**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

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

**Forthe quarterly period ended June 30, 2004**

**OR**

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

**Forthe transition period from                         to                      **

**CommissionFile Number: 1-6862**

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

(Exact name of registrantas specified in its charter)

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| **Delaware**                                                     | ** ** | **13-1898818**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation 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 telephonenumber, including area code)

**The Registrantmeets the conditions set forth in General Instruction H(1)(a) and (b) ofForm 10-Q and is therefore filing this Form 10-Q with thereduced disclosure format.**

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch 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 x   No o

Indicated by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

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

 

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**CREDIT SUISSE FIRSTBOSTON (USA), INC.**

**Quarterly Report onForm 10-Q for the Quarter Ended June 30, 2004**
| **PART I**  | **FINANCIAL INFORMATION** |                                                                                                                                         |
|-------------|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|        | ITEM 1:                   | Financial Statements                                                                                                                         |   |
|        |                      | Condensed  Consolidated Statements of Financial Condition (Unaudited) as of  June 30, 2004 and December 31, 2003                   | 2 |
|        |                      | Condensed  Consolidated Statements of Income (Unaudited) for the three and six months  ended June 30, 2004 and 2003                     | 4 |
|        |                      | Condensed  Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for  the six months ended June 30, 2004 and 2003 | 5 |
|        |                      | Condensed  Consolidated Statements of Cash Flows (Unaudited) for the six months ended  June 30, 2004 and 2003                           | 6 |
|        |                      | Notes to  Condensed Consolidated Financial Statements (Unaudited)                                                                            |   |
|        |                      | 1.                                                                                                                                      | Summary  of Significant Accounting Policies | 7 |
|        |                      | 2.                                                                                                                                      | Share-Based Compensation | 9 |
|        |                      | 3.                                                                                                                                      | Discontinued Operations | 10 |
|        |                      | 4.                                                                                                                                      | Related Party  Transactions | 10 |
| ** **  | ** **                | 5.                                                                                                                                      | Income Taxes | 13 |
| ** **  | ** **                | 6.                                                                                                                                      | Transfers  and Servicing of Financial Assets | 15 |
| ** **  | ** **                | 7.                                                                                                                                      | Borrowings | 19 |
| ** **  | ** **                | 8.                                                                                                                                      | Private  Equity and Other Long Term Investments | 21 |
| ** **  | ** **                | 9.                                                                                                                                      | Net Capital | 22 |
| ** **  | ** **                | 10.                                                                                                                                     | Cash  and Securities Segregated Under Federal and Other  Regulations | 22 |
| ** **  | ** **                | 11.                                                                                                                                     | Derivatives Contracts | 23 |
| ** **  | ** **                | 12.                                                                                                                                     | Employee Benefit Plans | 25 |
| ** **  | ** **                | 13.                                                                                                                                     | Leases and Commitments | 26 |
| ** **  | ** **                | 14.                                                                                                                                     | Guarantees | 27 |
| ** **  | ** **                | 15.                                                                                                                                     | Industry  Segment and Geographic Data | 31 |
| ** **  | ** **                | 16.                                                                                                                                     | Goodwill  and Identifiable Intangible Assets | 34 |
| ** **  | ** **                | 17.                                                                                                                                     | Legal Proceedings | 34 |
| ** **  | ** **                | Report  of Independent Registered Public Accounting Firm                                                                                     | 36 |
| ** **  | ITEM  2:                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                  | 37 |
| ** **  | ITEM  3:                  | Quantitative  and Qualitative Disclosures About Market Risk                                                                                  | 63 |
| ** **  | ITEM 4:                   | Controls and Procedures                                                                                                                      | 64 |
| **PART II** | **OTHER INFORMATION**     |                                                                                                                                         |
| ** **  | ITEM 1:                   | Legal Proceedings                                                                                                                            | 65 |
| ** **  | ITEM 5:                   | Other Information                                                                                                                            | 66 |
| ** **  | ITEM 6:                   | Exhibits  and Reports on Form 8-K                                                                                                            | 66 |
| ** **  | Signature                 | 67                                                                                                                                           |

 

**AVAILABLE INFORMATION**

We file annual, quarterly and current reports andother information with the Securities and Exchange Commission, or SEC. Our SECfilings are available to the public over the internet on the SEC’s website at *www.sec.gov*. You may also view our annual,quarterly and current reports on our website at *www.csfb.com* (under “Company Information”) as soon as isreasonably practicable after the report is electronically filed with, orfurnished to, the SEC. The information on our website is not incorporated byreference into this Quarterly Report.

1

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**PART I**FINANCIAL INFORMATIONItem 1: Financial Statements

**CREDIT SUISSE FIRST BOSTON (USA), INC. ANDSUBSIDIARIES**Condensed Consolidated Statements of Financial Condition(Unaudited)(In millions)
| ** **                                                                                                                 | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                 |       |                    |       |                        |       |   |   |
| Cash and cash  equivalents                                                                                                 |       | $                       | 861        |                        |       | $ | 334 |   |   |
| Collateralized  short-term financings:                                                                                     |       |                    |       |                        |       |   |   |
| Securities purchased under agreements to resell                                                                            |       | 54,670                  |       |                        | 50,388     |   |   |
| Securities borrowed                                                                                                        |       | 85,784                  |       |                        | 77,999     |   |   |
| Receivables:                                                                                                               |       |                    |       |                        |       |   |   |
| Customers                                                                                                                  |       | 2,211                   |       |                        | 2,859      |   |   |
| Brokers, dealers and other                                                                                                 |       | 11,187                  |       |                        | 6,673      |   |   |
| Financial instruments  owned (includes securities pledged as collateral of $52,281 and $47,565,  respectively):            |       |                    |       |                        |       |   |   |
| U.S. government and agencies                                                                                               |       | 37,568                  |       |                        | 31,781     |   |   |
| Corporate debt                                                                                                             |       | 13,329                  |       |                        | 12,761     |   |   |
| Mortgage whole loans                                                                                                       |       | 12,283                  |       |                        | 9,101      |   |   |
| Equities                                                                                                                   |       | 22,504                  |       |                        | 15,161     |   |   |
| Commercial paper                                                                                                           |       | 1,083                   |       |                        | 641        |   |   |
| Private equity and other long-term investments                                                                             |       | 2,551                   |       |                        | 1,123      |   |   |
| Derivatives contracts                                                                                                      |       | 6,073                   |       |                        | 5,573      |   |   |
| Other                                                                                                                      |       | 4,098                   |       |                        | 3,765      |   |   |
| Net deferred tax  asset                                                                                                    |       | 1,142                   |       |                        | 1,283      |   |   |
| Office facilities  and property at cost (net of accumulated depreciation and amortization of  $917 and $865, respectively) |       | 518                     |       |                        | 468        |   |   |
| Goodwill                                                                                                                   |       | 532                     |       |                        | 532        |   |   |
| Loans receivable  from parent and affiliates                                                                               |       | 21,654                  |       |                        | 19,481     |   |   |
| Other assets and  deferred amounts                                                                                         |       | 1,139                   |       |                        | 1,643      |   |   |
| Total assets                                                                                                               |       | $                       | 279,187    |                        |       | $ | 241,566 |   |   |

 

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

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**CREDIT SUISSE FIRST BOSTON(USA), INC. AND SUBSIDIARIESCondensed Consolidated Statements of Financial Condition (Continued)(Unaudited)**(In millions, except share data)
| ** **                                                                                      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                  |       |                    |       |                        |       |   |   |
| Commercial paper  and short-term borrowings                                                     |       | $                       | 23,223     |                        |       | $ | 15,984 |   |   |
| Collateralized  short-term financings:                                                          |       |                    |       |                        |       |   |   |
| Securities sold under agreements to repurchase                                                  |       | 106,201                 |       |                        | 110,667    |   |   |
| Securities loaned                                                                               |       | 35,144                  |       |                        | 27,708     |   |   |
| Payables:                                                                                       |       |                    |       |                        |       |   |   |
| Customers                                                                                       |       | 4,973                   |       |                        | 4,278      |   |   |
| Brokers, dealers and other                                                                      |       | 11,493                  |       |                        | 5,410      |   |   |
| Financial instruments  sold not yet purchased:                                                  |       |                    |       |                        |       |   |   |
| U.S. government and agencies                                                                    |       | 36,039                  |       |                        | 23,700     |   |   |
| Corporate debt                                                                                  |       | 3,211                   |       |                        | 2,523      |   |   |
| Equities                                                                                        |       | 5,852                   |       |                        | 5,231      |   |   |
| Derivatives contracts                                                                           |       | 5,005                   |       |                        | 3,955      |   |   |
| Other                                                                                           |       | 133                     |       |                        | 336        |   |   |
| Obligation to  return securities received as collateral                                         |       | 4,663                   |       |                        | 1,955      |   |   |
| Accounts payable  and accrued expenses                                                          |       | 2,505                   |       |                        | 2,836      |   |   |
| Other liabilities                                                                               |       | 4,268                   |       |                        | 3,021      |   |   |
| Long-term  borrowings                                                                           |       | 26,202                  |       |                        | 24,321     |   |   |
| Total liabilities                                                                               |       | 268,912                 |       |                        | 231,925    |   |   |
| Stockholders’ Equity:                                                                      |       |                    |       |                        |       |   |   |
| Common stock  ($0.10 par value; 50,000 shares authorized; 1,100 shares issued and  outstanding) |       | —                  |       |                        | —     |   |   |
| Paid-in capital                                                                                 |       | 8,186                   |       |                        | 8,012      |   |   |
| Retained earnings                                                                               |       | 2,246                   |       |                        | 1,787      |   |   |
| Accumulated other  comprehensive loss                                                           |       | (157                    | )          |                        | (158       | ) |   |
| Total stockholders’ equity                                                                 |       | 10,275                  |       |                        | 9,641      |   |   |
| Total liabilities  and stockholders’ equity                                                |       | $                       | 279,187    |                        |       | $ | 241,566 |   |   |

 

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

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**CREDIT SUISSE FIRST BOSTON(USA), INC. AND SUBSIDIARIESCondensed Consolidated Statements of Income(Unaudited)(In millions)**
| ** **                                                                                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Principal transactions-net                                                                                                  |       | $                                               | 612        |                                          | $          | (6 | ) | $ | 674 |   | $ | (48 | ) |
| Investment banking and advisory                                                                                             |       | 392                                             |       | 486                                           |       | 864 |   | 853 |   |
| Commissions and fees                                                                                                        |       | 330                                             |       | 335                                           |       | 707 |   | 650 |   |
| Interest and dividends, net of interest expense of  $1,273, $1,248, $2,471 and $2,323, respectively                         |       | 624                                             |       | 604                                           |       | 1,271 |   | 1,143 |   |
| Other                                                                                                                       |       | 9                                               |       | 27                                            |       | 31 |   | 49 |   |
| Total net revenues                                                                                                          |       | 1,967                                           |       | 1,446                                         |       | 3,547 |   | 2,647 |   |
| Expenses:                                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Employee compensation and benefits                                                                                          |       | 825                                             |       | 840                                           |       | 1,788 |   | 1,553 |   |
| Occupancy and equipment rental                                                                                              |       | 117                                             |       | 121                                           |       | 231 |   | 237 |   |
| Brokerage, clearing and exchange fees                                                                                       |       | 81                                              |       | 83                                            |       | 153 |   | 147 |   |
| Communications                                                                                                              |       | 32                                              |       | 33                                            |       | 64 |   | 71 |   |
| Professional fees                                                                                                           |       | 66                                              |       | 71                                            |       | 121 |   | 137 |   |
| Merger-related costs                                                                                                        |       | 4                                               |       | 59                                            |       | 8 |   | 121 |   |
| Other operating expenses                                                                                                    |       | 37                                              |       | 83                                            |       | 50 |   | 138 |   |
| Total expenses                                                                                                              |       | 1,162                                           |       | 1,290                                         |       | 2,415 |   | 2,404 |   |
| Income from  continuing operations before provision for income taxes, minority interests  and discontinued operations  |       | 805                                             |       | 156                                           |       | 1,132 |   | 243 |   |
| Provision for  income taxes                                                                                                 |       | 148                                             |       | 30                                            |       | 227 |   | 60 |   |
| Minority  interests                                                                                                         |       | 365                                             |       | —                                        |       | 446 |   | — |   |
| Income from  continuing operations                                                                                          |       | 292                                             |       | 126                                           |       | 459 |   | 183 |   |
| Discontinued operations:                                                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Income from discontinued operations                                                                                         |       | —                                          |       | 1,324                                         |       | — |   | 1,361 |   |
| Provision for income taxes                                                                                                  |       | —                                          |       | 472                                           |       | — |   | 485 |   |
| Income from discontinued operations, net of income  taxes                                                                   |       | —                                          |       | 852                                           |       | — |   | 876 |   |
| Net income                                                                                                                  |       | $                                               | 292        |                                          | $          | 978 |   | $ | 459 |   | $ | 1,059 |   |

 

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

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**CREDIT SUISSE FIRSTBOSTON (USA), INC. AND SUBSIDIARIESCondensed Consolidated Statements of Changes in Stockholders’ Equity(Unaudited)For the Six Months Ended June 30, 2004 and 2003(In millions)**
| ** **                                        | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| Balances as of December 31, 2002             |       |                 | $          | 4                 |       |                 |       | $                      | —     |                                                      |       | $         | 7,646      |   |   | $ | 595 |   |   |   | $ | (156 | ) |   | $ | 8,089 |   |
| Net income                                        |       |                 | —     |              |       |                 | —     |                   |       | —                                                    |       |      | 1,059      |   |   |   | — |   |   | 1,059 |   |
| Total comprehensive income                        |       |                 |       |              |       |                 |       |                   |       |                                                      |       |      |       |   |   |   |   |   |   | 1,059 |   |
| Redemption of Series B preferred stock       |       |                 | (4         | )                 |       |                 | —     |                   |       | —                                                    |       |      | —     |   |   |   | — |   |   | (4 | ) |
| Capital contribution by CSFBI                     |       |                 | —     |              |       |                 | —     |                   |       | 75                                                        |       |      | —     |   |   |   | — |   |   | 75 |   |
| CSG share plan activity, net of tax charge of $26 |       |                 | —     |              |       |                 | —     |                   |       | 201                                                       |       |      | —     |   |   |   | — |   |   | 201 |   |
| Balances as of June 30, 2003                 |       |                 | $          | —            |       |                 |       | $                      | —     |                                                      |       | $         | 7,922      |   |   | $ | 1,654 |   |   |   | $ | (156 | ) |   | $ | 9,420 |   |
| Balances as of December 31, 2003             |       |                 | $          | —            |       |                 |       | $                      | —     |                                                      |       | $         | 8,012      |   |   | $ | 1,787 |   |   |   | $ | (158 | ) |   | $ | 9,641 |   |
| Net income                                        |       |                 | —     |              |       |                 | —     |                   |       | —                                                    |       |      | 459        |   |   |   | — |   |   | 459 |   |
| Decrease in pension liability                     |       |                 | —     |              |       |                 | —     |                   |       | —                                                    |       |      | —     |   |   |   | 1 |   |   | 1 |   |
| Total comprehensive income                        |       |                 |       |              |       |                 |       |                   |       |                                                      |       |      |       |   |   |   |   |   |   | 460 |   |
| CSG share plan activity, net of tax charge of $12 |       |                 | —     |              |       |                 | —     |                   |       | 174                                                       |       |      | —     |   |   |   | — |   |   | 174 |   |
| Balances as of  June 30, 2004                |       |                 | $          | —            |       |                 |       | $                      | —     |                                                      |       | $         | 8,186      |   |   | $ | 2,246 |   |   |   | $ | (157 | ) |   | $ | 10,275 |   |

 

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

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**CREDIT SUISSE FIRST BOSTON(USA), INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Unaudited)(In millions)**
| ** **                                                                                               | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2004**                                                        | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                                    |       |                                                            |       |   |   |
| Net income                                                                                               |       | $                                                               | 459        |   | $ | 1,059 |   |
| Adjustments to reconcile net income to net cash  (used in) provided by operating activities:             |       |                                                            |       |   |   |
| Pre-tax gain on sale of  Pershing                                                                        |       | —                                                          |       | (1,324 | ) |
| Depreciation and  amortization                                                                           |       | 84                                                              |       | 95 |   |
| CSG share plan activity                                                                                  |       | 186                                                             |       | 227 |   |
| Deferred taxes                                                                                           |       | 132                                                             |       | 72 |   |
| Other, net                                                                                               |       | (11                                                             | )          | (26 | ) |
| Change in operating assets and operating  liabilities:                                                   |       |                                                            |       |   |   |
| Securities borrowed                                                                                      |       | (7,785                                                          | )          | 2,780 |   |
| Receivables from  customers                                                                              |       | 648                                                             |       | (543 | ) |
| Receivables from  brokers, dealers and other                                                             |       | (4,514                                                          | )          | (12,575 | ) |
| Financial instruments  owned                                                                             |       | (18,534                                                         | )          | (8,474 | ) |
| Other assets and Other  liabilities, net                                                                 |       | 255                                                             |       | 278 |   |
| Securities loaned                                                                                        |       | 7,436                                                           |       | 2,695 |   |
| Payables to customers                                                                                    |       | 695                                                             |       | 1,403 |   |
| Payables to brokers,  dealers and other                                                                  |       | 6,083                                                           |       | 12,922 |   |
| Financial instruments  sold not yet purchased                                                            |       | 14,495                                                          |       | 7,854 |   |
| Obligation to return  securities received as collateral                                                  |       | 2,708                                                           |       | 456 |   |
| Accounts payable and  accrued expenses                                                                   |       | (331                                                            | )          | (584 | ) |
| Net cash provided by  operating activities                                                               |       | 2,006                                                           |       | 6,315 |   |
| Cash flows from investing activities:                                                                    |       |                                                            |       |   |   |
| Net payments for:                                                                                        |       |                                                            |       |   |   |
| Loans receivable from  parent and affiliates                                                             |       | (2,173                                                          | )          | (1,740 | ) |
| Proceeds from Pershing  sale                                                                             |       | —                                                          |       | 2,000 |   |
| Office facilities                                                                                        |       | (129                                                            | )          | (85 | ) |
| Net cash (used in)  provided by investing activities                                                     |       | (2,302                                                          | )          | 175 |   |
| Cash flows from financing activities:                                                                    |       |                                                            |       |   |   |
| Net proceeds from (payments for):                                                                        |       |                                                            |       |   |   |
| Commercial paper and  short-term borrowings                                                              |       | 7,239                                                           |       | 5,184 |   |
| Repurchase of  Series B preferred stock                                                             |       | —                                                          |       | (4 | ) |
| Capital contribution by  CSFBI                                                                           |       | —                                                          |       | 75 |   |
| Securities sold under  agreements to repurchase, net of securities purchased under agreements to  resell |       | (8,748                                                          | )          | (12,405 | ) |
| Issuances of long-term  borrowings                                                                       |       | 3,483                                                           |       | 2,694 |   |
| Redemptions and  maturities of long-term borrowings                                                      |       | (1,151                                                          | )          | (2,072 | ) |
| Net cash provided by  (used in) financing activities                                                     |       | 823                                                             |       | (6,528 | ) |
| Increase (decrease) in  cash and cash equivalents                                                        |       | 527                                                             |       | (38 | ) |
| Cash and cash  equivalents as of the beginning of period                                                 |       | 334                                                             |       | 480 |   |
| Cash and cash  equivalents as of the end of period                                                       |       | $                                                               | 861        |   | $ | 442 |   |
| SUPPLEMENTAL DISCLOSURES:                                                                                |       |                                                            |       |   |   |
| Cash payments for  interest                                                                              |       | $                                                               | 2,446      |   | $ | 2,387 |   |
| Cash payments for income taxes, net of refunds                                                           |       | $                                                               | 58         |   | $ | 67 |   |

 

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

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004**

**1.   Summary ofSignificant Accounting Policies**

**TheCompany**

Credit Suisse First Boston(USA), Inc. and its subsidiaries (the “Company”) is a leading integratedinvestment bank serving institutional, corporate, government and high-net worthindividual clients. The Company provides clients with a broad range of productsand services that includes securities underwriting, sales and trading,financial advisory services, private equity investments, full-service brokerageservices, derivatives and risk management products and investment research.

**Basis of Presentation**

The condensed consolidated financial statementsinclude Credit Suisse First Boston (USA), Inc. and its subsidiaries. Allsignificant intercompany balances and transactions have been eliminated. TheCompany is a wholly owned subsidiary of Credit Suisse First Boston, Inc. (“CSFBI”).

Certain financial information that is normallyincluded in annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America but not requiredfor interim 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.

On June 4, 2004, the Company filed on Form 8-K(the “June 4 Form 8-K”) audited consolidated statements of financialcondition as of December 31, 2003 and 2002 and the related auditedconsolidated statements of operations, changes in stockholders’ equity and cashflows for each of the three years ended December 31, 2003, 2002 and 2001and related notes, restated to reflect the transfer of the high-net-worthbusiness discussed below and containing updated segment information to reflectthe segment changes discussed both below and in Note 15 of the condensed consolidated financialstatements.

The results of operations for interim periods are notnecessarily indicative of results for the entire year. These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the June 4Form 8-K.

To prepare condensed consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates of America, management must make estimates and assumptions. The reportedamounts of assets and liabilities and revenues and expenses are affected bythese estimates and assumptions, the most significant of which are discussed inthe notes to the condensed consolidated financial statements. Estimates, bytheir nature, are based on judgment and available information. Therefore, actualresults could differ materially from these estimates. For a description of theCompany’s significant accounting policies, see Note 1 of the consolidatedfinancial statements in the June 4 Form 8-K.

Prior period numbers have been restated to reflect thetransfer by CSFBI, the Company’s immediate parent, of the high-net-worthbusiness of Credit Suisse Asset Management, LLC (“CSAM”), a wholly ownedsubsidiary of CSFBI, to the Company as a capital contribution of$221 million on March 31, 2004. The transfer of this business wasaccounted for at historical cost in a manner similar to pooling-of-interestaccounting because CSAM and the Company were under the common control of CSFBIat the time of transfer. Accordingly, the Company has restated its financialinformation for all periods presented to 

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**1.   Summary of Significant Accounting Policies(Continued)**

reflect the results ofoperations, financial condition, cash flows and changes in stockholders’ equityof the CSAM high-net-worth business as if the Company had acquired it on November 3,2000, the date that the Company was acquired by CSFBI. The transferred assetsof this business consist principally of goodwill and intangible assets relatingprimarily to CSAM’s acquisition of Warburg Pincus Asset Management in 1999. In December 2003,CSAM wrote down the value of its high-net-worth intangible assets, resulting ina pre-tax loss of $200 million and an after-tax loss of $130 million.The loss is reflected in the restated audited consolidated financial statementsincluded in the June 4 Form 8-K. For the three and six months ended June 30,2003, the CSAM high-net-worth business had net revenues of $1 million and $2million, respectively.  For the three andsix months ended June 30, 2003, the high-net-worth business had a net lossof $2 million and $4 million, respectively.

As of January 1, 2004, the Company transferredthe private equity and private fund businesses from the InstitutionalSecurities segment to the Financial Services segment, which has been renamedWealth & Asset Management. As a result, the Company changed thepresentation of the Institutional Securities and Wealth & AssetManagement segment results. In addition, the Company allocated to the segmentsmerger-related costs and certain other costs and revenues, previously excludedfrom its reportable segments, which the Company believed did not representnormal operating costs and revenues. For comparative purposes, prior periodsegment numbers have been changed to conform to the new segment reportingstructure. These segment changes did not affect the Company’s previouslyreported consolidated results of operations.

Certain other reclassifications have been made toprior year condensed consolidated financial statements to conform to the 2004presentation.

