**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q**

 

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterlyperiod ended June 30, 2003**

 

**OR**

 

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

 

**For the transitionperiod from            to          **

 

**CommissionFile Number: 1-6862**

 

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

(Exact name of registrant as 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 telephone number, including area code)       |

 

**TheRegistrant meets the conditions set forth in GeneralInstruction H (1) (a) and (b) of Form 10-Q and istherefore filing this Form 10-Q with the reduced disclosure format.**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days: Yes ý  No o

 

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

 

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 FIRST BOSTON (USA), INC.**

 

**Quarterly Report on Form 10-Q for theQuarter Ended June 30, 2003**

 
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                |
|-------------|-----------------------------------------------------------------------------------------------------------|
|        | ITEM 1: Financial  Statements                                                                        |
|        |                                                                                                      | Condensed  Consolidated Statements of Financial Condition  (Unaudited) as of June 30, 2003 and December 31, 2002 |
|        |                                                                                                      |   |
|        |                                                                                                      | Condensed  Consolidated Statements of Income  (Unaudited) for the three and six months ended June 30, 2003 and 2002 |
|        |                                                                                                      |   |
|        |                                                                                                      | Condensed Consolidated Statements of  Changes in Stockholders’ Equity  (Unaudited) for the six months ended June 30, 2003 and 2002 |
|        |                                                                                                      |   |
|        |                                                                                                      | Condensed  Consolidated Statements of Cash Flows  (Unaudited) for the six months ended June 30, 2003 and 2002 |
|        |                                                                                                      |   |
|        |                                                                                                      | Notes  to Condensed Consolidated Financial Statements (Unaudited) |
|        |                                                                                                      |   | 1. | Summary of Significant Accounting Policies |
|        |                                                                                                      |   | 2. | Discontinued Operations |
|        |                                                                                                      |   | 3. | Merger-Related Costs |
|        |                                                                                                      |   | 4. | Related Party Transactions |
|        |                                                                                                      |   | 5. | Income Taxes |
|        |                                                                                                      |   | 6. | Transfers and Servicing of Financial Assets |
|        |                                                                                                      |   | 7. | Borrowings |
|        |                                                                                                      |   | 8. | Private Equity and Other Long-Term Investments |
|        |                                                                                                      |   | 9. | Net Capital |
|        |                                                                                                      |   | 10. | Cash and Securities Segregated Under  Federal and Other Regulations |
|        |                                                                                                      |   | 11. | Derivatives Contracts |
|        |                                                                                                      |   | 12. | Commitments |
|        |                                                                                                      |   | 13. | Guarantees |
|        |                                                                                                      |   | 14. | Industry Segment and Geographic Data |
|        |                                                                                                      |   | 15. | Legal Proceedings |
|        |                                                                                                      |   | 16. | Subsequent  Events |
|        |                                                                                                      | Independent  Accountants’ Review Report |
|        | ITEM  2: Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
|        | ITEM  3: Quantitative and Qualitative Disclosures About Market Risk                                  |
|        | ITEM 4: Controls  and Procedures                                                                     |
|        |                                                                                                      |
| **PART II** | **OTHER INFORMATION**                                                                                     |
|        | ITEM 1: Legal  Proceedings                                                                           |
|        | ITEM 5: Other  Information                                                                           |
|        | ITEM  6: Exhibits and Reports on Form 8-K                                                            |
|        | Signature                                                                                                 |

 
|   | **AVAILABLE INFORMATION**
 

We file annual, quarterly and current reports and other information  with the Securities and Exchange Commission, or SEC.  Our SEC filings are available to the  public over the internet on the SEC’s website at www.sec.gov.  You may also view our SEC filings on our  website at www.csfb.com as soon as is reasonably practicable after the report  is electronically filed with, or furnished to, the SEC.  The information on our website is not  incorporated by reference into this Quarterly Report. |   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

