the financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. This statement is effective for fiscalyears beginning after June 15, 2002. Management believes that the adoptionof SFAS 143 will not have a significant impact on the Company’s consolidatedfinancial condition or results of operations.

 

In October 2001, the FASB issued Statement of Financial AccountingStandards No. 144, “Accounting for Impairment or Disposal of Long-LivedAssets” (“SFAS 144”), which replaces FASB Statement No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of”. SFAS 144 requires that long-lived assets which are “heldfor sale” be measured at the lower of carrying amount or fair value less costto sell and also broadens the reporting requirements for discontinuedoperations. Effective January 1, 2002, the Company adopted SFAS 144. There wasno impact on the Company’s consolidated financial condition or results ofoperations as a result of adopting SFAS 144.

 

In April 2002, the FASB issued Statement of Financial AccountingStandards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). Thisstatement rescinds FASB Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt”, an amendment of that statement, FASB Statement No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and FASBStatement No. 44.  SFAS 145 amends FASBStatement No. 13, “Accounting for Leases” to eliminate an inconsistency betweenthe required accounting for sale-leaseback transactions and the requiredaccounting for certain lease modifications that have economic effects that aresimilar to sale-leaseback transactions. This statement is effective for fiscalyears beginning after May 15, 2002. Management is evaluating the impact of adopting SFAS 145.

 

In May 2002, the FASB issued an ExposureDraft “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others - an interpretationof FASB Statements No. 5, 57, and 107”. This proposed interpretation would require additional disclosuresby a guarantor in its financial statements about its obligations under certainof its guarantees. It also would require a guarantor to recognize, at theinception of a guarantee, a liability for the fair value of the obligations ithas undertaken in issuing the guarantee. Managementis evaluating the impact of adopting the proposed interpretation, which isexpected to be issued in November 2002.

 

In June 2002, the FASB issued Statement of Financial AccountingStandards No. 146 “Accounting for Costs Associated with Exit or DisposalActivities” (“SFAS 146”), which requires companies to recognize costsassociated with exit or disposal activities when they are incurred rather thanat the date of a commitment to an exit or disposal plan.  Examples of costs covered by the standardinclude lease termination costs and certain employee severance costs that areassociated with restructurings, discontinued operations, plant closings, orother exit or disposal activities. The statement is effective for exit ordisposal activities initiated after December 31, 2002.  Management is evaluating the impact ofadopting SFAS 146.

 

In June 2002, the FASB issued an ExposureDraft, “Consolidation of Certain Special-Purpose Entities - an Interpretationof ARB No. 51”.  This proposedinterpretation would address consolidation by business enterprises ofspecial-purpose entities (“SPEs”) to which the usual condition forconsolidation described in Accounting Research Bulletin No. 51, *Consolidated Financial Statements,*doesnot apply because the SPEs have no voting interests or otherwise are notsubject to control through ownership of voting interests. If the proposedinterpretation were adopted, off balance sheet treatment would be eliminatedfor many transactions that were structured by companies under currentaccounting guidance. The FASB is reconsidering its proposed guidance, and theCompany is monitoring the FASB’s deliberations.

 

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In October 2002, the FASB issued an Exposure Draft, “Accounting forStock-Based Compensation - Transition and Disclosure”, which would amend Statement of Financial Accounting StandardsNo. 123, “Accounting forStock-Based Compensation”.  Thisproposed interpretation would provide transition alternatives for companies whohave voluntarily elected to adopt a fair-value based methodology with respectto employee stock options.  It wouldalso require additional and more frequent disclosures related to such stockoptions. The Company currently accounts for stock options using the intrinsicvalue-based method in Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees”, rather than the fair value-based method in SFAS123. Management is evaluating the impact of adopting SFAS 123 and the proposedinterpretation.