On May 1, 2003, theCompany sold its Pershing unit (“Pershing”) to The Bank of New York Company, Inc.and recorded a pre-tax gain of approximately $1.3 billion and an after-taxgain of $852 million in the second quarter of 2003. The Pershing income ispresented as discontinued operations for all periods presented in the condensedconsolidated statements of income. The condensed consolidated statements ofcash flows present the Company’s cash flows as if the assets and liabilities ofPershing were not presented as assets held for sale and liabilities held forsale in the condensed consolidated statements of financial condition as of December 31,2002 used to prepare the condensed consolidated statement of cash flows for thesix months ended June 30, 2003. Therefore, the cash flows pertaining todiscontinued operations have not been reported separately in the condensedconsolidated statements of cash flows.

**New Accounting Pronouncements**

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”),which requires the Company to consolidate all variable interest entities (“VIEs”)for which it is the primary beneficiary, defined as the entity that will absorba majority of expected losses, receive a majority of the expected residualreturns, or both. In December 2003, the FASB modified FIN 46, throughthe issuance of FIN 46R, to address various implementation issues that hadarisen since the issuance of FIN 46 and to provide companies the option todefer the adoption of FIN 46 for certain VIEs to periods ending after March 15,2004. As of December 31, 2003, with the exception of certain privateequity funds that were a subject of the deferral, the Company 

8

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**1.   Summary of Significant Accounting Policies (Continued)**

consolidatedall VIEs under FIN 46, for which it is the primary beneficiary, all ofwhich were related to its collateralized debt obligations (“CDO”) activities. During2004, the Company consolidated certain private equity funds that are managed bythe Company and recorded $1.5 billion of additional private equity andother long-term investments, $200 million in other net assets, includingcash, and $1.7 billion of minority interests in other liabilities in thecondensed consolidated statement of financial condition through theconsolidation of certain private equity funds primarily under FIN 46R.Similarly, for the three and six months ended June 30, 2004, the Companyrecorded an increase of $365 million and $446 million, respectively,in net revenues as a result of the consolidation of these private equity funds.Net income was unaffected as offsetting minority interests were recorded in thecondensed consolidated statements of income. See Note 6 for more information.

**2.   Share-BasedCompensation**

In August 2003, the Company adopted the fairvalue recognition provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), asamended by SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure,” using the prospective method. Underthe prospective method, the Company recognizes compensation expense over thevesting period for all share option and share awards granted or modified underthe Credit Suisse Group International Share Plan (the “Plan”) for servicesprovided after January 1, 2003.

Share option awards granted in or before January 2003for services provided in prior years, if not subsequently modified, willcontinue to be accounted for under the recognition and measurement provisionsof Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB 25”), and no compensation expense has been orwill be recognized for those option awards, which had no intrinsic value on thedate of grant. Share awards with no vesting requirements granted in or before January 2003for services provided in prior years were expensed during the year the serviceswere provided. For share awards granted with vesting requirements, compensationexpense is recognized over the vesting period.

9

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**2.   Share-Based Compensation (Continued)**

If the Company had appliedthe fair-value based method under SFAS 123 to recognize expense over therelevant service period for share options that had future vesting requirementsgranted in or before January 2003, net income would have decreased for thethree and six months ended June 30, 2004 and 2003. The following tablereflects this pro forma effect:
| ** **                                                                                                                                   | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                   | ** ** | **(In millions)**                                        | ** ** | **(In millions)**                                      | ** ** |
| Net income, as  reported                                                                                                                     |       | $                                                             | 292        |                                                        | $          | 978 |   | $ | 459 |   | $ | 1,059 |   |
| Add: Share-based  employee compensation expense, net of related tax effects, included in  reported net income                                |       | 54                                                            |       | 70                                                          |       | 118 |   | 140 |   |
| Deduct: Share-based  employee compensation expense, net of related tax effects, determined under  the fair-value based method for all awards |       | 56                                                            |       | 75                                                          |       | 122 |   | 149 |   |
| Pro forma net income                                                                                                                         |       | $                                                             | 290        |                                                        | $          | 973 |   | $ | 455 |   | $ | 1,050 |   |

 

**3.   DiscontinuedOperations**

In accordance with SFAS144, “Accounting for Impairment or Disposal of Long-lived Assets”, theoperating results of Pershing are presented as discontinued operations in thecondensed consolidated statements of income. For the three monthsended June 30, 2003, the Company had no income or loss from discontinuedoperations, excluding the gain on the sale. For the six months ended June 30,2003, the Company had income from discontinued operations of $37 million,excluding the gain on the sale.

**4.   RelatedParty Transactions**

Credit Suisse Group (“CSG”), through CSFBI, owns allof the Company’s outstanding voting common stock. The Company is involved insignificant financing and other transactions, and has significant related partybalances, with Credit Suisse First Boston, a Swiss bank subsidiary of CSG andan indirect parent of the Company, and certain of its subsidiaries andaffiliates. The Company generally enters into these transactions in theordinary course of business and believes that these transactions are generallyon market terms that could be obtained from unrelated third parties.

10

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**4.   Related Party Transactions (Continued)**

The following table setsforth the Company’s related party assets and liabilities as of June 30,2004 and December 31, 2003.
| ** **                                             | ** ** | **As of  June 30,  2004** | ** ** | **As of  December 31,  2003** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **(In millions)**              | ** ** |
| **ASSETS**                                             |       |                                |       |                                    |       |   |   |
| Securities  purchased under agreements to resell       |       | $                                   | 6,639      |                                    |       | $ | 8,071 |   |   |
| Securities  borrowed                                   |       | 2,906                               |       |                                    | 1,688      |   |   |
| Receivables from  customers                            |       | 295                                 |       |                                    | 297        |   |   |
| Receivables from  brokers, dealers and other           |       | 2,294                               |       |                                    | 1,168      |   |   |
| Derivatives  contracts                                 |       | 1,264                               |       |                                    | 1,910      |   |   |
| Net deferred tax  asset                                |       | 1,142                               |       |                                    | 1,283      |   |   |
| Loans receivable  from parent and affiliates           |       | 21,654                              |       |                                    | 19,481     |   |   |
| Total assets                                           |       | $                                   | 36,194     |                                    |       | $ | 33,898 |   |   |
| **LIABILITIES**                                        |       |                                |       |                                    |       |   |   |
| Short-term  borrowings                                 |       | $                                   | 21,524     |                                    |       | $ | 14,482 |   |   |
| Securities sold  under agreements to repurchase        |       | 24,562                              |       |                                    | 16,651     |   |   |
| Securities loaned                                      |       | 26,370                              |       |                                    | 16,425     |   |   |
| Payables to  customers                                 |       | 1,186                               |       |                                    | 721        |   |   |
| Payables to  brokers, dealers and other                |       | 1,960                               |       |                                    | 581        |   |   |
| Derivatives  contracts                                 |       | 691                                 |       |                                    | 824        |   |   |
| Taxes payable  (included in Other liabilities)         |       | 331                                 |       |                                    | 311        |   |   |
| Intercompany  payables (included in Other liabilities) |       | 198                                 |       |                                    | 211        |   |   |
| Total liabilities                                      |       | $                                   | 76,822     |                                    |       | $ | 50,206 |   |   |

 

Included in the condensed consolidated statements ofincome are revenues and expenses resulting from various securities trading andfinancing activities with certain affiliates, as well as fees foradministrative services performed by the Company under the terms of variousservice agreements. Service fees earned are treated as a reduction of otheroperating expenses in the condensed consolidated statements of income.

11

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**4.   Related Party Transactions (Continued)**

The following table setsforth the Company’s related party revenues and expenses, excluding transactionswith Pershing, for the three and six months ended June 30, 2004 and 2003:
| ** **                                          | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **(In millions)**                                        | ** ** | **(In millions)**                                      | ** ** |
| Principal  transactions-net (derivatives contracts) |       | $                                                             | 470        |                                                        | $          | (61 | ) | $ | 530 |   | $ | 52 |   |
| Commissions                                         |       | (3                                                            | )          | (11                                                         | )          | (8 | ) | (19 | ) |
| Net interest  expense                               |       | (84                                                           | )          | (42                                                         | )          | (143 | ) | (61 | ) |
| Total net revenues                                  |       | $                                                             | 383        |                                                        | $          | (114 | ) | $ | 379 |   | $ | (28 | ) |
| Other operating expenses                            |       | (65                                                           | )          | $                                                           | (34        | ) | (123 | ) | $ | (105 | ) |
| Total expenses                                      |       | $                                                             | (65        | )                                                           | $          | (34 | ) | $ | (123 | ) | $ | (105 | ) |

 

Revenues and expenses of Pershing with respect torelated party transactions with the Company for the three and six months ended June 30,2003 were not material. The operating results of Pershing for these periods arepresented as discontinued operations in the condensed consolidated statementsof income.

The Company sold at cost, without recourse, to CSFBI,the right, title and interest in certain assets with an aggregate value of$295 million and $303 million as of June 30, 2004 and December 31,2003, respectively.

Certain CSAM private equity funds with approximately$4.1 billion of committed capital are managed by the Company’s privateequity business. CSAM reimburses the private equity business for all costs andexpenses incurred by the Company in connection with managing the funds.

In April 2004, the Company entered into hedgingarrangements with respect to deferred compensation obligations payable to itsemployees and employees of affiliates that are not part of its consolidatedgroup. These hedging arrangements will result in the Company recognizing gainsor losses with respect to the hedge of the deferred compensation obligation ofsuch affiliates. For the quarter ended June 30, 2004, the Company hadimmaterial losses from the hedging arrangements with respect to these affiliateobligations.

The Credit Suisse Group International Share Planprovides for the grant of equity-based awards to Company employees based on CSGshares pursuant to which employees of the Company may be granted, ascompensation, share or other equity-based awards as compensation for servicesperformed. CSFBI purchases shares from CSG to satisfy these awards, but CSFBIdoes not require reimbursement from the Company; therefore, amounts areconsidered a capital contribution to the Company and credited topaid-in-capital. Amounts contributed by CSFBI relating to compensation expensefor the six months ended June 30, 2004 and 2003 were $174 million and$201 million, respectively. See Note 2 for further information on theCompany’s share-based compensation.

Certain of the Company’s directors, officers andemployees and those of the Company’s affiliates and their subsidiaries maintainmargin accounts with Credit Suisse First Boston LLC (“CSFB LLC”) in the 

12

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**4.   Related PartyTransactions (Continued)**

ordinary course ofbusiness. In addition, certain of such directors, officers and employees hadinvestments or commitments to invest in various private equity funds sponsoredby the Company, pursuant to which the Company has made loans to such directors,officers and employees, to the extent permitted by law. CSFB LLC, from time totime and in the ordinary course of business, enters into, as principal,transactions involving the purchase or sale of securities from or to suchdirectors, officers and employees and members of their immediate families.

The Company is included in the consolidated federalincome tax return and combined state and local income tax returns filed byCSFBI. See Note 5 for more information.

**5.**   Income Taxes

TheCompany is included in the consolidated federal income tax return and combinedstate and local income tax returns filed by CSFBI. CSFBI allocates federalincome taxes to its subsidiaries on a separate return basis, and current stateand local income taxes on a *pro rata*basis, pursuant to a tax sharing agreement. Included in the condensedconsolidated statements of income for the six months ended June 30, 2004and 2003, are current and deferred provisions (benefits) for income taxes fromcontinuing operations that were allocated to the Company by CSFBI as follows:
| ** **                                             | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **    2004     **  | ** ** | **    2003    ** | ** ** |
| ** **                                             | ** ** | **(In millions)**                                          | ** ** |
| Current:                                               |       |                                                            |       |   |   |   |   |   |   |
| U.S. federal                                           |       |                                                            | $          | 91 |   |   |   | $ | (17 | ) |   |
| Foreign                                                |       |                                                            | 1          |   |   |   | 1 |   |   |
| State and local                                        |       |                                                            | 3          |   |   |   | 4 |   |   |
| Total current                                          |       |                                                            | 95         |   |   |   | (12 | ) |   |
| Deferred:                                              |       |                                                            |       |   |   |   |   |   |   |
| U.S. federal                                           |       |                                                            | 132        |   |   |   | 72 |   |   |
| Total deferred                                         |       |                                                            | 132        |   |   |   | 72 |   |   |
| Provision for income  taxes from continuing operations |       |                                                            | $          | 227 |   |   |   | $ | 60 |   |   |

 

Excluded from the table above is a provision forincome taxes that CSFBI allocated to the Company for the six months ended June 30,2003 of $485 million related to discontinued operations.

13

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**5.**   IncomeTaxes (Continued)

The following tablesummarizes the difference between the federal statutory tax rate and theeffective tax rate related to continuing operations for the six months ended June 30,2004 and 2003:
| ** **                                                | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2004**                                                            | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | **Amount**                                                          | ** ** | **Percent of   Pre-tax Income** | ** ** | **Amount** | ** ** | **Percent of   Pre-tax Income** | ** ** |
| ** **                                                | ** ** | **(In millions)**                                              | ** ** | ** ** | ** ** | **(In millions)** | ** ** | ** ** | ** ** |
| Computed  “expected” tax provision              |       |                                                                | $          | 396 |   |   |   | 35.0 | % |   |   | $ | 85 |   |   |   | 35.0 | % |   |
| Increase (decrease) due  to:                              |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority interests(1)                                     |       |                                                                | (156       | ) |   |   | (13.8 | ) |   |   | — |   |   |   | — |   |   |
| Dividend exclusion                                        |       |                                                                | (10        | ) |   |   | (0.9 | ) |   |   | (14 | ) |   |   | (6.0 | ) |   |
| Entertainment expense                                     |       |                                                                | 2          |   |   |   | 0.2 |   |   |   | 2 |   |   |   | 0.9 |   |   |
| State and local taxes, net of federal income tax  effects |       |                                                                | 2          |   |   |   | 0.2 |   |   |   | 2 |   |   |   | 1.0 |   |   |
| Other                                                     |       |                                                                | (7         | ) |   |   | (0.7 | ) |   |   | (15 | ) |   |   | (6.4 | ) |   |
| Provision for  income taxes from continuing operations    |       |                                                                | $          | 227 |   |   |   | 20.0 | % |   |   | $ | 60 |   |   |   | 24.5 | % |   |

----

(1)          Represents non-taxablerevenues from private equity funds consolidated primarily under FIN 46R. Netincome was unaffected as offsetting minority interests were recorded in thecondensed consolidated statements of income. See Note 6 for more information.

14

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**5.**   IncomeTaxes (Continued) 

Deferred tax assets anddeferred tax liabilities are generated by the following temporary differences:
| ** **                                                                   | ** ** | **As of June 30,  2004** | ** ** | **As of December 31,  2003** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **(In millions)**                  | ** ** |
| Deferred tax assets:                                                         |       |                                    |       |                                        |       |   |   |   |   |
| Inventory                                                                    |       |                                    | $          | 161                                         |       |   |   | $ | 171 |   |   |
| Investments                                                                  |       |                                    | 269        |                                        |       |   | 267 |   |   |
| Other liabilities and accrued expenses, primarily  compensation and benefits |       |                                    | 1,070      |                                        |       |   | 1,196 |   |   |
| Office facilities                                                            |       |                                    | 24         |                                        |       |   | 24 |   |   |
| State and local taxes                                                        |       |                                    | 32         |                                        |       |   | 36 |   |   |
| Total deferred tax assets                                                    |       |                                    | 1,556      |                                        |       |   | 1,694 |   |   |
| Deferred tax  liabilities:                                                   |       |                                    |       |                                        |       |   |   |   |   |
| Inventory                                                                    |       |                                    | 57         |                                        |       |   | 55 |   |   |
| Investments                                                                  |       |                                    | 231        |                                        |       |   | 228 |   |   |
| Office facilities                                                            |       |                                    | 19         |                                        |       |   | 51 |   |   |
| Other                                                                        |       |                                    | 75         |                                        |       |   | 41 |   |   |
| Total deferred tax liabilities                                               |       |                                    | 382        |                                        |       |   | 375 |   |   |
| Deferred tax assets net of deferred tax liabilities                          |       |                                    | 1,174      |                                        |       |   | 1,319 |   |   |
| Valuation  allowance for state and local taxes                               |       |                                    | (32        | )                                           |       |   | (36 | ) |   |
| Net deferred tax asset                                                       |       |                                    | $          | 1,142                                       |       |   |   | $ | 1,283 |   |   |

 

Management has determinedthat the realization of the recognized gross deferred tax assets of$1.6 billion and $1.7 billion as of June 30, 2004 and December 31,2003, respectively, is more likely than not based on anticipated future taxableincome. In addition, for federal income tax purposes, the Company has taxplanning strategies available that enhance its ability to utilize these taxbenefits. However, if estimates of future taxable income are reduced, theamount of the deferred tax assets considered realizable could also be reduced.Further, due to uncertainty concerning the Company’s ability to generate thenecessary amount and mix of state and local taxable income in future periods,the Company maintains a valuation allowance against its deferred state andlocal tax asset in the amount of $32 million and $36 million as of June 30,2004 and December 31, 2003, respectively.

**6.**   Transfers and Servicing of FinancialAssets

As of June 30, 2004 and December 31, 2003,the fair market value of assets that the Company pledged to counterparties was$189.9 billion and $163.7 billion, respectively, of which$52.3 billion and $47.6 billion, respectively, was included infinancial instruments owned in the condensed consolidated statements offinancial condition.

The Company has alsoreceived similar assets as collateral that the Company has the right tore-pledge or sell. The Company routinely re-pledges or lends these assets tothird parties. As of June 30, 2004 

15

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**6.**   Transfersand Servicing of Financial Assets (Continued)

and December 31,2003, the fair market value of the assets pledged to the Company was$197.3 billion and $162.3 billion, respectively, of which$190.2 billion and $154.3 billion, respectively, was sold orrepledged.

**Securitization Activities**

The Company originates and purchases commercial andresidential mortgages for the purpose of securitization. The Company sellsthese mortgage loans to qualified special purpose entities (“QSPEs”) or otherVIEs. These QSPEs issue securities that are backed by the assets transferred tothe QSPEs and pay a return based on the returns on those assets. Investors inthese mortgage-backed securities typically have recourse to the assets in theQSPE. The investors and the QSPEs have no recourse to the Company’s assets. CSFBLLC is an underwriter of, and makes a market in, these securities.

The Company purchases loans and other debt obligationsfrom clients for the purpose of securitization. The loans and other debtobligations are sold by the Company directly, or indirectly through affiliates,to QSPEs or other VIEs that issue CDOs. CSFB LLC structures, underwrites andmakes a market in these CDOs. CDOs are securities backed by the assetstransferred to the CDO VIEs and pay a return based on the returns on thoseassets. Investors typically have recourse to the assets in the CDO VIEs. Theinvestors and the CDO VIEs have no recourse to the Company’s assets.

The Company may retain interests in these securitizedassets in connection with its underwriting and market-making activities. TheCompany’s exposure in its securitization activities is limited to its retainedinterests. Retained interests in securitized financial assets are included atfair value in financial instruments owned in the condensed consolidatedstatements of financial condition. Any changes in the fair value of theseretained interests are recognized in the condensed consolidated statements ofincome. The fair values of retained interests are determined using presentvalue of estimated future cash flows valuation techniques that incorporateassumptions that market participants customarily use in their estimates ofvalues.

Thefollowing table presents the proceeds and gain or loss related to thesecuritization of commercial mortgage loans, residential mortgage loans andCDOs for the six months ended June 30, 2004 and 2003:
| ** **                         | ** ** | **For the Six Months EndedJune 30, 2004** | ** ** | **For the Six Months Ended  June 30, 2003** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Commercial  mortgage  loans**                                         | ** ** | **Residential  mortgage  loans**                                          | ** ** | **Collateralized  debt  obligations** | ** ** | **Commercial  mortgage  loans** | ** ** | **Residential  mortgage  loans** | ** ** | **Collateralized  debt  obligations** | ** ** |
| ** **                         | ** ** | **(In millions)**                                                  | ** ** |
| Proceeds from new  securitizations |       |                                                                    | $          | 3,195                                                                     |       |   | $ | 21,340 |   |   | $ | 2,184 |   |   |   | $ | 3,740 |   |   |   | $ | 37,640 |   |   |   | $ | 2,618 |   |   |
| Gain on securitizations(1)         |       |                                                                    | $          | 118                                                                       |       |   | $ | 32 |   |   | $ | 25 |   |   |   | $ | 157 |   |   |   | $ | (43 | ) |   |   | $ | 24 |   |   |

----

(1)          Includes the effects ofhedging, underwriting and retained interest gains and losses but excludes allgains or losses, including net interest revenues, on assets prior tosecuritization.

Included in the table above are proceeds of$7.8 billion and $22.7 billion, respectively, related to thesecuritization of agency mortgage-backed securities for the six months ended June 30,2004 and 2003. For 

16

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**6.**   Transfersand Servicing of Financial Assets (Continued)

the six months ended June 30,2004 and 2003, the Company realized gains of $5 million and$14 million, respectively, from these securitizations.

Key economic assumptionsused in measuring at the date of securitization the fair value of the retainedinterests resulting from securitizations completed during the six months ended June 30,2004 and 2003 were as follows:
| ** **                                                            | ** ** | **For the Six Months Ended June 30, 2004** | ** ** | **For the Six Months Ended June 30, 2003** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Commercial  mortgage  loans(1)**                                            | ** ** | **Residential  mortgage  loans**                                              | ** ** | **Collateralized  debt  obligations(2)** | ** ** | **Commercial  mortgage  loans(1)** | ** ** | **Residential  mortgage  loans** | ** ** | **Collateralized  debt  obligations(2)** | ** ** |
| Weighted-average life (in years)                                      |       |                                                                          | 3.3        |                                                                          |       | 4.2 |   |   | 8.9 |   |   |   | 3.2 |   |   | 4.6 |   |   | 6.7 |   |   |
| Prepayment speed assumption (“PSA”) (in rate per  annum)(3) |       |                                                                          | N/A        |                                                                          |       | 250 PSA    to 1051% PSA |   |   | N/A |   |   |   | N/A |   |   | 200 PSA  to 325% PSA |   |   | N/A |   |   |
| Cash flow discount rate (in rate per annum)(4)                        |       |                                                                          | 3.6-10.3   | %                                                                             |       | 4.2-16.8 | % |   | 4.0-7.9 | % |   |   | 7.8-12.8 | % |   | 4.3-37.5 | % |   | 2.9-6.9 | % |   |
| Expected credit  losses (in rate per annum)(5)                        |       |                                                                          | —     |                                                                          |       | — |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   |

 

Thefollowing table sets forth the fair value of retained interests fromsecuritizations as of June 30, 2004, key economic assumptions used todetermine the fair value and the sensitivity of the fair value to immediateadverse changes in those assumptions:
| ** **                                        | ** ** | **As of June 30, 2004** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Commercial  mortgage  loans(1)**          | ** ** | **Residential  mortgage  loans** | ** ** | **Collateralized  debt  obligations(2)** | ** ** |
| ** **                                        | ** ** | **(Dollars in millions)**         | ** ** |
| Carrying  amount/fair value of retained interests |       |                                        | $          | 61 |   |   | $ | 980 |   |   | $ | 224 |   |   |
| Weighted-average  life (in years)                 |       |                                        | 6.7        |   |   | 3.1 |   |   | 12.5 |   |   |
| PSA (in rate per  annum)(3)                       |       |                                        | N/A        |   |   | 320-1051% PSA |   |   | N/A |   |   |
| Impact on fair value of 10% adverse change        |       |                                        | —     |   |   | $ | (2 | ) |   | — |   |   |
| Impact on fair value of 20% adverse change        |       |                                        | —     |   |   | $ | (6 | ) |   | — |   |   |
| Cash flow  discount rate (in rate per annum)(4)   |       |                                        | 6.3        | % |   | 6.0 | % |   | 7.9 | % |   |
| Impact on fair value of 10% adverse change        |       |                                        | $          | (1 | ) |   | $ | (11 | ) |   | $ | (13 | ) |   |
| Impact on fair value of 20% adverse change        |       |                                        | $          | (3 | ) |   | $ | (22 | ) |   | $ | (26 | ) |   |
| Expected credit  losses (in rate per annum)(5)    |       |                                        | —     |   |   | — |   |   | — |   |   |
| Impact on fair value of 10% adverse change(6)     |       |                                        | $          | — |   |   | $ | (1 | ) |   | $ | (4 | ) |   |
| Impact on fair  value of 20% adverse change(6)    |       |                                        | $          | (1 | ) |   | $ | (1 | ) |   | $ | (7 | ) |   |
|                                                   |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          To deter prepayment,commercial mortgage loans typically have prepayment protection in the form ofprepayment lockouts and yield maintenances.