1

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**PART I**

**FINANCIAL INFORMATION**

**ITEM1:  Financial Statements**

 

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

**Condensed Consolidated Statements ofFinancial Condition**

**(Unaudited)**

**(In millions)**

 
|                                                                                                           |   | **June 30,  2003** |    | **December 31,********2002** |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------------------|--------|
|                                                                                                           |   |               |    |                              |   |
| **ASSETS**                                                                                                     |   |               |    |                              |   |
| Cash and cash equivalents                                                                                      |   | $                  | 442     |                              | $      | 480 |   |
| Collateralized short-term financings:                                                                          |   |               |    |                              |   |
| Securities purchased under agreements to resell                                                                |   | 50,222             |    | 51,756                            |   |
| Securities borrowed                                                                                            |   | 68,516             |    | 71,296                            |   |
| Receivables:                                                                                                   |   |               |    |                              |   |
| Customers                                                                                                      |   | 1,622              |    | 829                               |   |
| Brokers, dealers and other                                                                                     |   | 19,635             |    | 7,310                             |   |
| Financial instruments owned (includes securities  pledged as collateral of $50,274 and $49,695, respectively): |   |               |    |                              |   |
| U.S. government and agencies                                                                                   |   | 35,959             |    | 32,131                            |   |
| Corporate debt                                                                                                 |   | 11,100             |    | 12,174                            |   |
| Mortgage whole loans                                                                                           |   | 9,252              |    | 9,465                             |   |
| Equities                                                                                                       |   | 12,324             |    | 9,735                             |   |
| Commercial paper                                                                                               |   | 451                |    | 619                               |   |
| Private equity and other long-term investments                                                                 |   | 985                |    | 956                               |   |
| Derivatives contracts                                                                                          |   | 6,471              |    | 3,956                             |   |
| Other                                                                                                          |   | 4,477              |    | 3,211                             |   |
| Net deferred tax asset                                                                                         |   | 1,531              |    | 1,685                             |   |
| Office facilities at cost (net of accumulated  depreciation and amortization of$842 and $749, respectively)    |   | 476                |    | 485                               |   |
| Goodwill                                                                                                       |   | 320                |    | 301                               |   |
| Loans receivable from parent and affiliates                                                                    |   | 18,150             |    | 16,412                            |   |
| Other assets and deferred amounts                                                                              |   | 2,104              |    | 1,749                             |   |
| Assets held for sale                                                                                           |   | —             |    | 11,547                            |   |
| Total assets                                                                                                   |   | $                  | 244,037 |                              | $      | 236,097 |   |

 

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

 