 

In October 2002, the FASB issued Statement of Financial AccountingStandards No. 147 “Acquisitions of Certain Financial Institutions” (“SFAS147”).  This statement provides guidanceon accounting for the acquisition of a financial institution and applies toacquisitions of all financial institutions except mutual enterprises.  Paragraph 5 of this statement, which relatesto the application of the purchase method of accounting, is effective if thedate of acquisition is on or after October 1, 2002.  The provisions related to accounting for the impairment ordisposal of certain long-term assets were effective October 1, 2002.  Transition provisions from previously recognizedunidentifiable intangible assets were effective October 1, 2002 with earlierapplication permitted.  Managementbelieves that the adoption of SFAS 147 will not have a significant impact onthe Company’s consolidated financial condition or results of operations.

 

#### **ITEM 3: Quantitative and Qualitative Disclosures about Market Risk**

 

**Risk Management and Value at Risk**

 

# **Fora description of the Company’s risk management policies and procedures andvalue-at-risk (“VAR”) model, including such model’s assumptions andlimitations, refer to “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2001.  The Company-wide trading portfolio VAR was approximately $42.9million and $28.7 million at September 30, 2002 and December 31, 2001,respectively.**

 

# **Dueto the benefit of diversification, the Company-wide trading portfolio VAR isless than the sum of the individual components. The three main components ofmarket risk, expressed in terms of theoretical fair values, had the followingVAR:**

 
|                           |   | **September 30,  2002** |   | **December 31,********2001** |   |
|--------------------------------|--------|-------------------------|--------|-----------------------------------|--------|
|                           |   | **(In millions)**       |   |
| Trading:                       |   |                    |   |                              |   |
| Interest rate risk             |   | $                       | 53.2   |                              | $      | 29.2 |   |
| Equity risk                    |   | 3.9                     |   | 10.0                              |   |
| Foreign currency exchange risk |   | 0.4                     |   | 0.0                               |   |
| Benefit of diversification     |   | (14.6                   | )      | (10.5                             | )      |
| Total                          |   | $                       | 42.9   |                              | $      | 28.7 |   |

 

Theinterest rate risk on non-trading positions is measured using sensitivityanalysis that estimates the potential decline in the value of the non-tradingportfolio resulting from a 100 basis points decline in the interest rates ofG21 nations and a 200 basis points decline in the interest rates of non-G21nations. Our non-trading interest rate risk was approximately $45.2 million and$361.0 million at September 30, 2002 and December 31, 2001, respectively.

 

The equityrisk on our non-trading financial instruments portfolio, which mainly consistsof our private equity investments, is calculated using a sensitivity analysisas described in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.  The Company equityrisk on the non-trading portfolio was approximately $80.8 million and $95.9million at September 30, 2002 and December 31, 2001, respectively.

 

We do not have material foreign exchange or commodity price risks onour non-trading portfolio.

 

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#### **ITEM 4:  Controls and Procedures**

 

Within the 90-day period prior to the filing of this report, anevaluation was carried out under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief Financial andAccounting Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-14(c) of theExchange Act). Based upon that evaluation**,**our Chief Executive Officer and Chief Financial and Accounting Officerhave concluded that the design and operation of these disclosure controls andprocedures were effective.  Nosignificant changes were made in our internal controls or in other factors thatcould significantly affect these internal controls subsequent to the date oftheir most recent evaluation.

 

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**PART II**

**OTHER INFORMATION**

**ITEM 1:  LegalProceedings**

 

Certain significant legal proceedings and matters have been previouslydisclosed in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001, Quarterly Reports on Form 10-Q for the three months endedMarch 31, 2002 and June 30, 2002, or Current Reports on Form 8-K previouslyfiled in 2002.  The following is anupdate of such proceedings.

 

***In re Issuer Plaintiff InitialPublic Offering Fee Antitrust Litigation***

 

On September 25, 2002, the U.S. District Court for the SouthernDistrict of New York denied the defendants’ motion to dismiss the consolidatedcomplaint that alleges that the defendant broker/dealers conspired to fix the“fee” paid for underwriting IPOs by setting the underwriters’ discount or“spread” at 7%, in violation of the federal antitrust laws.