(2)          CDO deals are generallystructured to be protected from prepayment risk.

17

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**6.**   Transfersand Servicing of Financial Assets (Continued)

(3)          PSA is an industrystandard prepayment speed metric used for projecting prepayments over the lifeof a residential mortgage loan. PSA utilizes the Constant Prepayment Rate (“CPR”)assumptions. A 100% prepayment assumption assumes a prepayment rate of 0.2% perannum of the outstanding principal balance of mortgage loans in the firstmonth. This increases by 0.2% thereafter during the term of the mortgage loan,leveling off to a CPR of 6.0% per annum beginning in the thirtieth month andeach month thereafter during the term of the mortgage loan. 100% PSA equals 6CPR.

(4)          The rate is based on theweighted average yield on the retained interest.

(5)          Expected credit lossesare not expected to be significant because a significant portion of thebeneficial interests retained as of June 30, 2004 and 2003 representinvestment-grade interests.

(6)          The investment-graderetained interests were not subjected to credit stress because the subordinatedbonds are expected to absorb the potential credit losses.

These sensitivities arehypothetical and do not reflect the benefits of hedging activities andtherefore should be used with caution. Changes in fair value based on a 10% or20% variation in assumptions generally cannot be extrapolated because therelationship of the change in assumption to the change in fair value may not belinear. Also, the effect of a variation in a particular assumption on the fairvalue of the retained interests is calculated without changing any otherassumption. In practice, changes in one assumption may result in changes inother assumptions (for example, increases in market interest rates may resultin lower prepayments and increased credit losses), which may magnify orcounteract the sensitivities.

**Variable Interest Entities**

The Company has variable interests in several CDO VIEs.In the normal course of its business, the Company purchases loans and otherdebt obligations from and on behalf of clients primarily for the purpose ofsecuritization. These assets are sold to and warehoused by affiliates and, atthe end of a warehousing period, the assets are sold to VIEs or QSPEs forsecuritization. The Company engages in these transactions to meet the needs ofclients, earn fees and sell financial assets. The purpose of CDO VIEs is toprovide investors a return based on the underlying debt instruments of the CDOVIEs. In connection with its underwriting and market-making activities, theCompany may retain interests in the CDO VIEs. The CDO entities may haveactively managed (“open”) portfolios or static or unmanaged (“closed”)portfolios. The closed CDO transactions are typically structured to use QSPEs,which are not consolidated in the Company’s financial statements.

The Company has consolidated all CDO VIEs for which itis the primary beneficiary. As of June 30, 2004, the Company recorded$473 million, the carrying amount of the consolidated assets of these CDOVIEs that are collateral for the VIE obligations. The beneficial interests ofthese consolidated CDO VIEs are payable solely from the cash flows of therelated collateral, and the creditors of these VIEs do not have recourse to theCompany in the event of default.

The Company retains significant debt and equityinterests in open CDO VIEs that are not consolidated because the Company is notthe primary beneficiary. The total assets in these CDO VIEs as of June 30,2004 were $1.8 billion. The Company’s maximum exposure to loss as of June 30,2004 was 

18

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**6.   Transfers andServicing of Financial Assets (Continued)**

$131 million, whichwas the amount of its retained interests, carried at fair value, in financialinstruments owned.

Certain of the Company’sprivate equity funds are subject to FIN 46R. In the normal course of itsprivate equity activities, the Company is typically the general partner andinvestment adviser to private equity funds. The Company did not consolidatethese private equity funds as of December 31, 2003 in accordance with theeffective date and transition provisions of FIN 46R. During 2004, the Companyconsolidated certain private equity funds that are managed by the Company andrecorded $1.5 billion of additional private equity and other long-terminvestments, $200 million in other net assets, including cash, and$1.7 billion of minority interests in other liabilities in the condensedconsolidated statement of financial condition through the consolidation ofcertain private equity funds primarily under FIN 46R. Similarly, for the threeand six months ended June 30, 2004, the Company recorded an increase of$365 million and $446 million, respectively, in net revenues as aresult of the consolidation of these private equity funds. Net income wasunaffected as offsetting minority interests were recorded in the condensedconsolidated statements of income.

**7.   Borrowings**

Short-term borrowings are generally demand obligationswith interest approximating the federal funds rate, LIBOR or other money marketindices. Such borrowings are generally used to facilitate the securitiessettlement process, finance financial instruments owned and finance securitiespurchased by customers on margin. As of June 30, 2004 and December 31,2003, there were no short-term borrowings secured by Company-owned securities.

The following table setsforth the Company’s short-term borrowings and their weighted average interestrates:
| ** **                                      | ** ** | **Short-term borrowings**          | ** ** | **Weighted average interest rates** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **As of June 30,  2004** | ** ** | **As of December 31,  2003**        | ** ** | **As of June 30,  2004** | ** ** | **As of December 31,  2003** | ** ** |
| ** **                                      | ** ** | **(In millions)**                  | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Bank loans,  including loans from affiliates(1) |       |                                    | $          | 22,042                                             |       |   |   | $ | 14,932 |   |   |   | 1.39 | % |   |   | 1.31 | % |   |
| Commercial paper                                |       |                                    | 1,181      |                                               |       |   | 1,052 |   |   |   | 1.07 | % |   |   | 1.08 | % |   |
| Total short-term  borrowings                    |       |                                    | $          | 23,223                                             |       |   |   | $ | 15,984 |   |   |   |   |   |   |   |   |   |   |

 

----

(1)          Includes$21.5 billion and $14.5 billion in loans from affiliates as of June 30,2004 and December 31, 2003, respectively.

The Company has two commercial paper programs exemptfrom registration under the Securities Act of 1933 that allow the Company toissue up to $7.0 billion in commercial paper. As of June 30, 2004 andDecember 31, 2003, $1.2 billion and $1.1 billion, respectively,of commercial paper was outstanding under these programs.

19

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**7.   Borrowings (Continued)**

In June 2004, the Company filed with theSecurities and Exchange Commission (“SEC”) a shelf registration statement thatallows the Company to issue from time to time up to $15.0 billion ofsenior and subordinated debt securities and warrants to purchase suchsecurities. Under that shelf registration statement, the Company had, as of August 6,2004, $15.0 billion available for issuance.

The following table setsforth the Company’s long-term borrowings as of June 30, 2004 and December 31,2003:
| ** **                                                                    | ** ** | **As of June 30,  2004** | ** ** | **As of December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **(In millions)**                  | ** ** |
| Senior notes  3.875%—8.00%, due various dates through 2032          |       |                                    | $          | 18,686                                      |       |   |   | $ | 16,791 |   |   |
| Medium-term notes  0.98%—7.528%, due various dates through 2032     |       |                                    | 7,411      |                                        |       |   | 7,391 |   |   |
| Structured  borrowings 7.06%—16.06%, due various dates through 2014 |       |                                    | 105        |                                        |       |   | 139 |   |   |
| Total long-term borrowings                                                    |       |                                    | $          | 26,202                                      |       |   |   | $ | 24,321 |   |   |
| Current maturities of  long-term borrowings                                   |       |                                    | $          | 3,589                                       |       |   |   | $ | 2,239 |   |   |

 

For both the six months ended June 30, 2004 and2003, interest paid on all borrowings and financing arrangements, includingrepurchase agreements, was $2.4 billion. As of June 30, 2004 and December 31,2003, long-term borrowings included unrealized appreciation of approximately$326 million and $808 million, respectively, associated with fairvalue hedges under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities”, as amended (“SFAS 133”).As of June 30, 2004 and December 31, 2003, the Company had enteredinto interest rate swaps of $18.9 billion and $16.6 billion,respectively, on the Company’s long-term borrowings for hedging purposes.Substantially all of these swaps qualified as fair value hedges underSFAS 133. See Note 11 for more information.

The Company’s 364-day$1.0 billion committed unsecured revolving credit facility with asyndicate of banks available to the Company as borrower terminated on May 21,2004. As of June 30, 2004, CSFB LLC maintained three 364-day committedsecured revolving credit facilities totaling $700 million, with twofacilities totaling $450 million maturing in August and November 2004and one facility for $250 million maturing in February 2005. Thesefacilities require CSFB LLC to pledge unencumbered marketable securities tosecure any borrowings. Borrowings under each facility would bear interest atshort-term rates related to either the federal funds rate or LIBOR and can beused for general corporate purposes. The facilities contain customary covenantsthat the Company believes will not impair its ability to obtain funding. As of June 30,2004, no borrowings were outstanding under any of the facilities.

**2004Financings:**

In the six months ended June 30, 2004, theCompany issued longer-dated fixed income securities to extend the maturityprofile of the Company’s debt. For the six months ended June 30, 2004, theCompany issued $1.1 billion in medium-term notes, $1.0 billion of 5.125%notes due 2014 and $1.4 billion of 4.7% notes due 2009 under itsthen-existing $10.0 billion shelf registration statement.

During the six monthsended June 30, 2004, the Company repaid approximately $1.1 billion ofmedium-term notes and $31 million of structured notes.

20

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**8.**   Private Equity and Other Long-TermInvestments

Private equity and other long-term investments includedirect investments and investments in partnerships that make private equity andrelated investments in various portfolio companies and funds. The Companycategorizes its private equity and other long-term investments into threecategories, CSFB-managed funds, direct investments and funds managed by thirdparties. These investments generally have no readily available market or may beotherwise restricted as to resale under the Securities Act of 1933; therefore,these investments are carried at amounts which approximate fair value.

The Company’s subsidiaries manage many private equitypartnerships (the “Funds”). When the investment performance of CSFB-managedFunds exceeds specific thresholds, the Company and certain other generalpartners (the “GPs”) may be entitled to receive a carried interestdistribution. Carried interest distributions are based on the cumulativeinvestment performance of each Fund at the time the distribution is made. As aresult, the Company, in its capacity as a GP (or general partner or managingmember of a GP), may be obligated to return to investors in the Funds all or aportion of the carried interest distributions received by the GPs if the GPshave received excess carried interest payments over the life of the Funds underthe governing documents of the Funds. The amount of such contingent obligationis based upon the performance of the Funds but cannot exceed the amount ofcarried interest received by the GPs. As of June 30, 2004 and December 31,2003, the maximum amount of such contingent obligations was $441 millionand $252 million, respectively, assuming the Funds’ remaining investmentswere worthless. Assuming the Funds’ remaining investments were sold at theircurrent carrying values, as of June 30, 2004 and December 31, 2003,the contingent obligations would have been $8 million and $6 million,respectively. As of June 30, 2004 and December 31, 2003, the Companyhas recorded liabilities of $64 million and $25 million,respectively, in connection with the contingent obligation to return priorcarried interest distributions to third party investors in the Funds.

In addition, pursuant to certain contractualarrangements, the Company is obligated to make cash payments to certaininvestors in certain Funds if specified performance thresholds are not met. Asof June 30, 2004 and December 31, 2003, the maximum amount of suchcontingent obligations was $57 million and $46 million, respectively,assuming the Funds’ remaining investments were worthless. Assuming the Funds’remaining investments were sold at their current carrying values as of June 30,2004 and December 31, 2003, there would have been no contingentobligations.

As of June 30, 2004and December 31, 2003, the Company had investments in private equity andother long-term investments of $2.6 billion and $1.1 billion,respectively, and had commitments to invest up to an additional$1.2 billion and $1.3 billion as of June 30, 2004 and December 31,2003, respectively. The cost of these investments was $2.8 billion and$1.5 billion as of June 30, 2004 and December 31, 2003,respectively. For those private equity investments consolidated primarily underFIN 46R, the cost represents the carrying value. Changes in net unrealizedappreciation/depreciation arising from changes in fair value and the gain orloss realized upon sale are reflected in principal transactions-net in thecondensed consolidated statements of income. The increase in the private equityand other long-term investments was principally related to the Company’sadoption of FIN 46R and the consolidation of certain private equity funds. During2004, the Company consolidated certain private equity funds that are managed bythe Company and recorded $1.5 billion of additional private equity andother long-term investments, $200 million in other net assets, includingcash, and $1.7 billion of minority interests in other liabilities in thecondensed consolidated statement of financial condition through theconsolidation of certain private equity funds 

21

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**8.**   Private Equityand Other Long-Term Investments (Continued)

primarilyunder FIN 46R. Similarly, for the three and six months ended June 30,2004, the Company recorded an increase of $365 million and$446 million, respectively, in net revenues as a result of theconsolidation of these private equity funds. Net income was unaffected asoffsetting minority interests were recorded in the condensed consolidatedstatements of income. See Note 6 for more information.

**9.**   Net Capital

The Company’s principal wholly owned subsidiary, CSFBLLC, is a registered broker-dealer, registered futures commission merchant andmember firm of the New York Stock Exchange, Inc. (“NYSE”). As such, it issubject to the NYSE’s net capital rule, which conforms to the uniform netcapital rule pursuant to Rule 15c3-1 of the Securities Exchange Actof 1934, as amended (the “Exchange Act”). Under the alternative methodpermitted by this rule, the required net capital may not be less than twopercent of aggregate debit balances arising from customer transactions or fourpercent of segregated funds, whichever is greater. If a member firm’s netcapital is less than four percent of aggregate debit balances, the NYSE mayrequire the firm to reduce its business. If a member firm’s net capital is lessthan five percent of aggregate debit balances, the NYSE may prevent the firmfrom expanding its business and declaring cash dividends. As of June 30,2004, CSFB LLC’s net capital of approximately $2.6 billion was 42% ofaggregate debit balances and in excess of the minimum requirement byapproximately $2.5 billion.

The Company’s over-the-counter (“OTC”) derivativesdealer subsidiary, Credit Suisse First Boston Capital LLC (“CSFB Capital LLC”),is also subject to the uniform net capital rule, but calculates its net capitalbased on value at risk under Appendix F of Rule 15c3-1 under theExchange Act. As of June 30, 2004, CSFB Capital LLC’s net capital of$170 million, allowing for market and credit risk exposure of$50 million and $51 million, respectively, was in excess of theminimum net capital requirement by $150 million. CSFB Capital LLC operatespursuant to the (k)(2)(ii) exemptive provisions of Rule 15c3-3 of theExchange Act, and, accordingly, all customer transactions are cleared throughCSFB LLC on a fully disclosed basis.

Certain other subsidiariesare subject to capital adequacy requirements. As of June 30, 2004, theCompany and its subsidiaries complied with all applicable regulatory capitaladequacy requirements.

**10.**   Cash and Securities Segregated UnderFederal and Other Regulations

In compliance with the Commodity Exchange Act, CSFBLLC segregates funds deposited by customers and funds accruing to customers asa result of trades or contracts. As of June 30, 2004 and December 31,2003, cash and securities aggregating $3.2 billion and $2.6 billion,respectively, were segregated or secured by CSFB LLC in separate accountsexclusively for the benefit of customers.

In accordance with the SEC’s no-action letter dated November 3,1998, CSFB LLC computed a reserve requirement for the proprietary accounts ofintroducing broker-dealers. As of June 30, 2004 and December 31,2003, CSFB LLC segregated securities aggregating $176 million and$196 million, respectively, on behalf of introducing broker-dealers.

22

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**10.**   Cash andSecurities Segregated Under Federal and Other Regulations (Continued)

In addition, CSFB LLCsegregated U.S. Treasury securities with a market value of $4.1 billionand $3.3 billion as of June 30, 2004 and December 31, 2003,respectively, in a special reserve bank account exclusively for the benefit ofcustomers as required by Rule 15c3-3 of the Exchange Act.

**11.**   DerivativesContracts

The Company usesderivatives contracts for trading and hedging purposes and to provide productsfor clients. These derivatives include options, forwards, futures and swaps.

**Non-trading Derivatives**

The Company hedges its fixed rate debt by usinginterest rate swaps. These swaps are considered hedging instruments and qualifyas fair value hedges under SFAS 133. For qualifying fair value hedges, thechanges in fair value of both the hedging instrument and the underlying debtare included in principal transactions-net and the interest flows are includedin interest and dividends, net of interest expense in the condensedconsolidated statements of income.

The effectiveness of a qualifying hedging relationshipis evaluated using quantitative measures of correlation. If a hedgerelationship is not found to be highly effective, the hedge relationship nolonger qualifies for hedge accounting under SFAS 133. As such, any subsequentgains or losses attributable to the hedged item cease to be recognized, whilethe subsequent changes in the derivatives instrument’s fair value arerecognized in earnings, in each reporting period. In addition, the fair valueadjustment of the debt due to hedge accounting is amortized over the remaininglife of the debt as a yield adjustment.

The gains and losses related to the ineffectivecomponent of the fair value hedges were not material for the six months ended June 30,2004 and 2003.

Other derivatives used forhedging purposes that do not qualify as hedges under SFAS 133 are carriedat fair value with changes in value and interest flows included in principaltransactions-net in the condensed consolidated statements of income. For thesix months ended June 30, 2004 and 2003, the Company recognized a pre-taxgain of $1 million and $3 million, respectively, for these derivatives.

**TradingDerivatives**

The Company enters intovarious transactions using derivatives for trading purposes, to hedge tradingexposures or to provide products to its clients. These derivatives includeoptions, forwards, futures and swaps. Trading derivative contracts are carriedat fair value with changes in unrealized and realized gains and losses andinterest flows included in principal transactions-net in the condensedconsolidated statements of income.

***Options***

The Company writes option contracts specificallydesigned to meet customer needs, for trading purposes or for hedging purposes.The options do not expose the Company to credit risk because the Company, notits counterparty, is obligated to perform. At the beginning of the contractperiod, the Company receives a cash premium. During the contract period, theCompany bears the risk of unfavorable 

23

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**11.**   DerivativesContracts (Continued)

changes in the value ofthe financial instruments underlying the options. To manage this market risk,the Company purchases or sells cash or derivative financial instruments on aproprietary basis. Such purchases and sales may include debt and equitysecurities, forward and futures contracts, swaps and options.

The Company also purchasesoptions to meet customer needs, for trading purposes or for hedging purposes.With purchased options, the Company gets the right, for a fee, to buy or sellthe underlying instrument at a fixed price on or before a specified date. Theunderlying instruments for these options include fixed income securities,equities, foreign currencies and interest rate instruments or indices. Thecounterparties to these option contracts are reviewed to determine whether theyare creditworthy.

***Forwards and Futures***

The Company enters into forward purchases and salescontracts for U.S. government and agencies, corporate debt, mortgage-backedsecurities and foreign currencies. In addition, the Company enters into futurescontracts on equity-based indices and other financial instruments, as well asoptions on futures contracts.

Because forward contracts are subject to the financialreliability of the counterparty, the Company is exposed to credit risk. Tomitigate this credit risk, the Company limits transactions with specificcounterparties, reviews credit limits and adheres to internally establishedcredit extension policies.

For futures contracts andoptions on futures contracts, the change in the market value is settled with aclearing broker in cash each day. As a result, the credit risk with theclearing broker is limited to the net positive change in the market value for asingle day, which is recorded in receivables (payables) from (to) brokers,dealers and others in the condensed consolidated statements of financialcondition.

***Swaps***

The Company’s swapagreements consist primarily of interest rate, equity and credit default swaps.Interest rate swaps are contractual agreements to exchange interest ratepayments based on agreed notional amounts and maturity. Equity swaps arecontractual agreements to receive the appreciation or depreciation in valuebased on a specific strike price on an equity instrument in exchange for payinganother rate, which is usually based on an index or interest rate movements.Credit default swaps are contractual agreements in which one counterparty paysa periodic fee in return for a contingent payment by the other counterpartyfollowing a credit event of a reference entity. A credit event is commonlydefined as bankruptcy, insolvency, receivership, material adverse restructuringof debt, or failure to meet payment obligations when due. Swaps are reported atfair value.

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**11.**   DerivativesContracts (Continued)

**Quantitative Disclosures for All Derivatives**

The fair values of allderivatives contracts outstanding as of June 30, 2004 and December 31,2003 were as follows: 

** **
| ** **        | ** ** | **As of June 30, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|-------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **        | ** ** | **Assets**                                  | ** ** | **Liabilities**                                 | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **        | ** ** | **(In millions)**                      | ** ** |
| Options           |       | $                                           | 2,917      |                                            |       | $ | 2,813 |   |   | $ | 2,892 |   |   | $ | 2,756 |   |   |
| Forward contracts |       | 1,775                                       |       |                                            | 1,344      |   |   | 695 |   |   | 257 |   |   |
| Swaps             |       | 1,381                                       |       |                                            | 848        |   |   | 1,986 |   |   | 942 |   |   |
| Total             |       | $                                           | 6,073      |                                            |       | $ | 5,005 |   |   | $ | 5,573 |   |   | $ | 3,955 |   |   |

 

These assets andliabilities are included as derivatives contracts in financial instrumentsowned/sold not yet purchased, respectively, in the condensed consolidatedstatements of financial condition.

**12.   Employee BenefitPlans**

The Company provides retirement and postretirementbenefits to its U.S. and certain non-U.S. employees through participation indefined benefit and defined contribution pension plans and other plans. TheCompany’s measurement date for its pension and other postretirement benefitplans is September 30.

**PensionPlans**

The Company participates in a non-contributory definedbenefit pension plan (the “Qualified Plan”) available to certain individualsemployed before January 1, 2000. Contributions to the Qualified Plan aremade as required by the Internal Revenue Code and applicable law but not inexcess of the amounts deductible by the Company for income tax purposes.

The Company also sponsors a savings and retirementplan, which is a defined contribution plan, with both a savings and aretirement component. All employees are eligible to participate in the savingscomponent whereby the Company matches employee contributions. In addition,individuals employed before January 1, 2000 who do not accrue benefitsunder the Qualified Plan and employees hired on or after January 1, 2000participate in the retirement component and receive a retirement contributionthat is linked to the return on equity of the Credit Suisse First Bostonbusiness unit.

The Company also providesa non-contributory, non-qualified, unfunded plan (the “Supplemental Plan”),which provides benefits to certain senior employees and Qualified Planparticipants whose benefits may be limited by tax regulations. Benefits underthese pension plans are based on years of service and employee compensation.

 

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**12.   Employee Benefit Plans (Continued)**

**Other Postretirement Plans**

In addition, the Company provides certain subsidizedunfunded health-care benefits for eligible retired employees (the “Other Plans”).Employees hired prior to July 1, 1988 become eligible for these benefitsif they meet minimum age and service requirements.

Thefollowing table presents the pension expense by component for the QualifiedPlan, the Supplemental Plan and the Other Plans for the three and six monthsended June 30, 2004 and 2003:
| ** **                                    | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(In millions)**                                        | ** ** |
| **Components of Net Periodic  Benefit Cost:** |       |                                                          |       |                                                        |       |   |   |   |   |
| Service cost                                  |       | $                                                             | 7          |                                                        | $          | 8 |   | $ | 14 |   | $ | 17 |   |
| Interest cost                                 |       | 10                                                            |       | 11                                                          |       | 21 |   | 21 |   |
| Expected return on  plan assets               |       | (12                                                           | )          | (11                                                         | )          | (25 | ) | (22 | ) |
| Amortization of  loss                         |       | 5                                                             |       | 3                                                           |       | 11 |   | 7 |   |
| Amortization of  prior service cost           |       | 1                                                             |       | 1                                                           |       | — |   | 1 |   |
| Recognized net  actuarial loss                |       | (1                                                            | )          | 1                                                           |       | (1 | ) | — |   |
| Net periodic  benefit cost                    |       | $                                                             | 10         |                                                        | $          | 13 |   | $ | 20 |   | $ | 24 |   |

 

The Company made a payment of $150 million to theQualified Plan in January 2004. The Company made payments of$3 million to participants in the Supplemental Plan and the Other Plansduring the first six months of 2004 and expects to pay a total of$8 million for the year ended December 31, 2004.