2

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

**Condensed Consolidated Statements ofFinancial Condition (Continued)(Unaudited)**

**(In millions, except share data)**

 
|                                                                                                                                   |   | **June 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------------|--------|
|                                                                                                                                   |   |               |    |                        |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                         |   |               |    |                        |   |
|                                                                                                                                   |   |               |    |                        |   |
| Commercial paper and short-term borrowings                                                                                             |   | $                  | 17,117  |                        | $      | 11,933 |   |
| Collateralized short-term financings:                                                                                                  |   |               |    |                        |   |
| Securities sold under agreements to repurchase                                                                                         |   | 93,957             |    | 107,896                     |   |
| Securities loaned                                                                                                                      |   | 26,873             |    | 24,178                      |   |
| Payables:                                                                                                                              |   |               |    |                        |   |
| Customers                                                                                                                              |   | 4,331              |    | 2,928                       |   |
| Brokers, dealers and other                                                                                                             |   | 21,611             |    | 8,689                       |   |
| Financial instruments sold not yet purchased:                                                                                          |   |               |    |                        |   |
| U.S. government and agencies                                                                                                           |   | 28,864             |    | 22,710                      |   |
| Corporate debt                                                                                                                         |   | 2,522              |    | 3,315                       |   |
| Equities                                                                                                                               |   | 3,945              |    | 3,240                       |   |
| Derivatives contracts                                                                                                                  |   | 4,751              |    | 2,849                       |   |
| Other                                                                                                                                  |   | 221                |    | 335                         |   |
| Obligation to return securities received as  collateral                                                                                |   | 1,352              |    | 896                         |   |
| Accounts payable and accrued expenses                                                                                                  |   | 2,647              |    | 3,200                       |   |
| Other liabilities                                                                                                                      |   | 2,639              |    | 2,156                       |   |
| Long-term borrowings                                                                                                                   |   | 24,140             |    | 23,094                      |   |
| Liabilities held for sale                                                                                                              |   | —             |    | 10,947                      |   |
| Total liabilities                                                                                                                      |   | 234,970            |    | 228,366                     |   |
|                                                                                                                                   |   |               |    |                        |   |
| Stockholders’ Equity:                                                                                                             |   |               |    |                        |   |
| Preferred stock, 50,000,000 shares authorized:                                                                                         |   |               |    |                        |   |
| Series B preferred stock, at $50.00 per share  liquidation preference (88,500 shares issued and outstanding at December 31, 2002) |   | —             |    | 4                           |   |
| Common stock ($0.10 par value; 50,000 shares  authorized; 1,100 shares issued and outstanding)                                         |   | —             |    | —                      |   |
| Paid-in capital                                                                                                                        |   | 7,555              |    | 7,279                       |   |
| Retained earnings                                                                                                                      |   | 1,668              |    | 604                         |   |
| Accumulated other comprehensive loss                                                                                                   |   | (156               | )       | (156                        | )      |
| Total stockholders’ equity                                                                                                        |   | 9,067              |    | 7,731                       |   |
| Total liabilities and stockholders’ equity                                                                                        |   | $                  | 244,037 |                        | $      | 236,097 |   |

 

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

 

3

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

**Condensed Consolidated Statements of Income(Unaudited)**

**(In millions)**

 
|                                                                                                |   | **Three  Months Ended**June 30, |   | **Six  Months Ended**June 30, |   |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                                                |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
|                                                                                                |   |                            |   |                          |   |   |   |   |   |
| Revenues:                                                                                           |   |                            |   |                          |   |   |   |   |   |
| Principal transactions-net                                                                          |   | $                               | 47     |                          | $      | (26 | ) | $ | 50 |   | $ | 11 |   |
| Investment banking and  advisory                                                                    |   | 530                             |   | 792                           |   | 968 |   | 1,506 |   |
| Commissions                                                                                         |   | 266                             |   | 318                           |   | 511 |   | 643 |   |
| Interest and dividends, net of  interest expense of $1,272, $1,428, $2,324 and $2,753, respectively |   | 574                             |   | 489                           |   | 1,067 |   | 869 |   |
| Other                                                                                               |   | 28                              |   | 17                            |   | 49 |   | 529 |   |
| Total net revenues                                                                                  |   | 1,445                           |   | 1,590                         |   | 2,645 |   | 3,558 |   |
| Expenses:                                                                                           |   |                            |   |                          |   |   |   |   |   |
| Employee compensation and  benefits                                                                 |   | 847                             |   | 922                           |   | 1,571 |   | 1,871 |   |
| Occupancy and equipment rental                                                                      |   | 115                             |   | 120                           |   | 222 |   | 230 |   |
| Brokerage, clearing and exchange  fees                                                              |   | 82                              |   | 63                            |   | 144 |   | 135 |   |
| Communications                                                                                      |   | 40                              |   | 43                            |   | 86 |   | 92 |   |
| Professional fees                                                                                   |   | 61                              |   | 48                            |   | 116 |   | 96 |   |
| Merger-related costs                                                                                |   | 59                              |   | 91                            |   | 121 |   | 182 |   |
| Other operating expenses                                                                            |   | 82                              |   | 54                            |   | 136 |   | 178 |   |
| Total expenses                                                                                      |   | 1,286                           |   | 1,341                         |   | 2,396 |   | 2,784 |   |
| Income from continuing  operations before provision for income taxes and discontinued operations    |   | 159                             |   | 249                           |   | 249 |   | 774 |   |
| Provision for income taxes                                                                          |   | 30                              |   | 85                            |   | 61 |   | 271 |   |
| Income from continuing  operations before discontinued operations                                   |   | 129                             |   | 164                           |   | 188 |   | 503 |   |
| Discontinued operations:                                                                            |   |                            |   |                          |   |   |   |   |   |
| Income from discontinued  operations                                                                |   | 1,324                           |   | 27                            |   | 1,361 |   | 69 |   |
| Provision for income taxes                                                                          |   | 472                             |   | 9                             |   | 485 |   | 24 |   |
| Income from discontinued  operations, net of income taxes                                           |   | 852                             |   | 18                            |   | 876 |   | 45 |   |
| Net income                                                                                          |   | $                               | 981    |                          | $      | 182 |   | $ | 1,064 |   | $ | 548 |   |