 

***Litigation and Inquiries Relating to Enron***

 

## ***NewPower Holdings, Inc. Litigation***

 

On July 31,2002, plaintiffs filed a consolidated complaint alleging violations of thefederal securities laws due to alleged material misrepresentations in, andomissions of material fact from, the registration statement and prospectusissued in connection with NewPower’s October 5, 2000 IPO, and for allegedmisrepresentations and omissions regarding NewPower after the IPO.  One of our former employees, who was adirector of NewPower, is also named as a defendant in the consolidatedcomplaint.

 

*Tittle v. Enron Corp., et al.*

 

On October 1, 2002, plaintiffs filed a motion to certify the putativeclass in this matter.

 

*Newby v. EnronCorp., et al.*

 

On October 1, 2002, plaintiffs filed a motion to certify the putativeclass in this matter.

 

*The Retirement Systems of Alabama v. MerrillLynch & Co., et al.*

 

This matter has been remanded to Alabama state court, and on July 18,2002, CSFB Corp. moved to dismiss plaintiff’s third amended complaint.  On August 19, 2002, the Courtdenied all defendants’ motions to dismiss.

 

*Hudson Soft Co., Ltd., et al. v. Credit Suisse First Boston Corp., etal.*

 

On September29, 2002, a first amended complaint was filed alleging violations of theRacketeer Influenced and Corrupt Organizations Act, or RICO, in connection withvarious offerings of credit-linked notes and violations of the federalsecurities laws for alleged misstatements and omissions of material factregarding the financial condition of Enron in connection with various offeringsof credit-linked notes.

 

*Brazos Electric Power Cooperative, Inc. v. Ponderosa Pine Energy,L.L.C., et al.*

 

On August 14,2002, plaintiff filed a motion to remand this action to Texas state court, andon September 6, 2002, certain defendants opposed plaintiff’s motion toremand.  On August 28, 2002, CSFB Corp.and certain other defendants moved to transfer the case to the U.S. DistrictCourt for the Southern District of New York.

 

*Public Employees Retirement System of Ohio, et al. v. Fastow, et al.*

 

On September4, 2002, certain executives and directors of Enron, Arthur Andersen, the lawfirm of Vinson & Elkins, L.L.P., CSFB Corp. and certain other investmentbanks were named in an action filed in the Court of Common Pleas of FranklinCounty, Ohio by four retirement systems in the State of Ohio.  The complaint alleges violations of theTexas Securities Act, as well as violations of statutory and common law due toalleged misstatements and omissions of material fact from certain registrationstatements and prospectuses issued in connection with the sales of certainEnron debt securities and common stock, alleged material misstatements andomissions regarding the financial condition of Enron, and alleged conspiracy inconnection with the dissemination of such statements and omissions.  On September 27, 2002, this action wasremoved to the U.S. District Court for the Southern District of Ohio.

 

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*Washington State Investment Board, et al. v. Lay, et al.*

 

On September9, 2002, certain executives and directors of Enron, Arthur Andersen and certainpartners, executives and employees of Arthur Andersen, the law firms of Vinson& Elkins, L.L.P. and Kirkland & Ellis, and CSFB Corp. and certain otherinvestment banks, were named in a putative class action filed in the U.S.District Court for the Southern District of Texas by purchasers of Enronpublicly traded equity and debt securities between September 9, 1997 andOctober 18, 1998.  The complaint allegesviolations of the federal securities laws for alleged misstatements andomissions of material fact regarding the financial condition of Enron, allegedmisstatements and omissions of material fact in connection with variousregistration statements and prospectuses issued in connection with the sale ofcertain Enron securities and alleged controlling person liability.  CSFB Corp. has been named only in connectionwith the claims under the federal securities laws for alleged misstatements andomissions of material fact regarding the financial condition of Enron and forcontrolling person liability.  OnOctober 16, 2002, this action was consolidated with the *Newby* action.