**13.   Leases andCommitments**

Thefollowing table sets forth the Company’s minimum operating lease commitments asof June 30, 2004:
| **Period**        | ** ** | ** ** | ** ** | **(In millions)** | ** ** |
|-------------------|------------|------------|------------|------------------------|------------|
| Remainder of 2004 |       |       | $          | 83                     |       |   |
| 2005              |       |       | 154        |                   |       |
| 2006              |       |       | 148        |                   |       |
| 2007              |       |       | 140        |                   |       |
| 2008              |       |       | 131        |                   |       |
| 2009-2025         |       |       | 1,198      |                   |       |
| Total(1)          |       |       | $          | 1,854                  |       |   |

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(1)          Includescontractual obligations related to certain information technology, equipmentleases and software licenses of $14 million and excludes sublease revenue of$327 million.

 

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**13.   Leases andCommitments (Continued)**

Thefollowing table sets forth certain of the Company’s long-term commitments,including the current portion, as of June 30, 2004:
| ** **                    | ** ** | **Commitment Expiration Per Period** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **Less than 1  year**                     | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **Over 5  years** | ** ** | **Total  commitments** | ** ** |
| ** **                    | ** ** | **(In millions)**                              | ** ** |
| Standby resale  agreements(1) |       |                                                | $          | — |   |   | $ | 75 |   | $ | — |   | $ | — |   |   | $ | 75 |   |   |
| Private equity(2)             |       |                                                | 206        |   |   | 65 |   | 285 |   | 631 |   |   | 1,187 |   |   |
| Resale  agreements(3)         |       |                                                | 6,202      |   |   | — |   | — |   | — |   |   | 6,202 |   |   |
| Total commitments             |       |                                                | $          | 6,408 |   |   | $ | 140 |   | $ | 285 |   | $ | 631 |   |   | $ | 7,464 |   |   |

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(1)          Inthe ordinary course of business, the Company maintains certain standby resaleagreement facilities that commit the Company to enter into resale agreementswith customers at current market rates.

(2)          Represents commitmentsto invest in various partnerships that make private equity and relatedinvestments in various portfolio companies or other private equity funds.

(3)          Represents commitmentsto enter into forward resale agreements.

The Company has access to standby letters of credit of$99 million and $95 million as of June 30, 2004 and December 31,2003, respectively, in order to satisfy counterparty collateral requirements.

In connection with its residential mortgage business,the Company may from time to time arrange for the sale of certain qualifyingmortgage loans or pools of mortgage loans (the “Loans”) to an unaffiliatedentity (the “Purchaser”) pursuant to an agreement between the Company and thePurchaser. In accordance with the agreement, the Company may be required torepurchase one or more Loans, including the related hedge positions, from thePurchaser at its request in accordance with the terms of the agreement. As of June 30,2004, the Purchaser has the right to request the Company to repurchaseapproximately $3.3 billion of Loans from the Purchaser pursuant to the terms ofthe agreement.

The Company had no capitallease or purchase obligations as of June 30, 2004. For information aboutcertain of the Company’s additional commitments, see Notes 7, 8 and 14.

**14.**   Guarantees

In the ordinary course of business, the Company entersinto guarantee contracts as guarantor. FIN No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (“FIN 45”), requires disclosure by a guarantor of itsmaximum potential payment obligations under certain of its guarantees to theextent that it is possible to estimate them. FIN 45 also requires a guarantorto recognize, at the inception of a guarantee, a liability for the fair valueof the obligations undertaken in issuing such guarantee, including its ongoingobligation to stand ready to perform over the term of the guarantee in theevent that certain events or conditions occur. With certain exceptions, theseliability recognition requirements apply to any new guarantees entered into, orexisting guarantees that are modified, after December 31, 2002.

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**14.**   Guarantees (Continued)

The guarantees covered by FIN 45 may require theCompany to make payments to the guaranteed party based on changes related to anasset, a liability or an equity security of the guaranteed party. The Companymay also be contingently required to make payments to the guaranteed partybased on another entity’s failure to perform under an agreement, or the Companymay have an indirect guarantee of the indebtedness of others, even though thepayment to the guaranteed party may not be based on changes related to anasset, liability or equity security of the guaranteed party.

In addition, FIN 45 covers certain indemnificationagreements that contingently require the Company to make payments to theindemnified party based on changes related to an asset, liability or equitysecurity of the indemnified party, such as an adverse judgment in a lawsuit orthe imposition of additional taxes due to either a change in the tax law or anadverse interpretation of the tax law.

Thefollowing table sets forth the maximum quantifiable contingent liabilityassociated with guarantees covered by FIN 45 as of June 30, 2004 bymaturity:
| ** **                | ** ** | **Guarantee of Commitment  Expiration Per Period** | ** ** |
|---------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Less than 1  year**                                        | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **Over 5  years** | ** ** | **Total  guarantees** | ** ** |
| ** **                | ** ** | **(In millions)**                                                 | ** ** |
| Performance  guarantees   |       |                                                                   | $          | 53 |   |   | $ | 99 |   | $ | 191 |   | $ | 336 |   |   | $ | 679 |   |   |
| Derivatives               |       |                                                                   | 2,842      |   |   | 2,730 |   | 739 |   | 1,025 |   |   | 7,336 |   |   |
| Related party  guarantees |       |                                                                   | —     |   |   | — |   | — |   | 3,725 |   |   | 3,725 |   |   |
| Total guarantees          |       |                                                                   | $          | 2,895 |   |   | $ | 2,829 |   | $ | 930 |   | $ | 5,086 |   |   | $ | 11,740 |   |   |

 

**Performance Guarantees**

In the ordinary course of business, the Company entersinto contracts that would require it, as the guarantor, to make payments to theguaranteed party based on a third party’s failure to perform under an agreement.As of June 30, 2004, the Company had a maximum contingent liability of$679 million under performance guarantees.

***Federal National Mortgage Association (“FNMA”) Activities***

As part of the Company’s commercial mortgageactivities, the Company sells certain commercial mortgages that it hasoriginated to FNMA and agrees to bear a percentage of the losses should theborrowers fail to perform. Under these guarantees, the Company is required toreimburse FNMA for losses on certain whole loans underlying mortgage-backedsecurities issued by FNMA and, as of June 30, 2004, recorded liabilitiesof $8 million related to these guarantees. The Company’s maximum potentialexposure related to these guarantees, assuming all the borrowers failed to perform,was $270 million as of June 30, 2004.

As part of the Company’sresidential mortgage activities, the Company sells certain residentialmortgages that it has purchased to FNMA and agrees to bear a percentage of thelosses should the borrowers fail to perform. In accordance with FIN 45, theCompany did not recognize a liability for these guarantees because they wereissued prior to December 31, 2002 and have not been modified. The 

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**14.**   Guarantees (Continued)

Company’smaximum potential exposure related to these guarantees, assuming all theborrowers failed to perform, was $125 million as of June 30, 2004.

***Guarantees of Collection of Prepayment Penalties andPayments for Reductions in Excess Servicing Fees***

As part of the Company’s residential mortgagesecuritization activities, the Company at times guarantees the collection bythe servicer and remittance to the securitization trust of prepayment penalties.As of June 30, 2004, the Company’s maximum exposure under the guarantees,assuming that every mortgage holder prepays and the servicers fail to collectand remit the prepayment penalties, was $284 million; however, the Companyhas recourse against the servicer.

In addition, the Company attimes guarantees to cover any increases in servicing fees that would beotherwise borne by the securitization trust in connection with the replacementof the existing servicer. The Company has determined that is it not possible toestimate the maximum amount of its obligations under these guarantees as of June 30,2004.

**Derivatives**

In the ordinary course of business, the Company entersinto OTC contracts that meet the definition of a guarantee under FIN 45.Included in this category are certain written OTC put option contracts,pursuant to which the counterparty can potentially force the Company to acquirethe underlying financial instrument or require the Company to make a cashpayment in an amount equal to the decline in value of the financial instrumentunderlying the OTC put option. Also included in this category are creditderivatives that may subject the Company to credit spread or issuer defaultrisk because the change in credit spreads or the credit quality of theunderlying financial instrument may obligate the Company to make a payment. TheCompany seeks to manage these OTC derivatives exposures by engaging in varioushedging strategies to reduce its exposure.

FIN 45 does not require disclosures about derivativesinstruments if they can be cash settled and the Company has no basis toconclude that it is probable that the counterparties held the underlyinginstruments related to the derivatives instruments at the inception of thecontract. Derivatives meeting both of these criteria are not disclosed in thetable above.

As of June 30, 2004,the Company recorded $184 million in derivatives that met the definitionof a guarantee under FIN 45. These are reflected as derivatives contracts inthe condensed consolidated statements of financial condition. The maximum grosscontingent liability, excluding any potential offset from hedging activitiesrelated to these contracts, was $7.3 billion, of which $4.5 billionwas with CSG affiliates, and represents the obligation of the Company in theevent that all the underlying financial instruments are worthless, thelikelihood of which the Company believes is remote. For more information onderivatives, see Note 11.

**Related Party Guarantees**

For purposes of FIN 45, related party guarantees referto any guarantees issued by the Company for obligations of any company (“affiliates”)controlled by CSG, the Company’s ultimate parent, unless it is 

29

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**14.**   Guarantees (Continued)

one of the Company’sconsolidated subsidiaries. Guarantees issued by the Company for the obligationsof its consolidated subsidiaries are excluded because they do not create anyincremental liability.

The Company issuesguarantees to customers with respect to certain obligations of its affiliatesin the ordinary course of business, including, but not limited to, certainderivatives transactions. Failure to perform by an affiliate would require theCompany to perform under the guarantee. The maximum contingent liability offuture payments of guarantees issued to counterparties of affiliates as of June 30,2004 was $3.7 billion. Excluded from this maximum contingent liability arecertain guarantees for which an estimate cannot be made because the exposure isunlimited and therefore impossible to estimate. While the maximum contingentliability represents possible future payments under the guarantees, the Companybelieves that the likelihood of nonperformance by these affiliates is remote.

**Guarantees Related to Private Equity Activities**

As part of its privateequity activities, the Company provides guarantees related to carried interestand performance thresholds. The amounts of such guarantees are included in thecontingent obligations disclosed in Note 8.

**OtherGuarantees**

The Company has certainguarantees for which its maximum contingent liability cannot be quantified.These guarantees are not reflected in the table above and are discussed below.

***Indemnifications Issued in Connection with Asset Sales***

In connection with salesof certain assets or businesses, the Company has provided purchasers customaryindemnification provisions based on changes in an underlying asset or liabilityrelating to the assets sold. These indemnification provisions are negotiatedwith the purchaser of the assets or businesses and vary in their scope andduration. These indemnification provisions generally shift the risk of certainunquantifiable and unknowable loss contingencies (e.g., relating to litigation,tax and intellectual property matters) from the purchaser to the seller, asknown or quantifiable loss contingencies generally are reflected in the valueof the assets or businesses being sold. The Company has determined that it isnot possible to make an estimate of the maximum contingent liability underthese indemnification provisions. To date, the Company’s actual paymentsarising from these indemnification provisions have been in connection withlitigation matters and have not been material.

***Tax Gross-up Arrangements***

As a normal part ofissuing its own securities, the Company typically agrees to reimburse holdersfor additional tax withholding charges or assessments resulting from changes inapplicable tax laws or the interpretation of those laws. Securities thatinclude these agreements to pay additional amounts generally also include arelated redemption or call provision if the obligation to pay the additionalamounts results from a change in law or its interpretation and the obligationcannot be avoided by the issuer taking reasonable steps to avoid the payment ofadditional amounts. Since such potential obligations are dependent on futurechanges in tax laws, the Company has determined that it is not possible to makean 

30

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**14.**   Guarantees (Continued)

estimateof the maximum amount it could be obligated to pay as a result of such changes.In light of the related redemption or call provisions generally included in thesecurities, the Company does not expect any potential liabilities in respect oftax gross-ups to be material.

***Exchange and Clearinghouse Memberships***

The Company is a member of numerous securitiesexchanges and clearinghouses, and may, as a result of its membershiparrangements, be required to perform if another member defaults. The Companyhas determined that it is not possible to estimate the maximum amount of theseobligations and believes that any potential requirement to make payments underthese arrangements is remote.

**15.**   Industry Segment and Geographic Data

As of January 1, 2004, the Company transferredthe private equity and private fund businesses from the InstitutionalSecurities segment to the Financial Services segment, which has been renamedWealth & Asset Management. As a result, the Company changed thepresentation of the Institutional Securities and Wealth & AssetManagement segment results. In addition, theCompany allocated to the segments merger-related costs and certain other costsand revenues, previously excluded from its reportable segments, which theCompany believed did not represent normal operating costs and revenues. Priorperiod segment numbers have been changed to conform to the new segmentreporting structure.

The Company operates and manages its businessesthrough two operating segments: the Institutional Securities segment,consisting primarily of the Investment Banking and Trading divisions; and theWealth & Asset Management segment, consisting of the Private ClientServices, Private Equity and Private Fund divisions.

The Company’s segments are managed based on types ofproducts and services offered and their related client bases. The Companyevaluates the performance of its segments based primarily on income fromcontinuing operations before provision for income taxes and discontinuedoperations but excluding minority interests.

The InstitutionalSecurities segment consists of:

·       theInvestment Banking division, which serves a broad range of users and suppliersof capital and provides financial advisory and securities underwriting andplacement services; and

·       theTrading division, which trades and distributes equity and equity-relatedproducts, including listed and OTC derivatives, fixed income financial instrumentsand derivatives and risk management products, and engages in securities lendingand borrowing.

The Institutional Securities segment also includes theresults from legacy private equity and distressed assets.

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**15.   IndustrySegment and Geographic Data (Continued)**

The Wealth & Asset Management segmentconsists of:

·       thePrivate Client Services division, which is a financial advisory businessserving high-net-worth individuals and corporate investors with a wide range ofCSFB and third-party investment management products and services;

·       thePrivate Equity division, which makes privately negotiated investments and actsas an investment advisor for private equity funds; and

·       thePrivate Fund division, which raises private capital, primarily frominstitutional investors, for direct investment by venture capital, managementbuyout and other investment firms in a variety of fund types.

The Company allocates to its segments a pro rata shareof certain centrally managed costs, such as leased facilities and equipmentcosts, employee benefits and certain general overhead expenses based uponspecified amounts, usage criteria or agreed rates, and allocates interestexpense based upon the type of asset. The segmental allocation of some costs,such as incentive bonuses, is estimated.

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**15.**   Industry Segment and Geographic Data  (Continued)

The following table sets forth certain financialinformation of the Company’s segments.
| ** **                                          | ** ** | **Institutional  Securities** | ** ** | **Wealth & Asset   Management** | ** ** | **Total  Segment** | ** ** |
|-----------------------------------------------------|------------|-------------------------------|------------|----------------------------------------------------|------------|--------------------|------------|
| ** **                                          | ** ** | **(In millions)**        | ** ** |
| **For the three months ended June 30,  2004:** | ** ** |                          | ** ** | ** **                                         |       |               | ** ** | ** ** |   | ** ** | ** ** |
| Net revenues excluding  net interest                |       |                          | $          | 674                                                |       |               |       | $ | 669 |   |   | $ | 1,343 |   |
| Net interest revenue                                |       |                          | 593        |                                               |       |               | 31         |   |   | 624 |   |
| Total net revenues(1)                               |       |                          | 1,267      |                                               |       |               | 700        |   |   | 1,967 |   |
| Total expenses                                      |       |                          | 1,024      |                                               |       |               | 138        |   |   | 1,162 |   |
| Income(2)                                           |       |                          | 243        |                                               |       |               | 562        |   |   | 805 |   |
| Minority interests(3)                               |       |                          | 35         |                                               |       |               | 330        |   |   | 365 | ** ** |
| Income after minority  interests(4)                 | ** ** |                          | $          | 208                                                |       |               |       | $ | 232 |   |   | $ | 440 |   |
| **For the  three months ended June 30, 2003:** |       |                          |       |                                               |       |               |       |   |   |   |   |
| Net revenues excluding  net interest                |       |                          | $          | 668                                                |       |               |       | $ | 174 |   |   | $ | 842 |   |
| Net interest revenue                                |       |                          | 594        |                                               |       |               | 10         |   |   | 604 |   |
| Total net revenues(1)                               |       |                          | 1,262      |                                               |       |               | 184        |   |   | 1,446 |   |
| Total expenses                                      |       |                          | 1,141      |                                               |       |               | 149        |   |   | 1,290 |   |
| Income(2)                                           |       |                          | 121        |                                               |       |               | 35         |   |   | 156 |   |
| Minority interests(3)                               |       |                          | —     |                                               |       |               | —     |   |   | — |   |
| Income after minority  interests(4)                 | ** ** |                          | $          | 121                                                |       |               |       | $ | 35 |   |   | $ | 156 |   |
| **For the  six months ended June 30, 2004:**   |       |                          |       |                                               |       |               |       |   |   |   |   |
| Net revenues excluding  net interest                | ** ** |                          | $          | 1,377                                              |       |               |       | $ | 899 |   |   | $ | 2,276 |   |
| Net interest revenue                                |       |                          | 1,230      |                                               |       |               | 41         |   |   | 1,271 | ** ** |
| Total net revenues(1)                               |       |                          | 2,607      |                                               |       |               | 940        |   |   | 3,547 | ** ** |
| Total expenses                                      |       |                          | 2,119      |                                               |       |               | 296        |   |   | 2,415 | ** ** |
| Income(2)                                           | ** ** |                          | 488        |                                               |       |               | 644        |   |   | 1,132 |   |
| Minority interests(3)                               |       |                          | 62         |                                               |       |               | 384        |   |   | 446 | ** ** |
| Income after minority  interests(4)                 | ** ** |                          | $          | 426                                                |       |               |       | $ | 260 |   |   | $ | 686 |   |
| **For the  six months ended June 30, 2003:**   |       |                          |       |                                               |       |               |       |   |   |   |   |
| Net revenues excluding  net interest                | ** ** |                          | $          | 1,192                                              |       |               |       | $ | 312 |   |   | $ | 1,504 |   |
| Net interest revenue                                | ** ** |                          | 1,129      |                                               |       |               | 14         |   |   | 1,143 |   |
| Total net revenues(1)                               | ** ** |                          | 2,321      |                                               |       |               | 326        |   |   | 2,647 |   |
| Total expenses                                      | ** ** |                          | 2,105      |                                               |       |               | 299        |   |   | 2,404 |   |
| Income(2)                                           | ** ** |                          | 216        |                                               |       |               | 27         |   |   | 243 |   |
| Minority interests(3)                               |       |                          | —     |                                               |       |               | —     |   |   | — |   |
| Income after minority  interests(4)                 | ** ** |                          | $          | 216                                                |       |               |       | $ | 27 |   |   | $ | 243 |   |
| **Segment  assets as of June 30, 2004(5)**     | ** ** |                          | $          | 275,388                                            |       |               |       | $ | 3,799 |   |   | $ | 279,187 |   |
| **Segment assets as of December 31, 2003**     | ** ** |                          | $          | 239,733                                            |       |               |       | $ | 1,833 |   |   | $ | 241,566 |   |

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(1)          Interest income andexpense is accrued at the stated coupon rate for coupon-bearing financialinstruments, and for non-coupon-bearing financial instruments, interest incomeis recognized by 

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**15.**   Industry Segment and Geographic Data  (Continued)

accreting the discountover the life of the instrument. For coupon-bearing financial instrumentspurchased at a discount or premium, the difference between interest income andexpense accrued at the stated coupon rate and interest income and expensedetermined on an effective yield basis is included in principaltransactions-net in the Company’s condensed consolidated statements of incomeand in net revenues excluding net interest above.

(2)          Income from continuingoperations before provision for income taxes, minority interests anddiscontinued operations.

(3)          Related to the Company’sconsolidation of certain private equity funds.

(4)          Income from continuingoperations before provision for income taxes and discontinued operations.

(5)          The InstitutionalSecurities and Wealth & Asset Management segment assets as of June 30,2004 include $472 million and $1.2 billion, respectively, related to theCompany’s consolidation of certain private equity funds.

The Company’s principaloperations are located in the United States. The Company’s foreign revenues arenot significant.

**16.**   Goodwill and Identifiable IntangibleAssets

On January 1, 2002, the Company adopted SFAS No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”), which addresses theinitial recognition and measurement of intangible assets acquired outside abusiness combination and the recognition and measurement of goodwill and otherintangible assets subsequent to acquisition. Under the standard, goodwill andindefinite-lived intangible 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 June 30, 2004and December 31, 2003, the Company had $532 million of goodwill. Asof June 30, 2004 and December 31, 2003, the Company had identifiableintangible assets (primarily software and customer lists, which are beingamortized over useful lives ranging from 3 to 20 years) of$41 million and $46 million, net of accumulated amortization of $49 millionand $47 million, respectively, included in other assets and deferredamounts in the condensed consolidated statements of financial condition. See Note 1 for more information on thetransfer.

**17.**   LegalProceedings

The Company is involved in a number of judicial,regulatory and arbitration proceedings concerning matters arising in connectionwith the conduct of its businesses. These actions have been brought on behalfof various classes of claimants and, unless otherwise specified, seek damagesof material and/or indeterminate amounts. The Company believes, based oncurrently available information and advice of counsel, that the results of suchproceedings, in the aggregate, will not have a material adverse effect on itsfinancial condition but might be material to operating results for anyparticular period, depending, in part, upon the operating results for suchperiod.

It is inherently difficultto predict the outcome of many of these matters. In presenting the condensedconsolidated financial statements, management makes estimates regarding theoutcome of these matters 

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**CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 30, 2004**

**17.**   Legal Proceedings (Continued)

and records a reserve andtakes a charge to income when losses with respect to such matters are probableand can be reasonably estimated. Estimates, by their nature, are based onjudgment and currently available information and involve a variety of factors,including, but not limited to, the type and nature of the litigation, claim orproceeding, the progress of the matter, the advice of legal counsel, theCompany’s defenses and its experience in similar cases or proceedings.

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**Report of Independent Registered Public AccountingFirm**

The Board of Directors and StockholderCredit Suisse First Boston (USA), Inc.:

We have reviewed the accompanying condensedconsolidated statement of financial condition of Credit Suisse First Boston (USA), Inc.and subsidiaries as of June 30, 2004, the related condensed consolidatedstatements of income for the three and six-month periods ended June 30,2004 and 2003, and the related condensed consolidated statements of changes instockholders’ equity and cash flows for the six-month periods ended June 30,2004 and 2003. These condensed consolidated financial statements are theresponsibility of the Company’s management.

We conducted our reviews in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Areview of interim financial information consists principally of applyinganalytical procedures and making inquiries of persons responsible for financialand accounting matters. It is substantially less in scope than an auditconducted in accordance with the standards of the Public Company AccountingOversight Board (United States), the objective of which is the expression of anopinion regarding the financial statements taken as a whole. Accordingly, we donot express such an opinion.

Based on our reviews, we are not aware of any materialmodifications that should be made to the condensed consolidated financialstatements referred to above for them to be in conformity with U.S. generallyaccepted accounting principles.