 

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

 

4

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

**Condensed Consolidated Statements of Changesin Stockholders’ Equity(Unaudited)**

**For the Six Months Ended June 30, 2003 andJune 30, 2002**

**(In millions)**

 
|                                                            |   | **Preferred********Stock** |   | **Common********Stock** |   | **Paid-in  Capital** |   | **Retained********Earnings** |   | **Accumulated********Other********Comprehensive********Income (Loss)** |   | **Total** |   |
|-----------------------------------------------------------------|--------|----------------------------|--------|-------------------------|--------|----------------------|--------|------------------------------|--------|------------------------------------------------------------------------|--------|-----------|--------|
|                                                            |   |                       |   |                    |   |                 |   |                         |   |                                                                   |   |      |   |
| Balances at December 31, 2001                              |   | $                          | 5      |                    | $      | —               |   | $                            | 6,326  |                                                                   | $      | 859       |   | $ | (72 | ) | $ | 7,118 |   |
| Net income                                                      |   | —                     |   | —                  |   | —               |   | 548                          |   | —                                                                 |   | 548       |   |
| Foreign currency translation adjustment                         |   | —                     |   | —                  |   | —               |   | —                       |   | 3                                                                      |   | 3         |   |
| Decrease in pension liability, net of income tax  expense of $3 |   | —                     |   | —                  |   | —               |   | —                       |   | 5                                                                      |   | 5         |   |
| Total comprehensive income                                      |   |                       |   |                    |   |                 |   |                         |   |                                                                   |   | 556       |   |
| CSG share plan activity, net of tax effectof $9                 |   | —                     |   | —                  |   | 489                  |   | —                       |   | —                                                                 |   | 489       |   |
| Balances at June 30, 2002                                       |   | $                          | 5      |                    | $      | —               |   | $                            | 6,815  |                                                                   | $      | 1,407     |   | $ | (64 | ) | $ | 8,163 |   |
|                                                            |   |                       |   |                    |   |                 |   |                         |   |                                                                   |   |      |   |
| Balances at December 31, 2002                              |   | $                          | 4      |                    | $      | —               |   | $                            | 7,279  |                                                                   | $      | 604       |   | $ | (156 | ) | $ | 7,731 |   |
| Net income                                                      |   | —                     |   | —                  |   | —               |   | 1,064                        |   | —                                                                 |   | 1,064     |   |
| Total comprehensive income                                      |   |                       |   |                    |   |                 |   |                         |   |                                                                   |   | 1,064     |   |
| Redemption of Series B preferred stock                          |   | (4                         | )      | —                  |   | —               |   | —                       |   | —                                                                 |   | (4        | )      |
| Capital contribution by CSFBI                                   |   | —                     |   | —                  |   | 75                   |   | —                       |   | —                                                                 |   | 75        |   |
| CSG share plan activity, net of tax effectof $26                |   | —                     |   | —                  |   | 201                  |   | —                       |   | —                                                                 |   | 201       |   |
| Balances at June 30, 2003                                       |   | $                          | — |                    | $      | —               |   | $                            | 7,555  |                                                                   | $      | 1,668     |   | $ | (156 | ) | $ | 9,067 |   |