 

*Variable AnnuityLife Ins. Co. v. Credit Suisse First Boston, Inc., et al.*

 

On September 27, 2002, CSFBI, CSFB Corp., the Company, DLJSC, andcertain other investment banks were named in an action filed in the U.S.District Court for the Southern District of Texas by certain investment fundsand fund owners that purchased senior secured notes issued by Osprey Trust andOsprey I, Inc. in 1999 and 2000.  Thefirst amended complaint, filed on September 30, 2002, alleges violations ofstate and federal securities laws, civil conspiracy, common law fraud anddeceit, and negligent misrepresentation in connection with alleged misstatementsand omissions of material fact regarding the Osprey notes and allegedmisstatements and omissions of material fact in connection with variousregistration statements and prospectuses issued in connection with the sale ofthe Osprey notes.

 

*Town of Rocky Hillv. Connecticut Resources Recovery Authority, et al.*

 

On October 2, 2002, the Connecticut Resources Recovery Authority, orthe CRRA, and certain officers and directors of the CRRA, Connecticut GovernorJohn Rowland, the Republican Governors Association, certain executives,directors and employees of Enron, certain lobbyists, and CSFB Corp. and certainother investment banks were named in a putative class action filed in theSuperior Court for the Judicial District of Hartford, Connecticut, by the Townof Rocky Hill, Connecticut, on behalf of itself and other municipalities in theState of Connecticut.  The complaintalleges violations of the Connecticut Unfair Trade Practices Act, common lawconspiracy, aiding and abetting CRRA and its officers and directors in a breachof fiduciary duty, theft, unjust enrichment and fraud in connection withcertain transactions between the CRRA and Enron.

 

*Abbey National Treasury Services plc v. Credit Suisse First BostonCorp., et al.*

 

On October 11, 2002, CSFB Corp., CSG, Credit Suisse First Boston, theCompany, CSFBI, Credit Suisse First Boston (Europe) Limited and certain otherinvestment banks, Arthur Andersen, Andersen Worldwide, SC, Marlin Water Trustand Marlin Water Capital Corp. were named in a complaint filed in the U.S.District Court for the Southern District of Texas and in the U.S. DistrictCourt for the Southern District of New York by a purchaser of senior securednotes issued by Marlin Water Trust II. The complaints allege violations of state and federal securities laws,common law fraud, and negligent misrepresentation in connection with allegedmisstatements and omissions of material fact regarding the financial conditionof Enron in connection with the sale of Marlin Water Trust II senior securednotes.

 

*OCM Opportunities Fund III, L.P. and OCM Opportunities Fund IV, L.P. v.Citigroup, Inc., et al.*

 

OnOctober 15, 2002, CSFBI, the Company, CSFB Corp., DLJSC and certain otherinvestment banks were named in a complaint filed in Los Angeles Superior Courtin the State of California by certain investment funds that purchased Enronand/or Enron-related securities.  Thecomplaint alleges violations of various state statutes for alleged tradingbased on inside information regarding the financial condition of Enron andEnron-related entities and for alleged misstatements and omissions of materialfact regarding the financial condition of Enron and certain Enron-relatedentities.

 

*Inquiries*

 

We continue tocooperate with various governmental and regulatory agencies conductinginvestigations regarding certain transactions and business relationships withEnron and its affiliates, including certain Enron-related special-purposeentities.

 

***Litigationand Inquiries Relating to IPO Allocation and Research***

 

A number of putative class action lawsuitshave been filed against CSFB Corp. in the wake of publicity surrounding variousgovernmentaland regulatory investigations into the practices of equity researchanalysts.  The complaints generallyassert claims under Section 10(b) of the Exchange Act and Rule 10b-5promulgated thereunder, and Section 20(a) of the Exchange Act.

 

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CSFB Corp. has received requestsfor information from a U.S. Congressional committee and various governmentaland regulatory agencies as part of their investigations into the practice knownas “spinning” in connection with the allocation of IPOs.

 

On October 21, 2002, the Commonwealth ofMassachusetts through the Office of the Secretary filed a civil administrativecomplaint against CSFB Corp. relating to equity research and IPO allocationpractices.

 

We continue to cooperate with various U.S.Congressional committees and governmental and regulatory agencies reviewingequity research and/or IPO allocation practices.