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated statement offinancial condition of Credit Suisse First Boston (USA), Inc. andsubsidiaries as of December 31, 2003, and the related consolidatedstatements of income, changes in stockholders’ equity, and cash flows for theyear then ended (not presented herein); and in our report dated May 19,2004, we expressed an unqualified opinion on those consolidated financialstatements. In our opinion, the information set forth in the accompanyingcondensed consolidated statement of financial condition as of December 31,2003 is fairly stated, in all material respects, in relation to theconsolidated statement of financial condition from which it has been derived.
| /s/ KPMG LLP        |   |
|---------------------|--------|
| New York, New York  |   |
| August 5, 2004 |   |

 

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

**MANAGEMENT’S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

We are a leading integrated investment bank servinginstitutional, corporate, government and high-net-worth individual clients. Weare part of the Credit Suisse First Boston business unit, which we call CSFB,of Credit Suisse Group, or CSG, and our results do not necessarily reflect theoverall performance of CSFB or CSG. When we use the terms “we” and “our” andthe “Company,” we mean Credit Suisse First Boston (USA), Inc., a Delawarecorporation, and its consolidated subsidiaries.

The Company’s principaloperations are located in the United States. The Company’s foreign revenues arenot significant.

**BUSINESS ENVIRONMENT**

Our principal business activities, investment banking,private equity, securities underwriting and sales and trading, are, by theirnature, highly competitive and subject to general market conditions thatinclude volatile trading markets and fluctuations in the volume of new issuesand public and private mergers and acquisitions activities and fluctuations inthe value of financial instruments. Consequently, our results have been, andare likely to continue to be, subject to significant fluctuations reflectingthe impact of many factors beyond our control, including securities marketconditions, the level and volatility of interest rates, competitive conditions,the size and timing of transactions and the geopolitical environment.

The U.S. economy experienced strong growth in thefirst half of 2004, as industrial production and job creation surged. While itappears that the economic recovery is becoming broader, this sentiment has beentempered by unexpected soft economic data in June that suggests that theeconomy is now growing at a slower rate than in early 2004.

For the three and six months ended June 30, 2004,the major stock market indices were relatively flat, as expectations ofimproved corporate earnings offset concerns over oil prices and rising interestrates. The Dow Jones Industrial Average increased 1%, the Standard &Poor’s 500 stock index rose 1% and the NASDAQ composite index increased 3% forthe three months ended June 30, 2004. The Dow Jones Industrial Averagedecreased less than 1%, the Standard & Poor’s 500 stock index rose 3%and the NASDAQ composite index increased 2% for the first six months of 2004.

After managing positive returns for the first quarterof 2004, the fixed income markets retreated on news of improving job data andanticipated interest rate increases by the Federal Reserve Board. Losses in thesecond quarter of 2004 erased the gains from the first quarter of 2004. Theselosses were broad-based as treasury, corporate and high-yield bonds alldeclined. On June 30, 2004, the Federal Reserve Board increased itsfederal funds rate for the first time in four years from 1% to 1.25% statingthat it expected future rate increases to be “measured”.

The dollar value of U.S.debt underwriting decreased for the three months ended June 30, 2004compared to the three months ended June 30, 2003, reflecting anindustry-wide decline in debt underwriting. The dollar value of U.S. equity andequity-related underwriting decreased for the three months ended June 30,2004 compared to the three months ended June 30, 2003, primarilyreflecting a decrease in convertible securities issuances. The dollar value ofcompleted mergers and acquisitions in the United States increased for the threemonths ended June 30, 2004 compared to the three months ended June 30,2003.The dollar value of U.S. debt underwriting decreased in the first sixmonths of 2004 compared to the first six months of 2003, primarily as a resultof a sharp decline in mortgage-backed securities underwriting. The dollar valueof U.S. equity and equity-related underwriting increased in the first sixmonths of 2004 compared to the first six months of 2003. Mergers andacquisitions activity showed 

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signs ofrecovery as the dollar value of completed mergers and acquisitions in theUnited States for the first six months of 2004 increased compared with thefirst six months of 2003.

**MANAGEMENTOVERVIEW**

Net revenues in the second quarter of 2004 increased$521 million compared to the second quarter of 2003. The increase was primarilydue to significant gains from Wealth & Asset Management private equityinvestments and the consolidation of certain private equity funds, whichincreased net revenues by $365 million. Net trading revenues for theInstitutional Securities segment were essentially flat, with a decrease inequity net trading revenues partly offset by an increase in fixed income nettrading revenues. Investment Banking revenues for the Institutional Securitiessegment decreased 24%, reflecting a decline in debt underwriting partiallyoffset by an increase in advisory and other fees. Total expenses decreased 10%due to lower merger-related costs, other operating expenses and compensationand benefits expenses. Net income of $292 million decreased compared to secondquarter 2003 net income of $978 million, primarily reflecting the after-taxgain of $852 million from the sale of Pershing in the second quarter of 2003.

Net revenues in the firsthalf of 2004 increased $900 million compared to the first half of 2003,primarily due to significant gains from Wealth & Asset Managementprivate equity investments and the consolidation of certain private equityfunds, which increased net revenues by $446 million. Net trading revenues forInstitutional Securities increased 7% as increased fixed income net tradingrevenues were partially offset by a small decrease in equity net tradingrevenues. Investment Banking revenues for the Institutional Securities segmentdecreased 2%, reflecting declines in debt underwriting and flat advisory andother revenues offset in part by an increase in equity underwriting. Totalexpenses were essentially flat, as increases in compensation and benefitsexpenses, reflecting increased revenues, were offset by lower merger-relatedcosts and other operating expenses. Net income of $459 million decreasedcompared to second half 2003 net income of $1.1 billion, primarily reflectingthe after-tax gain of $852 million from the sale of Pershing in the secondquarter of 2003.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

In order to prepare the condensed consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States of America, or U.S. GAAP, we must make estimatesand assumptions based on judgment and available information. The reportedamounts of assets and liabilities and revenues and expenses are affected bythese estimates and assumptions. Actual results could differ from theseestimates, and the differences could be material.

Our significant accountingpolicies and a discussion of new accounting pronouncements are disclosed inNote 1 of the consolidated financial statements in Part II, Item 8 inour Annual Report on Form 10-K for the year ended December 31, 2003.We believe that the critical accounting policies discussed below involve themost complex judgments and assessments. We believe that the estimates andassumptions used in the preparation of the condensed consolidated financialstatements are prudent, reasonable and consistently applied.

**FairValue**

As is the normal practice in our industry, the valueswe report in the condensed consolidated financial statements with respect toFinancial instruments owned and Financial instruments sold not yet purchasedare in most cases based on fair value, with related unrealized and realizedgains or losses included in the condensed consolidated statements of income.Commercial mortgage whole loans and certain residential mortgage whole loansheld for sale are carried at the lower of aggregate cost or fair value.

Fair value may beobjective, as is the case for exchange-traded instruments for whichquoted prices in price-efficient and liquid markets generally exist, oras is the case where a financial instrument’s fair value 

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isderived from actively quoted prices or pricing parameters or alternativepricing sources with a reasonable level of price transparency. For financialinstruments that trade infrequently and have little price transparency, fairvalue may be subjective and require varying degrees of judgment depending onliquidity, concentration, uncertainty of market factors, pricing assumptionsand other risks affecting the specific instrument. In such circumstances,valuation is based on management’s best estimate of fair value. In addition,valuation of financial instruments ordinarily based on quoted prices may bedistorted in times of market dislocation.

***Controls Over Fair Valuation Process***

Control processes are applied to ensure that the fairvalue of the financial instruments reported in our condensed consolidatedfinancial statements, including those derived from pricing models, areappropriate and measured on a reliable basis. The Company bases fair value onobservable market prices or market-based parameters whenever possible. In theabsence of observable market prices or market-based parameters in an activemarket or from comparable market transactions, or other observable datasupporting fair value based on a model at the inception of a contract, fairvalue is based on the transaction price. Control processes are designed toensure that the valuation approach is appropriate and the assumptions arereasonable.

Control processes include the approval of newproducts, review of profit and loss, risk monitoring and review, priceverification procedures and reviews of models used to price financialinstruments by senior management and personnel with relevant expertise who areindependent of the trading and investment functions.

The Company also has agreements with certaincounterparties to exchange collateral based on the fair value of derivativescontracts. Through this process, one or both parties provide the other partywith the fair value of these derivatives contracts in order to determine theamount of collateral required. This exchange of information provides additionalsupport for the Company’s derivatives contracts valuations. As part of theCompany’s over-the-counter, or OTC, derivatives business, the Company and otherparticipants provide pricing information to aggregation services that compilethis data and provide this information to subscribers. This information isconsidered in the determination of fair value for certain OTC derivatives.

For further discussion ofour risk management policies and procedures, see “Quantitative and QualitativeDisclosures About Market Risk” in Part I, Item 3 and in Part II, Item7A of our Annual Report on Form 10-K for the year ended December 31,2003.

***Valuation***

Forpurposes of valuation, we categorize our financial instruments as cashproducts, derivatives contracts and private equity investments. As of June 30,2004 and December 31, 2003, the fair value of cash products, derivativescontracts and private equity investments was:
| ** **                  | ** ** | **As of June 30, 2004** | ** ** | **As of December 31, 2003**               | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                  | ** ** | **Financial  instruments  owned**           | ** ** | **Financial  instruments  sold not yet  purchased** | ** ** | **Financial  instruments  owned** | ** ** | **Financial  instruments  sold not yet  purchased** | ** ** |
| ** **                  | ** ** | **(In millions)**                      | ** ** |
| Cash products               |       |                                        | $          | 90,865                                                        |       |   |   | $ | 45,235 |   |   |   | $ | 73,210 |   |   |   | $ | 31,790 |   |   |
| Derivatives  contracts      |       |                                        | 6,073      |                                                          |       |   | 5,005 |   |   |   | 5,573 |   |   |   | 3,955 |   |   |
| Private equity  investments |       |                                        | 2,551      |                                                          |       |   | — |   |   |   | 1,123 |   |   |   | — |   |   |
| Total                       |       |                                        | $          | 99,489                                                        |       |   |   | $ | 50,240 |   |   |   | $ | 79,906 |   |   |   | $ | 35,745 |   |   |

 

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***CashProducts***

The vast majority of our financial instruments ownedand financial instruments sold not yet purchased are considered cash tradinginstruments. The fair value of the vast majority of these financial instrumentsis based on quoted market prices in active markets or observable marketparameters or is derived from such prices or parameters. These include U.S.government and agency securities, commercial paper, most investment-gradecorporate debt, most high-yield debt securities, most mortgage-backedsecurities and listed equities.

In addition, we hold positions in cash products thatare thinly traded or for which no market prices are available, and which havelittle or no price transparency. These products include certain high-yield debt securities, distresseddebt securities, mortgage loans, certain mortgage-backed and asset-backedsecurities, certain collateralized debt obligations, or CDOs, and equitysecurities that are not publicly traded. The techniques used todetermine fair value for these instruments are based on the type of product.Some of these valuation techniques require us to exercise a substantial amountof judgment, for example, in determining the likely future cash flows ordefault recovery on distressed debt instruments or asset-backed obligations orthe likely impact of country or market risk on various investments. Valuationtechniques for certain of these products are described more fully below.

For certain high-yield debt securities that are thinlytraded or for which market prices are not available, valuation is based onrecent market transactions, taking into account changes in the creditworthinessof the issuer, and  pricing models toderive yields reflecting the perceived risk of the issuer or country rating andthe maturity of the security. These factors contribute to significantsubjectivity in the valuation of these financial instruments.

Financial instruments held in the distressed portfolioare typically issued by private companies under significant financial burdenand/or near bankruptcy. Because of the less liquid nature of these financialinstruments, valuation techniques often include earnings-multiple analyses,similar market transactions and default recovery analyses. These factorscontribute to significant subjectivity in the valuation of these financialinstruments.

The mortgage loan portfolio primarily includesresidential and commercial mortgage loans that are either purchased ororiginated with the intent to securitize. For residential mortgage loans,valuations are based on pricing factors specific to loan level attributes, suchas loan-to-value ratios, current balance and liens. The commercial real estateloans are valued using origination spreads, incorporating loan-to-value ratios,debt service coverage ratios, geographic location, prepayment protection andcurrent yield curves. In addition, current written offers or contract pricesare considered in the valuation process.

Values of residential and commercial mortgage-backedsecurities and other asset-backed securities that are not based on quotedmarket prices or prices at which similarly structured and collateralizedsecurities trade between dealers and to and from customers are valued usingpricing models employing prepayment scenarios and Monte Carlo simulations.

CDOs arestructured securities based on underlying portfolios of asset-backedsecurities, certain residential and commercial mortgage securities, high-yieldand investment grade corporate bonds, leveraged loans and other debtobligations. These instruments are split into various structured tranches, andeach tranche is priced based upon its individual rating and the value or cashflow of the underlying collateral supporting the structure. Values are derivedusing pricing models that involve projected cash flows, default recoveryanalysis and other assumptions, and such valuations involve judgment.

For convertible securitiesthat are thinly traded or for which no market prices are available, internalmodels are used to derive fair value. The terms and conditions of the securityare factored into the model, along with market inputs such as underlying equityprice, equity price volatility and credit spread. Certain 

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adjustmentsare made to the derived theoretical values for high concentration levels andlow trading volumes.

***DerivativesContracts***

Ourderivatives contracts consist of OTC and exchange-traded derivatives, and thefair value of these as of June 30, 2004 and December 31, 2003 was asfollows:
| ** **      | ** ** | **As of June 30, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|-----------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **      | ** ** | **Assets**                                  | ** ** | **Liabilities**                                 | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **      | ** ** | **(In millions)**                      | ** ** |
| Exchange-traded |       | $                                           | 2,594      |                                            |       | $ | 2,413 |   |   | $ | 2,552 |   |   | $ | 2,292 |   |   |
| OTC             |       | 3,479                                       |       |                                            | 2,592      |   |   | 3,021 |   |   | 1,663 |   |   |
| Total           |       | $                                           | 6,073      |                                            |       | $ | 5,005 |   |   | $ | 5,573 |   |   | $ | 3,955 |   |   |

 

The fair value of exchange-tradedderivatives is typically derived from the observable exchange price and/orobservable market parameters. Our primary exchange-traded derivativesinclude futures and certain option agreements. OTC derivatives includeforwards, swaps and options on foreign exchange, interest rates, equities andcredit products. Fair values for OTC derivatives are determined on the basis ofinternally developed proprietary models using various input parameters. Theinput parameters include those characteristics of the derivative that have abearing on the economics of the instrument and market parameters. Inwell-established derivatives markets, the use of a particular model may bewidely accepted. For example, the Black-Scholes model is widely used tocalculate the fair value of many types of options. These models are used tocalculate the fair value of OTC derivatives and to facilitate the effectiverisk management of the portfolio. The determination of the fair value of manyderivatives involves only limited subjectivity because the required inputparameters are observable in the marketplace. For other more complexderivatives, subjectivity relating to the determination of input parametersreduces price transparency. Specific areas of subjectivity include long-datedvolatilities on OTC option transactions and recovery rate assumptions forcredit derivatives transactions. Uncertainty of pricing assumptions andliquidity are also considered as part of the valuation process. Because ofthese uncertainties, we do not recognize a dealer profit or unrealized gain atthe inception of a derivatives transaction unless the valuation underlying theunrealized gain is evidenced by quoted market prices in an active market,observable prices of other current market transactions or other observable datasupporting a valuation technique in accordance with Emerging Issues Task ForceIssue No. 02-3, “Issues Involved in Accounting for Derivative ContractsHeld for Trading Purposes and Contracts Involved in Energy Trading and RiskManagement Activities.” As of June 30, 2004 and December 31, 2003,most of the replacement values reported in our condensed consolidatedstatements of financial condition were derived using observable inputparameters. For further information on the fair value of derivatives as of June 30,2004 and December 31, 2003, see “—Derivatives—Sources and Maturities ofOTC Derivatives” and Note 11 of the condensed consolidated financial statementsin Part I, Item 1.

***PrivateEquity Investments***

Private equity and other long-term investments includedirect investments and investments in partnerships that make private equity andrelated investments in various portfolio companies and funds. Private equityinvestments and other long-term investments consist of both publicly tradedsecurities and private securities. Publicly traded investments are valued basedupon readily available market quotes with appropriate adjustments for liquidityas a result of holding large blocks and/or having trading restrictions. Privatesecurities, which generally have no readily available market or may beotherwise restricted as to resale, are valued taking into account a number offactors, such as the most recent round of financing involving unrelated newinvestors, earnings-multiple analyses using comparable companies or discountedcash flow analysis.

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TheCompany categorizes its private equity investments into three categories—CSFB-managedfunds, funds managed by third parties and direct investments. The increase inCSFB-managed funds reflects our consolidation primarily under the Financial Accounting Standards BoardInterpretation, or FIN, No. 46, “(Revised 2003) Consolidation of VariableInterest Entities,” or FIN 46R, of certain private equity funds. Formore information see Note 6 of the condensed consolidated financial statementsin Part I, Item 1. The following table sets forth the fair value of ourprivate equity investments by category as of June 30, 2004 and December 31,2003:
| ** **                      | ** ** | **As of June 30, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **Fair value**                         | ** ** | **Percent  of total**                      | ** ** | **Fair value** | ** ** | **Percent  of total** | ** ** |
| ** **                      | ** ** | **(In millions)**                      | ** ** | ** **                                      | ** ** | **(In millions)** | ** ** | ** ** | ** ** |
| CSFB-managed  funds             |       |                                        | $          | 2,245                                           |       |   |   | 88 | % |   |   | $ | 839 |   |   |   | 74 | % |   |
| Funds managed by  third parties |       |                                        | 285        |                                            |       |   | 11 |   |   |   | 279 |   |   |   | 25 |   |   |
| Direct  investments             |       |                                        | 21         |                                            |       |   | 1 |   |   |   | 5 |   |   |   | 1 |   |   |
| Total                           |       |                                        | $          | 2,551                                           |       |   |   | 100 | % |   |   | $ | 1,123 |   |   |   | 100 | % |   |

 

*CSFB-ManagedFunds.**  *CSFB-managedfunds are partnerships and related “side by side” direct investments for whichCSFB acts as the fund’s advisor and makes investment decisions. As of June 30,2004 and December 31, 2003, approximately 90% and 80%, respectively, ofCSFB-managed fund investments (excluding minority interests in private equityfunds that were consolidated primarily under FIN 46R) were in privatesecurities. The fair value of our investments in CSFB-managed fund of fundspartnerships is based on the valuation received from the underlying fundmanager.

*FundsManaged by Third Parties.**  *Funds managed by third parties are investments by theCompany as a limited partner in a fund managed by an external fund manager. Thefair value of these funds is based on the valuation received from the generalpartner of the fund.

*Direct Investments.**  *Direct investments are generallydebt and equity securities that are not made through or “side by side”CSFB-managed funds and consist of public and private securities. Theseinvestments are priced in accordance with the procedures for CSFB-managed orthird-party managed funds. As of June 30, 2004 and December 31, 2003,approximately 79% and 82%, respectively, of direct investments were in privatesecurities.

**DeferredTax Assets**

We recognize deferred tax assets and liabilities forthe estimated future tax effects of operating loss carry-forwards andtemporary differences between the carrying amounts of existing assets andliabilities and their respective tax bases as of the balance sheet date.

The realization of deferred tax assets on temporarydifferences is dependent upon the generation of taxable income during theperiods in which those temporary differences become deductible. The realizationof deferred tax assets on net operating losses is dependent upon the generationof taxable income during the periods prior to their expiration, if any.Periodically, management evaluates whether deferred tax assets can be realized.If management considers it more likely than not that all or a portion of adeferred tax asset will not be realized, a corresponding valuation allowance isestablished. In evaluating whether deferred tax assets can be realized,management considers projected future taxable income, the scheduled reversal ofdeferred tax liabilities and tax planning strategies.

This evaluation requires significant managementjudgment, primarily with respect to projected taxable income. The estimate offuture taxable income can never be predicted with certainty. It is derived frombudgets and strategic business plans but is dependent on numerous factors, someof which are beyond our control. Substantial variance of actual results fromestimated future taxable income, or changes in our 

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estimate of future taxableincome, could lead to changes in deferred tax assets being realizable orconsidered realizable, and would require a corresponding adjustment to thevaluation allowance.

As of June 30, 2004,we had deferred tax assets resulting from temporary differences that couldreduce taxable income in future periods. The condensed consolidated statementsof financial condition as of June 30, 2004 and December 31, 2003include deferred tax assets of $1.6 billion and $1.7 billion,respectively, and deferred tax liabilities of $382 million and$375 million, respectively. Due to uncertainty concerning our ability togenerate the necessary amount and mix of state and local taxable income infuture periods, we maintained a valuation allowance against our deferred stateand local tax assets in the amount of $32 million and $36 million asof June 30, 2004 and December 31, 2003, respectively. For furtherinformation on the temporary differences that generate deferred tax assets, seeNote 5 of the condensed consolidated financial statements in Part I,Item 1.

**Litigation Contingencies**

From time to time, we are involved in a variety of legal,regulatory and arbitration matters in connection with the conduct of ourbusiness. It is inherently difficult to predict the outcome of many of thesematters, particularly those cases in which the matters are brought on behalf ofvarious classes of claimants, seek damages of unspecified or indeterminateamounts or involve novel legal claims. In presenting our condensed consolidatedfinancial statements, management makes estimates regarding the outcome oflegal, regulatory and arbitration matters and takes a charge to income whenlosses with respect to such matters are probable and can be reasonablyestimated. Charges, other than those taken periodically for cost of defense,are not established for matters when losses cannot be reasonably estimated. Estimates,by their nature, are based on judgment and currently available information andinvolve a variety of factors, including, but not limited to, the type andnature of the litigation, claim or proceeding, the progress of the matter, theadvice of legal counsel and other advisers, our defenses and our experience insimilar cases or proceedings. For a discussion of legal proceedings, see “LegalProceedings” in Part II, Item 1.

**RECENTDEVELOPMENTS**

On June 4, 2004, the Company filed on Form 8-Kaudited consolidated statements of financial condition as of December 31,2003 and 2002 and the related audited consolidated statements of operations,changes in stockholders’ equity and cash flows for each of the three yearsended December 31, 2003, 2002 and 2001 and related notes, restated toreflect the transfer of the high-net-worth business and updated segmentinformation to reflect the segment changes made effective January 1, 2004. The Form 8-K filed on June 4,2004 also includes a revised discussion of the Company’s results of operationsto reflect the transfer of the high-net-worth business and change in segments.

On May 17, 2004, we entered into a memorandum ofunderstanding with TXU Energy Company LLC, a Texas-based energy tradingcompany, or TXU, to work together to form an independent energy trading entity.The proposed entity will market and trade power, natural gas and otherenergy-related commodities in North America. Each of the Company and TXUexpects to make a 50% investment in this entity, and the Company wouldguarantee certain obligations of this entity. The Company and TXU are workingtoward entering into definitive agreements in the third quarter of 2004 andexpect the energy trading entity to begin operations in the fourth quarter of2004.

 

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On March 31, 2004,Credit Suisse First Boston, Inc., or CSFBI, our immediate parent company,transferred the high-net-worth business of Credit Suisse Asset Management, LLC,or CSAM, a wholly owned subsidiary of CSFBI, to us as a capital contribution of$221 million, and this business is part of our Private Client Services business.The transfer of this business was accounted for at historical cost in a mannersimilar to pooling-of-interest accounting because CSAM and we were under thecommon control of CSFBI at the time of transfer. Accordingly, we have restatedour financial information for all periods presented to reflect the results ofoperations, financial condition, cash flows and changes in stockholders’ equityof the CSAM high-net-worth business as if we had acquired it on November 3,2000, the date that we were acquired by CSFBI. The transferred assets of thisbusiness consist principally of goodwill and intangible assets relatingprimarily to CSAM’s acquisition of Warburg Pincus Asset Management in 1999. In December 2003,CSAM wrote down the value of its high-net-worth intangible assets, resulting ina pre-tax loss of $200 million and an after-tax loss of $130 million, and thisloss is reflected in our restated audited consolidated financial statements.