 

We are involved in a number ofjudicial, regulatory and arbitration proceedings (including those describedabove and actions that have been separately described in previous filings)concerning matters arising in connection with the conduct of its businesses.Some of the actions have been brought on behalf of various classes of claimantsand seek damages of material and indeterminate amounts. We believe, based oncurrently available information and advice of counsel, that the results of suchproceedings, in the aggregate, will not have a material adverse effect on ourfinancial condition but might be material to operating results for anyparticular period, depending, in part, upon the operating results for suchperiod.  We intend to defend ourselvesvigorously against all of the claims asserted in these matters.

 

**ITEMS 2, 3and 4:**

 

Pursuant to General Instruction H of Form 10-Q, the informationrequired by Items 2, 3 and 4 is omitted.

 

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**ITEM 5: OTHER INFORMATION**

 

We have made in this Quarterly Report on Form 10-Q, including,without limitation in “Legal Proceedings” in Part II, Item 1, and in“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in Part I, Item 2, and from time to time may otherwise make inour public filings and press releases, forward-looking statements concerningour operations, economic performance and financial condition, as well as ourfuture plans and strategic objectives. Such forward-looking statements aresubject to various risks and uncertainties, and we claim the protectionafforded by the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act of 1995. Actual results could differ materiallyfrom those anticipated herein or in any such other filings, releases orstatements because of a number of factors, including without limitation, thosedetailed in “Business - Certain Factors That May Affect Our Business” inPart I, Item 1 of our Annual Report on Form 10-K for the year endedDecember 31, 2001, those discussed elsewhere herein, and in other publicfilings and press releases. These forward-looking statements are not historicalfacts but instead represent only our belief regarding future events, many ofwhich, by their nature, are inherently uncertain and beyond our control. Byidentifying these statements for you in this manner, we are alerting you to thepossibility that our actual results may differ, possibly materially, from the resultsindicated in these forward-looking statements. We undertake no obligation toupdate or revise any forward-looking statements except as otherwise required byapplicable law.

 

#### **ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits

 

12                                    Statement re computation of ratio of earningsto fixed charges

15                                    Letter re unaudited interim financialinformation

99                                    Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

(b)                                 Reports on Form 8-K

 

1.                                       Form 8-K dated July 8, 2002; Items 5 and 7

2.                                       Form 8-K dated July 18, 2002; Item 5

3.                                       Form 8-K dated September 19, 2002; Item 5

4.                                       Form 8-K dated September 23, 2002; Item 5

5.                                       Form 8-K dated October 3, 2002; Item 5

 

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**Signature**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                    | CREDIT SUISSE FIRST BOSTON (USA), INC. |
|-------------------------|----------------------------------------|
| November  14, 2002 | By:                                    | /s/   David C. Fisher |   |
|                    |                                   | *Chief Financial and Accounting Officer**(On behalf of the  Registrant and as**Principal  Financial Officer)* |

 

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**Certification**

 

I, John J. Mack, certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of Credit Suisse First Boston (USA), Inc.;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officers andI have indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  November 14, 2002 |   | /s/  John J. Mack        |   |
|-------------------------------|--------|--------------------------|--------|
|                          | Name:  | John  J. Mack            |
|                          | Title: | Chief  Executive Officer |

 

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**Certification**

 

I, David C. Fisher, certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of Credit Suisse First Boston (USA), Inc.;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officers andI have indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  November 14, 2002 |   | /s/  David C. Fisher                    |   |
|-------------------------------|--------|-----------------------------------------|--------|
|                          | Name:  | David  C. Fisher                        |
|                          | Title: | Chief  Financial and Accounting Officer |

 

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### **INDEX TO EXHIBITS**

 
| **Exhibits  No.** |   | **Description**                                                                                                           |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                      |
| 12                |   | Statement  re computation of ratio of earnings to fixed charges*                                                          |
| 15                |   | Letter  re unaudited interim financial information*                                                                       |
| 99                |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002* |

 

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*                                         Filed herewith.

 

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