**RESULTS OF OPERATIONS**

Thefollowing table sets forth a summary of our financial results for the three andsix months ended June 30, 2004 and 2003. On May 1, 2003, we sold thePershing unit, or Pershing, to The Bank of New York Company, Inc. Theresults of operations for Pershing, including the gain on the sale, arepresented as discontinued operations in the condensed consolidated statementsof income and in the following table.
| ** **                                                                                                            | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **June 30,**                             | ** ** | **June 30,**                           | ** ** |
| ** **                                                                                                            | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                            | ** ** | **(In millions)**                        | ** ** |
| Total net  revenues                                                                                                   |       | $                                             | 1,967      |                                        | $          | 1,446 |   | $ | 3,547 |   | $ | 2,647 |   |
| Total expenses                                                                                                        |       | 1,162                                         |       | 1,290                                       |       | 2,415 |   | 2,404 |   |
| Income from  continuing operations before provision for income taxes, minority interests  and discontinued operations |       | 805                                           |       | 156                                         |       | 1,132 |   | 243 |   |
| Provision for  income taxes                                                                                           |       | 148                                           |       | 30                                          |       | 227 |   | 60 |   |
| Minority  interests                                                                                                   |       | 365                                           |       | —                                      |       | 446 |   | — |   |
| Income from  continuing operations                                                                                    |       | 292                                           |       | 126                                         |       | 459 |   | 183 |   |
| Income from  discontinued operations, net of income tax provision                                                     |       | —                                        |       | 852                                         |       | — |   | 876 |   |
| Net income                                                                                                            |       | $                                             | 292        |                                        | $          | 978 |   | $ | 459 |   | $ | 1,059 |   |

 

Substantially all of our inventory is marked to marketdaily and, therefore, the value of such inventory and our net revenues aresubject to fluctuations based on market movements. In addition, net revenuesderived from our less liquid assets may fluctuate significantly depending onthe revaluation or sale of these investments in any given period. We alsoregularly enter into large transactions as part of our proprietary and othertrading businesses, and the number and size of such transactions may affect ourresults of operations in a given period.

Interest income and expense is accrued at the statedcoupon rate for coupon-bearing financial instruments, and for non-coupon-bearingfinancial instruments, interest income is recognized by accreting the discountover the life of the instrument. For coupon-bearing financial instrumentspurchased at a discount or premium, the difference between interest income andexpense accrued at the stated coupon rate and interest income and expensedetermined on an effective yield basis is included in principaltransactions-net in the condensed consolidated statements of income.

We use interest rate swaps to hedge the interest rateexposure associated with certain resale and repurchase agreements. Theseinterest rate swaps are carried at fair value while the resale and repurchase 

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agreements are carried atcontract amounts, with interest income or expense accruing over the term of theagreement. As a result, increases and decreases in the value of the interestrate swaps are not offset by decreases and increases in the value of the resaleand repurchase agreements until the securities are repurchased or sold. Therefore,our net revenues are subject to volatility from period to period due to timing.

Our businesses arematerially affected by conditions in the financial markets and economicconditions generally, including geopolitical events. Unpredictable or adversemarket and economic conditions have adversely affected and may in the futureadversely affect our results of operations. See “Business—Certain Factors That May AffectOur Results of Operations” in Part I, Item 1 of our Annual Report on Form 10-Kfor the year ended December 31, 2003.

**Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003**

The Company recorded net income of $292 million forthe three months ended June 30, 2004 compared to net income of $978million for the three months ended June 30, 2003. The decrease reflectsthe after-tax gain of $852 million from the sale of Pershing during thesecond quarter of 2003. The Company recorded income from continuing operationsof $292 million for the three months ended June 30, 2004 compared to $126million for the three months ended June 30, 2003 reflecting higher netrevenues and lower expenses.

Total net revenues increased $521 million, or36%, to $2.0 billion for the three months ended June 30, 2004, asprincipal transactions and net interest revenues were higher compared to thethree months ended June 30, 2003, partially offset by decreases ininvestment banking and advisory, commissions and other revenues. Principaltransactions were higher primarily due to significant gains from certainprivate equity investments, and the consolidation of certain private equityfunds in 2004, which increased net revenues by $365 million. Net income wasunaffected by the consolidation of such private equity funds as offsettingminority interests were recorded in the condensed consolidated statements ofincome. Investment banking and advisory fees decreased primarily due to lowercommercial mortgage securitization volume. Commissions were flat as increasesin fixed income commissions were offset by decreases in equity commissions. Netinterest income continued to benefit from decreased financing costs, reflectingthe low interest rates in the period.

Total expenses decreased$128 million, or 10%, to $1.2 billion for the three months ended June 30,2004 compared to the three months ended June 30, 2003. The decrease was principallydue to lower merger-related costs, other operating expenses and compensationand benefits expenses. See “—Expenses.”

**Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2003**

The Company recorded net income of $459 million for thesix months ended June 30, 2004 compared to net income of $1.1 billion forthe six months ended June 30, 2003. The decrease reflects the after-taxgain of $852 million from the sale of Pershing during the second quarterof 2003. The Company recorded income from continuing operations of $459 millionfor the six months ended June 30, 2004 compared to $183 million forthe six months ended June 30, 2003, reflecting higher net revenues andessentially flat expenses.

Total net revenues increased $900 million, or34%, to $3.5 billion for the six months ended June 30, 2004 comparedto the six months ended June 30, 2003, primarily due to a significantincrease in principal transactions but also reflecting higher investmentbanking and advisory, commissions and net interest revenues. The increase inprincipal transactions revenue was primarily due to significant gains fromcertain private equity investments and the consolidation of certain privateequity funds in 2004, which increased net revenues by $446 million. Net incomewas unaffected by the consolidation of such private equity funds 

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as offsetting minorityinterests were recorded in the condensed consolidated statements of income. Investmentbanking and advisory fees increased modestly due to increased equity underwritingactivity. Commissionsincreased primarily as a result of increased trading activity in equity cashproducts and fixed income listed derivatives. Net interest income benefitedfrom decreased financing costs, reflecting the low interest rates in theperiod.

Total expenses increased$11 million to $2.4 billion for the six months ended June 30, 2004compared to the six months ended June 30, 2003, as increases in employeecompensation and benefits expenses reflecting increased revenues were offset bylower merger-related costs and other operating expenses. See “—Expenses.”

**Resultsby Segment**

As of January 1, 2004, we transferred the privateequity and private fund businesses from the Institutional Securities segment tothe Financial Services segment, which has been renamed Wealth & AssetManagement. In addition, we changed the presentation of the InstitutionalSecurities and Wealth & Asset Management segment results. Theoperations of the Institutional Securities segment are presented in twodivisions: Investment Banking, which includes debt and equity underwriting andfinancial advisory services; and Trading, which includes our debt and equitysales and trading and other related activities. The Institutional Securitiessegment also includes the results from legacy private equity and distressedassets. The operations of the Wealth & Asset Management segment arepresented in three divisions: Private Client Services, Private Equity andPrivate Fund. Prior period segment numbers have been changed to conform to thenew segment reporting structure. These segment changes did not affect ourpreviously reported consolidated results of operations.

Our segments are managed based on the types ofproducts and services offered and their related client bases. We evaluate theperformance of our segments based primarily on income from continuingoperations before provision for income taxes and discontinued operations butexcluding minority interests.

Revenues are evaluated in the aggregate, including anassessment of trading gains and losses and the related interest income andexpense attributable to financing and hedging positions. Therefore, individualrevenue categories may not be indicative of the performance of the segmentresults.

The cost structure of eachof our segments is broadly similar to that of the Company as a whole, and,consequently, the discussion of expenses is presented on a company-wide basis.The Company allocates to its segments a pro rata share of certain centrallymanaged costs, such as leased facilities and equipment costs, employee benefitsand certain general overhead expenses based upon specified amounts, usagecriteria or agreed rates, and allocates interest expense based upon theparticular type of asset. The allocation of some costs, such as incentivebonuses, has been estimated. The timing and magnitude of changes in ourincentive bonus accrual can have a significant effect on our operating resultsfor a given period.

***Institutional Securities***

The Institutional Securities segment consists of the Tradingand Investment Banking divisions and the results from legacy private equity anddistressed assets. The Trading division consists of sales and trading in equitysecurities, equity-related derivatives, fixed income financialinstruments and fixed income-related derivatives, and other relatedactivities. The Investment Banking division raises and invests capital andprovides financial advice to companies throughout the United States and abroad.Through the Investment Banking division, we manage and underwrite offerings ofsecurities, arrange private placements and provide financial advisory and otherservices.

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Thefollowing table sets forth certain financial information of the Company’sInstitutional Securities segment:
| ** **                          | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **June 30,**                             | ** ** | **June 30,**                           | ** ** |
| ** **                          | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(In millions)**                        | ** ** |
| Revenues:                           |       |                                          |       |                                        |       |   |   |   |   |
| Principal transactions-net          |       | $                                             | 52         |                                        | $          | (89 | ) | $ | (7 | ) | $ | (170 | ) |
| Investment banking and advisory     |       | 365                                           |       | 478                                         |       | 818 |   | 831 |   |
| Commissions                         |       | 251                                           |       | 254                                         |       | 540 |   | 485 |   |
| Interest and dividends, net         |       | 593                                           |       | 594                                         |       | 1,230 |   | 1,129 |   |
| Other                               |       | 6                                             |       | 25                                          |       | 26 |   | 46 |   |
| Total net revenues                  |       | 1,267                                         |       | 1,262                                       |       | 2,607 |   | 2,321 |   |
| Total expenses                      |       | 1,024                                         |       | 1,141                                       |       | 2,119 |   | 2,105 |   |
| Income(1)                           |       | 243                                           |       | 121                                         |       | 488 |   | 216 |   |
| Minority interests(2)               |       | 35                                            |       | —                                      |       | 62 |   | — |   |
| Income after  minority interests(3) |       | $                                             | 208        |                                        | $          | 121 |   | $ | 426 |   | $ | 216 |   |

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(1)          Income from continuingoperations before provision for income taxes, minority interests anddiscontinued operations.

(2)          Related to the Company’sconsolidation of certain private equity funds.

(3)          Incomefrom continuing operations before provision for income taxes and discontinuedoperations.

***Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003***

The InstitutionalSecurities segment recorded income after minority interests of$208 million for the three months ended June 30, 2004 compared to$121 million for the three months ended June 30, 2003. Total netrevenues increased $5 million to $1.3 billion for the three monthsended June 30, 2004, reflecting increases in principal transactions,partially offset by decreases in investment banking and advisory fees,commissions and net interest and other revenues. Excluding $35 million ofrevenues from the consolidation of certain legacy private equity funds, totalnet revenues decreased $30 million, or 2%.

***Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2003***

The InstitutionalSecurities segment recorded income after minority interests of$426 million for the six months ended June 30, 2004 compared to$216 million for the six months ended June 30, 2003. Total netrevenues increased $286 million, or 12%, to $2.6 billion for the sixmonths ended June 30, 2004, reflecting increases in principaltransactions, commissions and net interest partially offset by decreases ininvestment banking and advisory fees and other revenues. Excluding $62 millionof revenues from the consolidation of certain legacy private equity funds,total net revenues increased $224 million, or 10%.

***Trading***

In evaluating the performance of its Tradingactivities, the Company views as net trading revenues, principal transactions,commissions and net interest in the aggregate. Changes in the composition oftrading inventories and hedge positions can cause principal transactions andnet interest income to fluctuate.

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Thefollowing table sets forth net trading revenues of the Institutional Securitiessegment:
| ** **        | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **        | ** ** | **June 30,**                             | ** ** | **June 30,**                           | ** ** |
| ** **        | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **        | ** ** | **(In millions)**                        | ** ** |
| Fixed Income      |       | $                                             | 588        |                                        | $          | 451 |   | $ | 1,054 |   | $ | 935 |   |
| Equity            |       | 191                                           |       | 331                                         |       | 538 |   | 555 |   |
| Total net Trading |       | $                                             | 779        |                                        | $          | 782 |   | $ | 1,592 |   | $ | 1,490 |   |

 

***Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003***

Total net trading revenuesfor the Institutional Securities segment decreased $3 million to$779 million for the three months ended June 30, 2004 compared to thethree months ended June 30, 2003, as decreases in equity net tradingrevenues were nearly offset by an increase in fixed income net trading revenues.The decrease in equitynet trading revenues was primarily due to losses from convertible securities,reflecting lower trading volumes as a result of higher interest rates and widerspreads, and lower revenues from index arbitrage and proprietary equityderivatives. The decrease was partially offset by improved results from ouradvanced execution services, a trade management system that allows investmentmanagers, hedge funds and broker-dealers to execute trades using automatedtrading strategies. The increase in fixed income net trading revenueswas due primarily to gains on derivatives that hedged certain fixed incomefinancial instruments and resale and repurchase agreements and higher revenuesfrom asset-backed securities. The increase was partially offset by decreases inhigh-yield secondary trading due to concerns about rising interest rates.

***Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2003***

Total net trading revenuesfor the Institutional Securities segment increased $102 million, or 7%, to$1.6 billion for the six months ended June 30, 2004 compared to thesix months ended June 30, 2003, as increased fixed income net tradingrevenues were partially offset by a decrease in equity net trading revenues. The increase in fixed income nettrading revenues was due primarily to gains on derivatives that hedged certainfixed income financial instruments and resale and repurchase agreements andhigher revenues from asset-backed securities and commercial mortgages. Theincrease in fixed income net trading revenues was partially offset by decreasesin high-yield secondary trading due to concerns about rising interest rates. Thedecrease in equity net trading revenueswas primarily due to lower revenues from convertible securities, reflectinglower trading volumes as a result of higher interest rates and wider spreads,and lower revenues from structured products. The decrease was partially offsetby improved results from risk arbitrage and our advanced execution services.

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***Investment Banking***

Thefollowing table sets forth the Investment Banking revenues for theInstitutional Securities segment:
| ** **                | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **June 30,**                             | ** ** | **June 30,**                           | ** ** |
| ** **                | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(In millions)**                        | ** ** |
| Debt underwriting         |       | $                                             | 123        |                                        | $          | 257 |   | $ | 351 |   | $ | 435 |   |
| Equity underwriting       |       | 98                                            |       | 100                                         |       | 237 |   | 163 |   |
| Total underwriting        |       | 221                                           |       | 357                                         |       | 588 |   | 598 |   |
| Advisory and  other fees  |       | 144                                           |       | 121                                         |       | 230 |   | 233 |   |
| Total Investment  Banking |       | $                                             | 365        |                                        | $          | 478 |   | $ | 818 |   | $ | 831 |   |

 

***Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003***

Investment Bankingrevenues decreased 24% to $365 million, reflecting a decline in debtunderwriting partially offset by an increase in advisory and other fees. For the three months ended June 30, 2004,debt underwriting revenues decreased 52% compared to the three months ended June 30,2003 to $123 million as commercial mortgage and asset-backedsecuritization and high-yield new issuance revenues were significantly lower. Equityunderwriting revenues decreased 2% to $98 million, despite increases ininitial public offering and common stock transaction volumes, reflecting asharp decline in convertible securities issuances. Advisory and other fees increased 19% to $144 million,reflecting industry-wide increases in mergers and acquisitions and otheradvisory fees offset by lower fees from structured products.

***Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2003***

Investment Bankingrevenues decreased 2% to $818 million, reflecting declines in debtunderwriting offset by an increase in equity underwriting. Advisory and otherfees were flat. For the six months ended June 30, 2004, debt underwritingrevenues decreased 19% compared to the six months ended June 30, 2003 to$351 million as commercial mortgage securitization and high-yield newissuance revenues were significantly lower. The decreases were partially offsetby increases in residential mortgage securitizations. Equity underwritingrevenues increased 45% to $237 million as our initial public offering andcommon stock transaction volumes increased compared to the weak first half of2003 despite a sharp decline in convertible securities issuances. Advisory andother fees decreased 1% to $230 million.

***Other Institutional Securities***

***Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003***

Totalrevenues from Other Institutional Securities increased $121 million to$123 million for the three months ended June 30, 2004 compared to thethree months ended June 30, 2003 reflecting gains from legacy distressedassets, increases in legacy private equity revenues of $35 million as aresult of our consolidation, primarily under FIN 46R, of certain private equityfunds and revenue that offsets certain allocations of interest expense chargedto our business divisions. Net income was unaffected by the consolidation ofsuch private equity funds as offsetting minority interests were recorded in thecondensed consolidated statements of income. See Note 6 of the condensedconsolidated financial statements in Part I, Item 1 for more information.

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***Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2003***

Totalrevenues from Other Institutional Securities which were nominal for thesix months ended June 30, 2003, increased to $197 million for the sixmonths ended June 30, 2004 reflecting gains from legacy distressed assets,increases in legacy private equity revenues of $62 million as a result ofour consolidation, primarily under FIN 46R, of certain private equity funds andrevenue that offsets certain allocations of interest expense charged to ourbusiness divisions. Net income was unaffected by the consolidation of suchprivate equity funds as offsetting minority interests were recorded in thecondensed consolidated statements of income. See Note 6 of the condensedconsolidated financial statements in Part I, Item 1 for more information.

***Wealth & Asset Management***

The Wealth & Asset Management segmentconsists of the Private Client Services, Private Equity and Private Funddivisions. The Private Client Services division is a financial advisorybusiness serving high-net-worth individuals and corporate investors with a widerange of CSFB and third-party investment management products and services. The Private Equity division makes privately negotiatedinvestments and acts as an investment advisor for private equity funds. ThePrivate Fund division raises private capital, primarily from institutionalinvestors, for direct investment by venture capital, management buyout andother investment firms in a variety of fund types.

Thefollowing table sets forth certain financial information of the Company’sWealth & Asset Management segment: 
| ** **                          | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **June 30,**                             | ** ** | **June 30,**                           | ** ** |
| ** **                          | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(In millions)**                        | ** ** |
| Revenues:                           |       |                                          |       |                                        |       |   |   |   |   |
| Principal transactions-net          |       | $                                             | 560        |                                        | $          | 83 |   | $ | 681 |   | $ | 122 |   |
| Investment banking and advisory     |       | 27                                            |       | 8                                           |       | 46 |   | 22 |   |
| Asset Management and Other Fees     |       | 79                                            |       | 81                                          |       | 167 |   | 165 |   |
| Interest and dividends, net         |       | 31                                            |       | 10                                          |       | 41 |   | 14 |   |
| Other                               |       | 3                                             |       | 2                                           |       | 5 |   | 3 |   |
| Total net revenues                  |       | 700                                           |       | 184                                         |       | 940 |   | 326 |   |
| Total expenses                      |       | 138                                           |       | 149                                         |       | 296 |   | 299 |   |
| Income(1)                           |       | 562                                           |       | 35                                          |       | 644 |   | 27 |   |
| Minority interests(2)               |       | 330                                           |       | —                                      |       | 384 |   | — |   |
| Income after  minority interests(3) |       | $                                             | 232        |                                        | $          | 35 |   | $ | 260 |   | $ | 27 |   |

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(1)          Income from continuingoperations before provision for income taxes, minority interests anddiscontinued operations.

(2)          Related to the Company’s consolidation ofcertain private equity funds.

(3)          Income from continuingoperations before provision for income taxes and discontinued operations.

***Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003***

The Wealth &Asset Management segment recorded income after minority interests of$232 million for the three months ended June 30, 2004 compared to $35million for the three months ended June 30, 2003. Total net revenuesincreased $516 million to $700 million for the three months ended June 30,2004, reflecting increases in net investment gains from certain private equityinvestments and $330 million of 

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revenuesas a result of our consolidation primarily under FIN 46R of certain privateequity funds. Net income was unaffected by the consolidation of such privateequity funds as offsetting minority interests were recorded in the condensedconsolidated statements of income. Excluding the effect of the consolidation ofcertain private equity funds, total net revenues increased $186 million, or101%. See Note 6 of the condensed consolidated financial statements in Part I,Item 1 for more information.

***Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2003***

The Wealth &Asset Management segment recorded income after minority interests of$260 million for the six months ended June 30, 2004 compared to $27million for the six months ended June 30, 2003. Total net revenuesincreased $614 million to $940 million for the six months ended June 30,2004, reflecting increases in net investment gains from certain private equityinvestments and $384 million of revenues as a result of our consolidationprimarily under FIN 46R of certain private equity funds. Excluding the effectof the consolidation of certain private equity funds, total net revenuesincreased $230 million, or 71%. Net income was unaffected by the consolidationof such private equity funds as offsetting minority interests were recorded inthe condensed consolidated statements of income. See Note 6 of the condensedconsolidated financial statements in Part I, Item 1 for more information.

***Wealth & Asset Management Divisions***

Thefollowing table sets forth the Private Equity, Private Client Services andPrivate Fund divisions’ revenues for the Wealth & Asset Managementsegment:
| ** **                               | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **June 30,**                             | ** ** | **June 30,**                           | ** ** |
| ** **                               | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(In millions)**                        | ** ** |
| Private Equity                           |       | $                                             | 623        |                                        | $          | 121 |   | $ | 787 |   | $ | 196 |   |
| Private Client  Services                 |       | 54                                            |       | 56                                          |       | 115 |   | 110 |   |
| Private Fund                             |       | 22                                            |       | 5                                           |       | 37 |   | 16 |   |
| Other                                    |       | 1                                             |       | 2                                           |       | 1 |   | 4 |   |
| Total Wealth & Asset Management |       | $                                             | 700        |                                        | $          | 184 |   | $ | 940 |   | $ | 326 |   |

 

***Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003***

Net revenues for the private equity division increased$502 million to $623 million, primarily reflecting increases in netinvestment gains. The increase in net investment gains reflects gains from thesale of certain private equity investments and $330 million of revenues as aresult of our consolidation, primarily under FIN 46R, of certain private equityfunds. Excluding the effect of the consolidation of certain private equityfunds, total net revenues increased $172 million, or 142%. Net income wasunaffected by the consolidation of such private equity funds as offsettingminority interests were recorded in the condensed consolidated statements ofincome. See Note 6 of the condensed consolidated financial statements in Part I,Item 1 for more information.

Net revenues for the private client services divisiondecreased 4% to $54 million, primarily reflecting lower interest income asa result of reduced customer margin debit balances partially offset byincreased equity underwriting revenues and higher revenues from sales ofmunicipal bonds.

Net revenues for theprivate fund division increased $17 million to $22 million primarily reflectingincreased placement fees.

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***Six Months Ended June 30, 2004 Compared to SixMonths Ended June 30, 2003***

Net revenues for the private equity division increased$591 million to $787 million, primarily reflecting increases in netinvestment gains. The increase in net investment gains reflects gains from thesale of certain private equity investments and $384 million of revenues as aresult of our consolidation, primarily under FIN 46R, of certain private equityfunds. Excluding the effect of the consolidation of certain private equityfunds, total net revenues increased $207 million, or 106%. Net income wasunaffected by the consolidation of such private equity funds as offsettingminority interests were recorded in the condensed consolidated statements ofincome. See Note 6 of the condensed consolidated financial statements in Part I,Item 1 for more information.

Net revenues for the private client services divisionincreased 5% to $115 million, primarily reflecting increases in equityunderwriting revenues, an increase in asset management fees, resulting fromincreased individual investor participation in the equity markets and higherfee-based advisory revenue as a result of market appreciation. The increase waspartially offset by lower interest income as a result of reduced customermargin debit balances.

Net revenues for theprivate fund division increased $21 million to $37 million primarily reflectingincreased placement fees.

**Expenses**

The normal operating cost structure of each of oursegments is broadly similar to that of the Company as a whole and, as a result,the discussion of expenses is presented on a company-wide basis.

Thefollowing table sets forth employee compensation and benefits expenses, otherexpenses and total expenses of the Company:
| ** **                          | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **June 30,**                             | ** ** | **June 30,**                           | ** ** |
| ** **                          | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(In millions)**                        | ** ** |
| Employee  compensation and benefits |       | $                                             | 825        |                                        | $          | 840 |   | $ | 1,788 |   | $ | 1,553 |   |
| Other expenses                      |       | 337                                           |       | 450                                         |       | 627 |   | 851 |   |
| Total expenses                      |       | 1,162                                         |       | 1,290                                       |       | 2,415 |   | 2,404 |   |
|                                     |            |                                               |            |                                             |            |  |  |  |  |  |  |  |  |

 

***Three Months Ended June 30, 2004 Compared toThree Months Ended June 30, 2003***

Total expenses decreased $128 million, or 10%, to $1.2billion for the three months ended June 30, 2004 compared to the threemonths ended June 30, 2003. The decrease was principally due to lower merger-relatedcosts, other operating expenses and compensation and benefits expenses. The decrease in compensation and benefitsexpenses was due to decreased accruals for certain deferred compensation plansoffset in part by an increase in severance expenses and increased base salaryexpenses.

Other expenses consistprincipally of occupancy and equipment rental; brokerage, clearing and exchangefees; communications; professional fees; merger-related costs of retentionawards; and other operating expenses, all of which decreased. Other expensesdecreased 25% for the three months ended June 30, 2004 compared to thethree months ended June 30, 2003, primarily as a result of decreasedmerger related costs, reflecting the completion of the retention awards, anddecreases in other operating expenses reflecting lower litigation accruals andhigher affiliate service fees that are treated as a reduction in otheroperating expenses.

*** ***

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***Six Months Ended June 30,2004 Compared to Six Months Ended June 30, 2003***

Total expenses of$2.4 billion were essentially flat for the six months ended June 30,2004 compared to the six months ended June 30, 2003 as increases inemployee compensation and benefits expenses were offset by lower merger-relatedcosts and other operating expenses. The increase in employee compensation andbenefits was primarily due to higher incentive compensation reflectingincreased net revenues, an increase in severance expenses and increased basesalary expenses. The increase was partially offset by decreased accruals forcertain deferred compensation plans.

Other expenses consistprincipally of occupancy and equipment rental; brokerage, clearing and exchangefees; communications; professional fees; merger-related costs of retentionawards; and other operating expenses. Except for brokerage, clearing andexchange fees, which increased in line with increased trading revenues, allother expenses decreased for the six months ended June 30, 2004. Otherexpenses decreased 26% for the six months ended June 30, 2004 compared tothe six months ended June 30, 2003, primarily as a result of decreasedmerger related costs, reflecting the completion of the retention awards, anddecreases in other operating expenses reflecting lower litigation accruals andhigher affiliate service fees that are treated as a reduction in otheroperating expenses.

**Provision for Taxes**

The provision forincome taxes from continuing operations for the six months ended June 30,2004 and 2003 was $227 million and $60 million, respectively.Excluded from the provision for income taxes from continuing operations for thesix months ended June 30, 2003 was a provision of $485 million fromdiscontinued operations.

The effective tax rate forcontinuing operations changed from a provision of 24.5% for the six monthsended June 30, 2003 to a provision of 20.0% for the six months ended June 30,2004. The lower effective tax rate was due to revenues from certain privateequity funds consolidated primarily under FIN 46R. See Notes 5 and 6 of thecondensed consolidated financial statements in Part I, Item 1 for moreinformation.

**LIQUIDITY AND CAPITAL RESOURCES**

**Liquidity Management Oversight**

We believe thatmaintaining access to liquidity is fundamental for firms operating in thefinancial services industry. We have therefore established a comprehensiveprocess for the management and oversight of our capital, liquidity and fundingstrategies. CSFB’s Capital Allocation and Risk Management Committee, or CARMC,has primary oversight responsibility for these functional disciplines. CARMCperiodically reviews and approves our liquidity management policies and targetsand reviews our liquidity position and other key risk indicators. The CorporateTreasury department is responsible for the management of capital, liquidity,long-term funding and a portion of the Company’s short-term funding, as well asrelationships with creditor banks and investors. It also maintains regularcontact with rating agencies and regulators on these and other issues. See “LiquidityRisk” in “Business—Certain Factors That May Affect Our Results ofOperations” in our Annual Report on Form 10-K for the year ended December 31,2003.

**BalanceSheet**

Significant portions of our assets are highly liquid,with the majority consisting of securities inventories and collateralizedreceivables, which fluctuate depending on the levels of proprietary trading andcustomer business. Collateralized receivables consist primarily of securitiespurchased under agreements to resell and securities borrowed, both of which areprimarily secured by U.S. government and agency securities and marketablecorporate debt and equity securities. In addition, we have significantreceivables from 

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customers, brokers,dealers and others, which turn over frequently. To meet client needs as asecurities dealer, we carry significant levels of trading inventories.

In addition to these liquid assets, we also maintainpositions in less liquid assets, such as certain mortgage whole loans,distressed securities, high-yield debt securities, asset-backedsecurities and private equity investments. These assets may be relativelyilliquid at times, especially during periods of market stress. We typicallyfund a significant portion of less liquid assets, such as private equityinvestments, with long-term borrowings and stockholders’ equity. Mortgage wholeloans, distressed securities, high-yield debt and asset-backed securitiesare generally financed with a combination of short-term unsecured financing orrepurchase agreements, long-term borrowings and stockholders’ equity.

Because of changes relating to customer needs,economic and market conditions and proprietary trading and other strategies,our total assets or the individual components of total assets may varysignificantly from period to period. As of June 30, 2004 and December 31,2003, our total assets were $279.2 billion and $241.6 billion,respectively.

Included below is adiscussion of our long-term contractual obligations, off-balance sheetarrangements and less liquid assets.

**Funding Sources and Strategy**

The majority of our assets are funded bycollateralized short-term borrowings, which include securities sold underagreements to repurchase and securities loaned. Other significant fundingsources include: commercial paper; short-term borrowings from affiliates;payables to customers, brokers, dealers and others; long-term borrowings; andstockholders’ equity. Short-term funding is generally obtained at rates relatedto the federal funds rate, LIBOR or other money market indices, while long-termfunding is generally obtained at fixed and floating rates related to U.S.Treasury securities or LIBOR, depending upon prevailing market conditions. Wecontinually aim to broaden our funding base by geography, investor and fundinginstrument.

The majority of ourunsecured funding originates largely from two sources: we borrow fromaffiliates (principally Credit Suisse First Boston, a Swiss bank subsidiary ofCSG and an indirect parent of the Company) and we issue debt securitiesdirectly to the market. We lend funds as needed to our operating subsidiariesand affiliates on both a senior and subordinated basis, the latter typically tomeet capital requirements of regulated subsidiaries. We generally try to ensurethat loans to our operating subsidiaries and affiliates have maturities equalto or shorter than the maturities of our market borrowings.

**Liquidity Planning and Measurement**

We maintain a large secondary source of liquidity,principally through our broker-dealers and various other operatingsubsidiaries. We have historically been able to access significant liquiditythrough the secured funding markets (securities sold under agreements torepurchase, securities loaned and other collateralized financing arrangements),even in periods of market stress. We continually monitor overall liquidity bytracking the extent to which unencumbered marketable assets and alternativeunsecured funding sources exceed both contractual obligations and anticipatedcontingent commitments.

The principal measure weuse to monitor our liquidity position is the “liquidity barometer,” whichestimates the time period over which the adjusted market value of unencumberedassets (including cash) exceeds the aggregate value of our maturing unsecuredliabilities plus anticipated contingent commitments. The adjusted market valueof unencumbered assets includes a reduction from market value, or “haircut,”reflecting the amount that could be realized by pledging an asset as collateralto a third-party lender in a secured funding transaction. Contingentcommitments include letters of credit, guarantees, commitments to invest inprivate equity funds and collateralization requirements related to creditratings. 

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Ourobjective, as mandated by CARMC, is to ensure that the liquidity barometerequals or exceeds one year. We believe this will enable us to carry out ourbusiness plans during extended periods of market stress, while minimizing, tothe extent possible, disruptions to our business.

**Contractual Obligations**

Thefollowing table sets forth future cash payments on our contractual obligationspursuant to long-term borrowings and operating leases as of June 30, 2004:
| ** **                     | ** ** | **Contractual Obligations Expiration Per Period** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Less than  1 year**                                  | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **Over  5 years** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | **(In millions)**                                           | ** ** |
| Long-term  borrowings          |       |                                                             | $          | 3,589 |   |   | $ | 7,209 |   | $ | 6,147 |   | $ | 9,257 |   | $ | 26,202 |   |
| Operating leases               |       |                                                             | 83         |   |   | 302 |   | 271 |   | 1,198 |   | 1,854 |   |
| Total contractual  obligations |       |                                                             | $          | 3,672 |   |   | $ | 7,511 |   | $ | 6,418 |   | $ | 10,455 |   | $ | 28,056 |   |

 

Our long-term borrowings are unsecured. As of June 30,2004, the weighted average maturity of our long-term borrowings wasapproximately 5.3 years. Our lease obligations are primarily for our principaloffices in New York City and other locations. The operating lease obligationsin the table above include $14 million in contractual obligations relatedto certain information technology, equipment leases and software licenses andexclude $327 million in sublease revenue. We had no capital lease orpurchase obligations as of June 30, 2004.

For information on these and other materialcommitments, see Notes 7, 8, 13 and 14 of the condensed consolidated financialstatements in Part I, Item 1. For information on commitments under ourpension arrangements, see Note 12 of the condensed consolidated financialstatements in Part I, Item 1.

Thefollowing table sets forth our commercial paper and other short-term unsecuredborrowings:
| ** **                | ** ** | **As of June 30,  2004** | ** ** | **As of December 31,  2003** | ** ** |
|---------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **(In millions)**                  | ** ** |
| Bank loans                |       |                                    | $          | 518                                         |       |   |   | $ | 450 |   |   |
| Commercial paper          |       |                                    | 1,181      |                                        |       |   | 1,052 |   |   |
| Loans from  affiliates(1) |       |                                    | 21,524     |                                        |       |   | 14,482 |   |   |
| Total                     |       |                                    | $          | 23,223                                      |       |   |   | $ | 15,984 |   |   |

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(1)          Wehave significant financing transactions with Credit Suisse First Boston andcertain of its subsidiaries and affiliates. See “—Related Party Transactions” and Note 4 of thecondensed consolidated financial statements in Part I, Item 1.

**CreditFacilities**

Our 364-day $1.0 billioncommitted unsecured revolving credit facility with a syndicate of banksavailable to us as borrower terminated on May 21, 2004. As part of ourliquidity management strategy, we have been moving from syndicated unsecuredfacilities to bilateral secured facilities, which offer a number of benefits. Asof June 30, 2004, Credit Suisse First Boston LLC, or CSFB LLC, maintainedthree 364-day committed secured revolving credit facilities totaling$700 million, with two facilities totaling $450 million maturing in August andNovember 2004 and one facility for $250 million maturing in February 2005.We expect to renew these facilities as they mature. These facilities requireCSFB LLC to pledge unencumbered marketable securities to secure any borrowings.Borrowings under each facility would bear interest at short-term rates relatedto either the federal funds rate or LIBOR and can be used for general corporatepurposes. The facilities contain customary covenants that we believe will notimpair our ability to 

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obtainfunding. As of June 30, 2004, no borrowings were outstanding under any ofthe facilities. In July 2004, CSFB LLC entered into a $500 millioncommitted secured revolving credit facility that matures in July 2005 onsubstantially the same terms as the other three facilities.

**Long-termFunding**

We issue long-term debt through U.S. and Euromarketmedium-term note programs, as well as syndicated and privately placed offeringsaround the world.

Under our currently effective $15.0 billion shelfregistration statement on file with the SEC, which was established in June 2004and allows us to issue from time to time senior and subordinated debtsecurities and warrants to purchase such securities, we had as of August 6,2004 $15.0 billion available for issuance.

For the six months ended June 30, 2004, in orderto extend the maturity profile of our debt, we issued $1.1 billion inmedium-term notes, $1.0 billion of 5.125% notes due 2014 and$1.4 billion of 4.7% notes due 2009 off of our then-existing $10.0 billionshelf registration statement.

During the six monthsended June 30, 2004, we repaid approximately $1.1 billion ofmedium-term notes and $31 million of structured notes.

**CreditRatings**

Our access to the debt capital markets and ourborrowing costs depend significantly on our credit ratings. These ratings areassigned by agencies, which may raise, lower or withdraw their ratings or placeus on “credit watch” with positive or negative implications at any time. Creditratings are important to us when competing in certain markets and when seekingto engage in longer-term transactions, including OTC derivatives. We believeagencies consider several factors in determining our credit ratings, includingearnings performance, business mix, market position, financial strategy, levelof capital, risk management policies and practices and management team, and ouraffiliation with CSFB and CSG, in addition to the broader outlook for thefinancial services industry.

A reduction in our credit ratings could limit ouraccess to capital markets, increase our borrowing costs, require us to provideadditional collateral in connection with OTC derivatives contracts, and allowcounterparties to terminate transactions under certain of our trading andcollateralized financing contracts. This, in turn, could reduce our liquidityand negatively impact our operating results and financial position. Ourliquidity planning takes into consideration those contingent events associatedwith a reduction in our credit ratings.

Because the majority of our OTC derivativesarrangements are with affiliates, the amount of collateral that we would havebeen required to post pursuant to such contracts in the event of a one-notchdowngrade of our senior long-term debt credit rating was not material as of June 30,2004.

As of August 6,2004, our ratings and ratings outlooks were as follows:
| ** **                       | ** ** | **Long-Term Debt** | ** ** | **Commercial  Paper** | ** ** | **Outlook** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------|------------|-------------|------------|
| Fitch Ratings                    |       |                    | AA-        |                  |       |        | F-1+       |   |   | Negative |   |
| Moody’s Investors Service   |       |                    | Aa3        |                  |       |        | P-1        |   |   | Stable |   |
| Standard &  Poor’s |       |                    | A+         |                  |       |        | A-1        |   |   | Stable |   |

 

**Capital Resources**

Certain of our businessesare capital intensive. In addition to normal operating requirements, capital isrequired to cover financing and regulatory capital charges on securitiesinventories, private equity investments and investments in fixed assets. Ouroverall capital needs are regularly reviewed to ensure that 

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ourcapital base can appropriately support the anticipated needs of our businessand the regulatory and other capital requirements of our subsidiaries. Based onthese analyses, we believe that our capitalization is adequate for currentoperating levels.

***Regulated Subsidiaries***

Our principal wholly owned subsidiary, CSFB LLC, is aregistered broker-dealer, registered futures commission merchant andmember firm of the New York Stock Exchange, or NYSE. As such, it is subject tothe NYSE’s net capital rule, which conforms to the uniform net capital rule pursuantto Rule 15c3-1 of the Securities Exchange Act of 1934, as amended,or the Exchange Act. Under the alternative method permitted by this rule, itsrequired net capital may not be less than two percent of aggregate debitbalances arising from customer transactions or four percent of segregatedfunds, whichever is greater. If a member firm’s capital is less than four percentof aggregate debit balances, the NYSE may require the firm to reduce itsbusiness. If a member firm’s capital is less than five percent of aggregatedebit balances, the NYSE may prevent the firm from expanding its business anddeclaring cash dividends. As of June 30, 2004, CSFB LLC’s net capital ofapproximately $2.6 billion was 42% of aggregate debit balances and inexcess of the minimum requirement by approximately $2.5 billion.

Our OTC derivatives dealer subsidiary, Credit SuisseFirst Boston Capital LLC, is also subject to the uniform net capital rule, butcalculates its net capital requirements based on value at risk pursuant toAppendix F of Rule 15c3-1. As of June 30, 2004, Credit SuisseFirst Boston Capital LLC’s net capital of $170 million, allowing formarket and credit risk exposure of $50 million and $51 million,respectively, was in excess of the minimum net capital requirement by$150 million. Credit Suisse First Boston Capital LLC operates pursuant tothe (k)(2)(ii) exemptive provisions of Rule 15c3-3 of theExchange Act, and, accordingly, all customer transactions are cleared throughan affiliated broker-dealer on a fully disclosed basis.

Certain of our othersubsidiaries are subject to capital adequacy requirements. As of June 30,2004, our subsidiaries complied with all applicable regulatory capital adequacyrequirements.

**CashFlows**

Our condensed consolidated statements of cash flowsclassify cash flows into three broad categories: cash flows from operatingactivities, investing activities and financing activities. These statementsshould be read in conjunction with “—Related Party Transactions”as well as Note 4 of the condensed consolidated financial statements in Part I,Item 1.

We present the condensed consolidated statements ofcash flows for the six months ended June 30, 2003 as if Pershing were partof our continuing operations and its assets and liabilities as of December 31,2002 were not presented as Assets held for sale and Liabilities held for salein the condensed consolidated statement of financial condition and its resultsof operations were not presented as discontinued operations in the condensedconsolidated statement of income.

Our cash flows are complexand frequently bear little relation to our net income and net assets,particularly because the Company is a wholly owned subsidiary of CSG, a globalfinancial services institution that may choose to allocate cash among itssubsidiaries for reasons independent of the Company’s activities. As a result,we believe that traditional cash flow analysis is not a particularly usefulmethod to evaluate our liquidity position as discussed above. Cash flowanalysis may, however, assist in highlighting certain macro trends andstrategic initiatives in our business.

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***For the Six Months Ended June 30, 2004***

Cash and cash equivalents increased $527 millionto $861 million as of June 30, 2004. Cash provided by operatingactivities was $2.0 billion. The change in cash provided by operatingactivities reflected a net increase in operating assets and operatingliabilities of $1.2 billion, which occurred in the normal course ofoperations as a result of changes in customer needs, market conditions andproprietary trading and other strategies.

Cash of $2.3 billion was used in investingactivities. Prior to the acquisition of Donaldson, Lufkin and Jenrette, Inc.,CSFBI issued its own debt to fund its operating, investment and financingneeds. The Company now provides most of this funding, resulting in increases inreceivables from affiliates of $2.2 billion.

Cash provided by financingactivities was $823 million. The changes are due to decreases in netcollateralized financing arrangements of $8.7 billion, increases of $7.2billion in short-term borrowings and increases of $3.5 billion inlong-term borrowings used primarily to fund normal operating activities,provide funding to affiliates as part of the Company’s investing activities andrepay $1.2 billion in long-term borrowings.

***For the Six Months Ended June 30, 2003***

Cash and cash equivalents decreased $38 millionto $442 million as of June 30, 2003. Cash provided by operatingactivities was $6.3 billion. The change in cash provided by operatingactivities reflected a net increase in operating assets and operating liabilitiesof $6.2 billion, which occurred in the normal course of operations as aresult of changes in customer needs, market conditions and proprietary tradingand other strategies.

Cash of $175 million was provided by investingactivities. The Company provides funding to CSFBI to fund its operating,investing and financing needs, resulting in increases in receivables fromaffiliates of $1.7 billion. The Company received $2.0 billion in cashas a result of the Pershing disposal.

Cash used in financingactivities was $6.5 billion. The changes are due to decreases in netcollateralized financing arrangements of $12.4 billion, partially offset byincreases of $5.2 billion in short-term borrowings and increases of$2.7 billion in long-term borrowings used primarily to fund normaloperating activities, provide funding to affiliates as part of the Company’sinvesting activities and repay $2.1 billion in long-term borrowings.

**OFF-BALANCE SHEET ARRANGEMENTS**

We enter into off-balance sheet arrangements in theordinary course of business. Off-balance sheet arrangements are transactions,agreements or other contractual arrangements with, or for the benefit of, anentity that is not consolidated with an issuer, and which include guaranteesand similar arrangements, retained or contingent interests in assetstransferred to an unconsolidated entity, and obligations and liabilities(including contingent obligations and liabilities) under material variableinterests in unconsolidated entities for the purpose of providing financing,liquidity, market risk or credit risk support.

We have not entered intoany derivatives contracts indexed or linked to the stock of CSG.

**Guarantees**

In the ordinary course of our business, we provideguarantees and indemnifications that contingently obligate us to make paymentsto the guaranteed or indemnified party based on changes in an asset, liabilityor equity security of the guaranteed or indemnified party. We may also becontingently obligated to make payments to a guaranteed party based on anotherentity’s failure to perform, or we may have an indirect 

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guarantee of theindebtedness of others. Guarantees we provide include customaryindemnifications to purchasers in conjunction with the sale of assets orbusinesses; to investors in private equity funds sponsored by the firmregarding potential obligations of employees to return amounts previously paidas carried interest; and to investors in our securities and other arrangementsto provide “gross up” payments if there is a withholding or deduction becauseof a tax assessment or other governmental charge. From time to time, we alsoguarantee the obligations of subsidiaries of CSG that are not our consolidatedsubsidiaries, and these guarantees are included in the scope of the disclosurerequirements of FIN No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” or FIN 45.

FIN 45 requires disclosureof our maximum potential payment obligations under certain guarantees to theextent that it is possible to estimate them and requires recognition of aliability for the fair value of guaranteed obligations for guarantees issued oramended after December 31, 2002. The recognition of these liabilities didnot have a material effect on our financial position or results of operations.For disclosure of our estimable maximum payment obligations under certainguarantees and related information, see Note 14 of the condensedconsolidated financial statements in Part I, Item 1.

**Retained or Contingent Interests in Assets Transferredto Unconsolidated Entities**

We originate and purchase commercial and residentialmortgages and sell these assets directly or through affiliates to specialpurpose entities that are, in most cases, qualified special purpose entities,or QSPEs. These QSPEs issue securities that are backed by the assetstransferred to the QSPEs and pay a return based on the returns on those assets.Investors in these mortgage-backed securities typically have recourse tothe assets in the QSPE. The investors and the QSPEs have no recourse to ourassets.

These QSPEs are sponsored by our subsidiaries. Ourprincipal broker-dealer subsidiary, CSFB LLC, underwrites and makesmarkets in these mortgage-backed securities. Under Statement of FinancialAccounting Standards, or SFAS, No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities, a replacementof FASB Statement No. 125,” or SFAS 140, a QSPE is not required to beconsolidated with the transferor. Our mortgage-backed securitizationactivities are generally structured to use QSPEs, and the assets andliabilities transferred to QSPEs are not included in our financial statements.

We may retain interests in these securitized assets ifCSFB LLC holds the assets in connection with its underwriting or market-makingactivities. Retained interests in securitized financial assets are included atfair value in the condensed consolidated statements of financial condition. Anychanges in the fair value of these retained interests are recognized in thecondensed consolidated statements of income. We engage in these securitizationactivities to meet the needs of clients as part of our fixed income activities,earn fees and sell financial assets. These securitization activities do notprovide a material source of our liquidity, capital resources or credit risk ormarket risk support. See Note 6 of the condensed consolidated financialstatements in Part I, Item 1, which includes quantitative information onour securitization activities and retained interests.

In connection with ourresidential mortgage business, we may from time to time arrange for the sale ofcertain qualifying mortgage loans or pools of mortgage loans, or the Loans, toan unaffiliated entity, or the Purchaser, pursuant to an agreement between usand the Purchaser, or the Agreement. In accordance with the Agreement, we maybe required to repurchase one or more Loans, including the related hedgepositions, from the Purchaser at its request in accordance with the terms ofthe Agreement. As of June 30, 2004, the Purchaser has the right to requestus to repurchase approximately $3.3 billion of Loans from the Purchaserpursuant to the terms of the Agreement.

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**Variable Interest Entities**

We are involved with various entities in the normalcourse of business that may be deemed to be variable interest entities, orVIEs, including VIEs that issue CDOs.

We purchase loans and other debt obligations from andon behalf of clients primarily for the purpose of securitization. The loans andother debt obligations are transferred by us directly, or indirectly throughaffiliates, to QSPEs or to VIEs that issue CDOs. CDOs are securities backed bythe assets transferred to the VIE and pay a return based on the returns on thoseassets. Investors typically have recourse to the assets in the CDO VIE. Theinvestors and the CDO VIE have no recourse to the Company’s assets. CSFB LLCstructures, underwrites and makes a market in these CDOs, and we may haveretained interests in these CDOs in connection with CSFB LLC’s underwriting andmarket-making activities. We engage in these CDO transactions to meet theneeds of clients, to earn fees and to sell financial assets. These CDOtransactions do not provide a material source of our liquidity, capitalresources or credit risk or market risk support.

FIN No. 46, “Consolidation of Variable InterestEntities,” or FIN 46, requires us to consolidate all VIEs for which we are theprimary beneficiary, defined as the entity that will absorb a majority ofexpected losses, receive a majority of the expected residual returns, or both. InDecember 2003, the FASB modified FIN 46, through the issuance of FIN 46R,to address various implementation issues that had arisen since the issuance ofFIN 46 and to provide companies the option to defer the adoption of FIN 46 forcertain VIEs to periods ending after March 15, 2004. As of December 31,2003, with the exception of certain private equity funds that were a subject ofthe deferral, we consolidated all VIEs under FIN 46 for which we are theprimary beneficiary, all of which were related to our CDO activities. We alsohave interests in CDO VIEs that are not required to be consolidated because weare not the primary beneficiary.

As of January 1,2004, the Company consolidated under FIN 46R certain private equity funds thatare managed by the Company. See Note 6 ofthe condensed consolidated financial statements in Part I, Item 1.

**OTHERCOMMITMENTS**

We have commitments undera variety of arrangements that are not recorded as liabilities in our condensedconsolidated statements of financial condition. These commitments are inaddition to guarantees and other arrangements discussed in “—Off-Balance Sheet Arrangements.”These commitments include standby letters of credit, standby resale agreementfacilities that commit us to enter into resale agreements with customers atmarket rates, commitments to invest in various partnerships that make privateequity and related investments in various portfolio companies and in otherprivate equity funds and commitments to enter into forward resale agreements.See Note 13 of the condensed consolidated financial statements in Part I,Item 1.

**RELATED PARTY TRANSACTIONS**

CSG, through CSFBI, owns all of our outstanding votingcommon stock. We are involved in significant financing and other transactions,and have significant related party balances, with Credit Suisse First Bostonand certain affiliates. We generally enter into these transactions in theordinary course of business and believe that these transactions are on marketterms that could be obtained from unrelated third parties. See “—Derivatives”and Notes 4 and 14 of the condensed consolidated financial statements in Part I,Item 1 for more information.

Certain of our directors,officers and employees and those of our affiliates and their subsidiariesmaintain margin accounts with CSFB LLC and other affiliated broker-dealersin the ordinary course of business. In addition, certain of such directors,officers and employees had investments or commitments to invest in variousprivate funds sponsored by us, pursuant to which we have made loans to suchdirectors, 

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officersand employees, to the extent permitted by law. CSFB LLC and other affiliatedbroker-dealers, from time to time and in the ordinary course of business,enter into, as principal, transactions involving the purchase or sale ofsecurities from or to such directors, officers and employees and members oftheir immediate families.

**LESSLIQUID ASSETS**

Certain of our assets, including private equity andother long-term investments, distressed securities, high-yield debt, mortgagewhole loans and other non-investment-grade debt, are not highly liquid ortrade in markets that have periods of volatility and illiquidity. The values ofmost of the more illiquid assets are reported at fair value, and thedetermination of fair value is based on management’s best estimate and dependson varying factors. See “—Critical Accounting Policies and Estimates—Fair Value”for further information on the determination of fair value of these moreilliquid assets.

**Private Equity Activities**

Our private equity andother long-term investment activities include direct investments andinvestments in partnerships that make private equity and relatedinvestments in various portfolio companies and funds. These investments areprimarily in unlisted or illiquid equity or equity-related securities andare carried at fair value based on a number of factors. As of June 30,2004 and December 31, 2003, we had investments in private equity andother long-term investments of $2.6 billion and $1.1 billion,respectively, and we had commitments to invest up to an additional$1.2 billion and $1.3 billion as of June 30, 2004 and December 31,2003, respectively. The increase in private equity and other long-term investmentsreflects our consolidation primarily under FIN 46R of certain private equityfunds. See “—CriticalAccounting Policies and Estimates—FairValue” and Notes 1, 6 and 8 of the condensed consolidated financialstatements in Part I, Item 1 for more information.

**High-Yield Debt, Mortgage Whole Loans and OtherNon-Investment-Grade Financial Instruments**

Weunderwrite, trade and hold high-yield debt, which includes distressed debt,mortgage whole loans, loan participations, legacy distressed financialinstruments, and other non-investment-grade financial instruments. Due tocredit considerations, liquidity of secondary trading markets and vulnerabilityto general economic conditions, these financial instruments and loans generallyinvolve greater risk than investment-grade financial instruments. We recordhigh-yield debt, residential mortgage whole loans, legacy distressed financialinstruments and other non-investment-grade financial instruments at fair value,with the exception of certain residential mortgage whole loans that are heldfor sale and are carried at the lower of cost or fair value. We record commercialmortgage whole loans held for sale and loan participations at the lower of costor fair value. Timing of the securitization of our mortgage whole loaninventory will affect the size of our positions at any given time. Thefollowing table sets forth our positions in these instruments as of June 30,2004 and December 31, 2003:
| ** **                               | ** ** | **As of June 30, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Assets**                                  | ** ** | **Liabilities**                                 | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **                               | ** ** | **(In millions)**                      | ** ** |
| High-yield and  distressed debt          |       | $                                           | 1,641      |                                            |       | $ | 672 |   |   | $ | 1,551 |   |   | $ | 675 |   |   |
| Mortgage whole  loans                    |       | 12,283                                      |       |                                            | —     |   |   | 9,101 |   |   | — |   |   |
| Loan  participations                     |       | 19                                          |       |                                            | —     |   |   | 70 |   |   | — |   |   |
| Legacy distressed  financial instruments |       | 192                                         |       |                                            | —     |   |   | 171 |   |   | — |   |   |
| Total                                    |       | $                                           | 14,135     |                                            |       | $ | 672 |   |   | $ | 10,893 |   |   | $ | 675 |   |   |

 

 

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**DERIVATIVES**

We enter into varioustransactions involving derivatives. We use derivatives contracts for bothtrading and hedging purposes and to provide products for our clients. Thesederivatives include options, forwards, futures and swaps. In general, derivativesare contractual agreements that derive their values from the performance ofunderlying assets, interest or currency exchange rates or a variety of indices.Most of our derivatives transactions are considered trading positions. SeeNote 11 of the condensed consolidated financial statements in Part I,Item 1 for more information.

**Sources and Maturities of OTC Derivatives**

Thefollowing table sets forth the distributions, by maturity, of our exposure withrespect to OTC derivatives as of June 30, 2004, after taking into accountthe effect of netting agreements. Fair values were determined on the basis ofpricing models and other valuation methods. See “—Critical Accounting Policies andEstimates—FairValue” and Notes 11 and 14 of the condensed consolidated financial statementsin Part I, Item 1 for more information.
| ** **             | ** ** | **Assets  Maturity Distribution as of June 30, 2004**      | ** ** |
|------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **Less than 1 year**                                                      | ** ** | **1-4 years** | ** ** | **4-5 years** | ** ** | **Over 5 years** | ** ** | **Total fair value** | ** ** |
| ** **             | ** ** | **(In millions)**                                                                   | ** ** |
| Interest rate  risk    |       |                                                                                     | $          | 1,153 |   |   |   | $ | 548 |   |   |   | $ | 171 |   |   |   | $ | 744 |   |   |   | $ | 2,616 |   |   |
| Equity price risk      |       |                                                                                     | 120        |   |   |   | 356 |   |   |   | 242 |   |   |   | 89 |   |   |   | 807 |   |   |
| Foreign exchange  risk |       |                                                                                     | 7          |   |   |   | 21 |   |   |   | 28 |   |   |   | — |   |   |   | 56 |   |   |
| Total                  |       |                                                                                     | $          | 1,280 |   |   |   | $ | 925 |   |   |   | $ | 441 |   |   |   | $ | 833 |   |   |   | $ | 3,479 |   |   |
| ** **             | ** ** | **Liabilities  Maturity Distribution as of June 30, 2004** | ** ** |
| ** **             | ** ** | **Less than 1 year**                                                      | ** ** | **1-4 years** | ** ** | **4-5 years** | ** ** | **Over 5 years** | ** ** | **Total fair value** | ** ** |
| ** **             | ** ** | **(In millions)**                                                                   | ** ** |
| Interest rate  risk    |       |                                                                                     | $          | 1,322 |   |   |   | $ | 396 |   |   |   | $ | 112 |   |   |   | $ | 269 |   |   |   | $ | 2,099 |   |   |
| Equity price risk      |       |                                                                                     | 122        |   |   |   | 141 |   |   |   | 39 |   |   |   | 170 |   |   |   | 472 |   |   |
| Foreign exchange  risk |       |                                                                                     | 5          |   |   |   | — |   |   |   | 16 |   |   |   | — |   |   |   | 21 |   |   |
| Total                  |       |                                                                                     | $          | 1,449 |   |   |   | $ | 537 |   |   |   | $ | 167 |   |   |   | $ | 439 |   |   |   | $ | 2,592 |   |   |

 

Thefollowing table sets forth as of June 30, 2004 our exposure with respectto OTC derivatives, by counterparty credit rating and with affiliates, aftertaking into account the effect of netting agreements.
| **Credit Rating(1)**    | ** ** | ** **             | ** ** | **As of June 30,  2004** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **(In millions)** | ** ** |
| AAA                          |       |                   | $          | —                                  |       |   |
| AA+/AA                       |       |                   | 1,865      |                                    |       |
| AA-                          |       |                   | 15         |                                    |       |
| A+/A/A-                      |       |                   | 203        |                                    |       |
| BBB+/BBB/BBB-                |       |                   | 3          |                                    |       |
| BB+ or lower                 |       |                   | 18         |                                    |       |
| Unrated                      |       |                   | 111        |                                    |       |
| Derivatives with  affiliates |       |                   | 1,264      |                                    |       |
| Total                        |       |                   | $          | 3,479                                   |       |   |

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(1)   Credit ratings are determined by external rating agencies or byour credit risk management department.

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**Derivatives With Related Parties**

Weenter into a substantial number of derivatives transactions with relatedparties. The following table sets forth derivatives transactions with relatedparties consisting primarily of interest rate swaps, credit default swaps andforeign exchange forward contracts. The fair values of derivatives contractsoutstanding with related parties as of June 30, 2004 and December 31,2003 were as follows:
| ** **             | ** ** | **As of June 30, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **             | ** ** | **Assets**                                  | ** ** | **Liabilities**                                 | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **             | ** ** | **(In millions)**                      | ** ** |
| Interest rate  risk    |       | $                                           | 1,213      |                                            |       | $ | 653 |   |   | $ | 1,860 |   |   | $ | 794 |   |   |
| Equity price risk      |       | 23                                          |       |                                            | 33         |   |   | 12 |   |   | 29 |   |   |
| Foreign exchange  risk |       | 28                                          |       |                                            | 5          |   |   | 38 |   |   | 1 |   |   |
| Total                  |       | $                                           | 1,264      |                                            |       | $ | 691 |   |   | $ | 1,910 |   |   | $ | 824 |   |   |

 

See Notes 4 and 11 of thecondensed consolidated financial statements in Part I, Item 1 for moreinformation.

**Item 3: Quantitative and Qualitative Disclosures AboutMarket Risk**

**Risk Management and Value at Risk**

For a description of theCompany’s risk management policies and procedures and value-at-risk, or VAR,model, including such model’s assumptions and limitations, see “Quantitativeand Qualitative Disclosure About Market Risk” in Part II, Item 7A of theCompany’s Annual Report on Form 10-K for the December 31, 2003.

***Market Risk Exposure***

**Tradingportfolios**

The Company-wide trading portfolio VAR wasapproximately $49 million as of both June 30, 2004 and December 31,2003.

Due to the benefit of diversification, theCompany-wide VAR is less than the sum of the individual components. The threemain components of market risk, expressed in terms of theoretical fair values,had the following VAR:
| ** **                           | ** ** | **Company’s Market Risk Exposures in Trading Portfolios (Unaudited)** | ** ** |                    |
|--------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|
| ** **                           | ** ** | ** **                                                                                                    | ** ** | ** **              | ** ** | ** ** | ** ** | **As of ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **As of ** | ** ** | **As of** | ** ** |   |
| ** **                           | ** ** | **Three Months Ended June 30, 2004**                                                 | ** ** | **June 30, ** | ** ** | **Three Months Ended March 31, 2004** | ** ** | **March 31, ** | ** ** | ** December 3,** | ** ** |   |
| ** **                           | ** ** | **Minimum(1)**                                                                                                | ** ** | **Maximum(1)**          | ** ** | **Average** | ** ** | **2004** | ** ** | **Minimum(1)** | ** ** | **Maximum(1)** | ** ** | **Average** | ** ** | **2004** | ** ** | **2003** | ** ** |   |
| 99%, one-day VAR, in $ millions |       |                                                                                                          |       |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate risk                   |       |                                                                                                          | 39         |                    |   |   | 55 |   |   |   | 46 |   |   |   | 51 |   |   |   | 32 |   |   |   | 49 |   |   |   | 40 |   |   |   | 35 |   |   |   | 49 |   |   |
| Equity risk                          |       |                                                                                                          | 19         |                    |   |   | 32 |   |   |   | 24 |   |   |   | 20 |   |   |   | 12 |   |   |   | 26 |   |   |   | 19 |   |   |   | 17 |   |   |   | 14 |   |   |
| Foreign currency exchange risk       |       |                                                                                                          | —     |                    |   |   | 4 |   |   |   | — |   |   |   | 1 |   |   |   | — |   |   |   | 3 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Benefit of diversification           |       |                                                                                                          | —     |                    |   |   | — |   |   |   | (16 | ) |   |   | (23 | ) |   |   | — |   |   |   | — |   |   |   | (11 | ) |   |   | (13 | ) |   |   | (14 | ) |   |
| **Total**                            | ** ** | ** **                                                                                                    | **45**     |                    | ** ** | ** ** | **69** |   | ** ** | ** ** | **54** |   | ** ** | ** ** | **49** |   | ** ** | ** ** | **34** |   | ** ** | ** ** | **63** |   | ** ** | ** ** | **48** |   | ** ** | ** ** | **39** |   | ** ** | ** ** | **49** |   |   |

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(1)    As the minimum and maximum occur on different days fordifferent risk types, it is not meaningful to calculate a portfoliodiversification benefit.

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Theaverage, maximum and minimum daily trading revenue over the last two quartersis shown below:
| ** **                                 | ** ** | **Three months ended   June 30, 2004** | ** ** | **Three months  ended  March 31, 2004** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Daily trading revenue,  in $ millions |       |                                                            |       |                                                             |       |   |   |   |   |
| Average                                    |       |                                                            | 12         |                                                             |       |   | 16 |   |   |
| Maximum                                    |       |                                                            | 67         |                                                             |       |   | 67 |   |   |
| Minimum                                    |       |                                                            | (41        | )                                                                |       |   | (17 | ) |   |

 

***Non-trading portfolios***

We measure equity risk on non-trading positions usingsensitivity analysis that estimates the potential change in the recorded valueof the investments resulting from a 10% decline in the equity markets of G22nations and a 20% decline in the equity markets of non-G22 nations. The estimated impact of equity risk on our non-tradingfinancial instruments portfolio, which is mainly comprised of our privateequity investments, would be a decrease in the value of the non-tradingportfolio of approximately $105 million and a decrease of approximately $112million as of June 30, 2004 and December 31, 2003, respectively. Theestimated impact of equity price risk as of June 30, 2004 excludes theinvestments in certain private equity funds consolidated primarily under FIN46R.

The interest rate risk on non-trading positions ismeasured using sensitivity analysis that estimates the potential change in thevalue of the non-trading portfolio resulting from a 50 basis point decline inthe interest rates of G22 nations and a 200 basis point decline in the interestrates of non-G22 nations. The estimated impact of interest rate risk on pre-taxnet income would be a decrease of approximately $6 million and an increase ofapproximately $55 million as of June 30, 2004 and December 31, 2003,respectively. This decrease is due to the reclassification of certain positionsinto the trading portfolio.

The foreign exchange risk on non-trading positions ismeasured using sensitivity analysis that estimates the potential change in thevalue of the non-trading portfolio resulting from a 10% strengthening of theU.S. dollar against G22 currencies and a 20% strengthening of the U.S. dollaragainst non-G22 currencies. The estimated impact of foreign exchange risk on the value of the non-tradingportfolio would be a decrease of approximately $2 million and a decrease ofapproximately $1 million as of June 30, 2004 and December 31, 2003,respectively.

We do not have materialcommodity price risk in our non-trading portfolio.

**Item 4: Controlsand Procedures**

As of the end of the period covered by 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. There are inherent limitations to theeffectiveness of any system of disclosure controls and procedures, including thepossibility of human error and the circumvention or overriding of the controlsand procedures. Accordingly, even effective disclosure controls and procedurescan only provide reasonable assurance of achieving their control objectives.Based upon and as of the date of the evaluation, our Chief Executive Officerand Chief Financial and Accounting Officer concluded that the design andoperation of these disclosure controls and procedures were effective in allmaterial respects to provide reasonable assurance that information required tobe disclosed in the reports we file and submit under the Exchange Act isrecorded, processed, summarized and reported as and when required. There wereno changes in our internal control over financial reporting that occurred duringthe quarter ended June 30, 2004 that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

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**PART IIOTHER INFORMATION**

**Item 1: 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, 2003 andQuarterly Report on Form 10-Q for the three months ended March 31,2004. The following is an update of such proceedings.

**Litigation Relating to IPO Allocation/Research-relatedPractices**

In the *In reInitial Public Offering Securities Litigation*class certificationmotions have been briefed and argued and are now under submission*.*On June 10, 2004, the plaintiffsand the issuer defendants and issuers’ officers and directors named in thelitigation entered into a definitive settlement agreement, and on June 14,2004, those parties moved for preliminary approval of the proposed settlement. OnJuly 14, 2003, the underwriter defendants filed papers in opposition tothe motion for preliminary approval.

On May 18, 2004, theplaintiffs in the action filed in the Superior Court of the State of Californiafor the County of Santa Clara alleging that CSFB LLC violated Section 17200of California’s Business and Professions Code, which prohibits unfair businesspractices, filed a notice of appeal to appeal the dismissal of that case. On June 3,2004, the Superior Court of the State of California for the County of LosAngeles granted CSFB LLC’s motion for summary judgment dismissing the actionbrought by a purchaser of shares of Clarent Corporation alleging fraud,negligence, and negligent misrepresentation in connection with Credit SuisseFirst Boston’s research coverage of that company. On July 27, 2004, theplaintiffs in the action in the U.S. District Court for the District ofMassachusetts relating to the research coverage of Synopsys, Inc.voluntarily dismissed their complaint.

**U.K. Insurance Litigation**

On June 11, 2004, theLondon Commercial Court ordered a stay of the proceedings on the terms of thestay agreement agreed between the parties.

****AdelphiaCommunications Corporation Litigation****

On or about July 22, 2004, the U.S. DistrictCourt for the District of Connecticut denied motions to remand to Connecticutstate court the two actions filed by investors who received Adelphia equitysecurities in the merger of Century Communications Corporation and Adelphia in October 1999.A decision on the motion by the CSFB entities to transfer these actions to theconsolidated proceeding in the U.S. District Court for the Southern District ofNew York remains pending.

We are involved in anumber of judicial, regulatory and arbitration proceedings (including thosedescribed above and actions that have been separately described in previousfilings) concerning matters arising in connection with the conduct of ourbusinesses. Some of these actions have been brought on behalf of variousclasses of claimants and, unless otherwise specified, seek damages of materialand/or indeterminate amounts. We believe, based on currently availableinformation and advice of counsel, that the results of such proceedings, in theaggregate, will not have a material adverse effect on our financial conditionbut might be material to operating results for any particular period,depending, in part, upon the operating results for such period. We intend todefend ourselves vigorously against all of the claims asserted in thesematters.

**Items2, 3 and 4:**

Pursuant to GeneralInstruction H of Form 10-Q, the information required by Items 2, 3 and 4is omitted.

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**Item 5:  OtherInformation**

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 Resultsof Operations” in Part I, Item 2, and from time to time may otherwise makein our 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 differmaterially from those anticipated herein or in any such other filings, releasesor statements because of a number of factors, including without limitation,those detailed in “Business—Certain Factors That May Affect Our Results ofOperations” in Part I, Item 1 of our Annual Report on Form 10-K forthe year ended December 31, 2003, those discussed elsewhere herein, and inother public filings and press releases. These forward-looking statements arenot historical facts but instead represent only our belief regarding futureevents, many of which, by their nature, are inherently uncertain and beyond ourcontrol. Forward-looking statements are typically identified by the use offuture or conditional verbs such as “will,” “should,” “would” or “could,” andby words or phrases such as “believe,” “expect,” “intend,” “estimate” andsimilar expressions. By identifying these statements for you in this manner, weare alerting you to the possibility that our actual results may differ,possibly materially, from the results indicated in these forward-lookingstatements. We undertake no obligation to update or revise any forward-lookingstatements except as otherwise required by applicable law.

Effective August 1,2004, Neil Moskowitz replaced Barbara A. Yastine as a member of the Board ofDirectors of the Company and became an executive officer with the titleManaging Director. Mr. Moskowitz joined the most senior executive board ofCSFB in July 2004 and became Chief Financial Officer of CSFB in August 2004.Prior to that Mr. Moskowitz served in a variety of roles at CSFB,including Chief Operating Officer of Institutional Securities and the Equitydivision.

**Item 6: Exhibits and Reports on Form 8-K**

(a)   Exhibits
| 3.1  |   | Amended and Restated Certificate of Incorporation of  Registrant                  |
|------|--------|-----------------------------------------------------------------------------------|
| 3.2  |   | By-laws of the Registrant                                                         |
| 12   |   | Statement re computation of ratio of earnings to  fixed charges                   |
| 15   |   | Letter re unaudited interim financial information                                 |
| 31.1 |   | Rule 13a-14(a) certification of Chief  Executive Officer                |
| 31.2 |   | Rule 13a-14(a) certification of Chief  Financial and Accounting Officer |
| 32   |   | Section 1350 certifications                                                  |

 

(b)   Reports on Form 8-K

1.      Form 8-Kdated May 5, 2004; Item 5

2.      Form 8-Kdated May 12, 2004; Items 5 and 7

3.      Form 8-Kdated May 17, 2004; Item 5

4.      Form 8-Kdated June 4, 2004; Items 2 and 7

5.      Form 8-Kdated June 25, 2004; Items 5 and 7

6.      Form 8-K dated August 4, 2004; Item 5

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                     |   | Credit Suisse First Boston  (USA), Inc. |
|---------------------|--------|----------------------------------------------|
| August 9, 2004 |   | By:                                          |   | /s/ Paul C. Wirth |
|                |   |                                         |   | Chief Financial and Accounting Officer  (On behalf of the Registrant and as Principal Financial Officer) |

 

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**INDEX TO EXHIBITS**
| **Exhibit Number** | ** ** | **Description** |
|-------------------------|------------|-----------------|
|                    | 3.1        |            |   | Amended and Restated Certificate of Incorporation of  Registrant |
|                    | 3.2        |            |   | By-laws of the Registrant |
|                    | 12         |            |   | Computation of ratio of earnings to fixed charges |
|                    | 15         |            |   | Letter re unaudited interim financial information |
|                    | 31.1       |            |   | Rule 13a-14(a) certification of Chief  Executive Officer |
|                    | 31.2       |            |   | Rule 13a-14(a) certification of Chief  Financial and Accounting Officer |
|                    | 32         |            |   | Section 1350 certifications |

 

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