 

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

 

5

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

**Condensed Consolidated Statements of CashFlows(Unaudited)**

**(In millions)**

 
|                                                                                        |   | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                        |   | **2003**                       |   | **2002** |   |
| Cash flows from operating  activities:                                                      |   |                           |   |   |   |
| Net income                                                                                  |   | $                              | 1,064  |   | $ | 548 |   |
| Adjustments to reconcile  net income to net cash (used in) provided byoperating activities: |   |                           |   |   |   |
| Net pre-tax gain on sale of  certain broker-dealer subsidiaries                             |   | —                         |   | (528 | ) |
| Pre-tax gain on sale of  Pershing                                                           |   | (1,324                         | )      | — |   |
| Depreciation and  amortization                                                              |   | 94                             |   | 75 |   |
| CSG share plan activity                                                                     |   | 227                            |   | 498 |   |
| Deferred taxes                                                                              |   | 74                             |   | 287 |   |
| Other, net                                                                                  |   | (26                            | )      | (1 | ) |
| Decrease (increase) in  operating assets:                                                   |   |                           |   |   |   |
| Securities borrowed                                                                         |   | 2,780                          |   | (549 | ) |
| Receivables from customers                                                                  |   | (793                           | )      | 229 |   |
| Receivables from brokers,  dealers and other                                                |   | (12,325                        | )      | 2,748 |   |
| Financial instruments owned                                                                 |   | (8,442                         | )      | (4,932 | ) |
| Other assets and deferred  amounts                                                          |   | (339                           | )      | (189 | ) |
| Increase (decrease) in  operating liabilities:                                              |   |                           |   |   |   |
| Securities loaned                                                                           |   | 2,695                          |   | (7,217 | ) |
| Payables to customers                                                                       |   | 1,403                          |   | (2,893 | ) |
| Payables to brokers,  dealers and other                                                     |   | 12,922                         |   | (3,838 | ) |
| Financial instruments sold  not yet purchased                                               |   | 7,854                          |   | 6,963 |   |
| Obligation to return  securities received as collateral                                     |   | 456                            |   | (396 | ) |
| Accounts payable and  accrued expenses                                                      |   | (584                           | )      | (899 | ) |
| Other liabilities                                                                           |   | 483                            |   | (113 | ) |
| Net cash provided by (used  in) operating activities                                        |   | $                              | 6,219  |   | $ | (10,207 | ) |

 

Seeaccompanying notes to condensed consolidated financial statements (unaudited).

 

6

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

**Condensed Consolidated Statements of CashFlows (Continued)(Unaudited)**

**(In millions)**

 
|                                                                                                    |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                    |   | **2003**                        |   | **2002** |   |
| Cash flows from investing activities:                                                                   |   |                            |   |   |   |
| Net (payments for) proceeds from:                                                                       |   |                            |   |   |   |
| Loans receivable from parent and affiliates                                                             |   | $                               | (1,738 | ) | $ | (9,010 | ) |
| Sale of broker-dealer subsidiaries                                                                      |   | —                          |   | 674 |   |
| Sale of Pershing unit                                                                                   |   | 2,000                           |   | — |   |
| Office facilities                                                                                       |   | (85                             | )      | 84 |   |
| Purchase of subsidiary                                                                                  |   | —                          |   | (70 | ) |
| Net cash provided by (used in) investing activities                                                     |   | 177                             |   | (8,322 | ) |
|                                                                                                    |   |                            |   |   |   |
| Cash flows from financing activities:                                                                   |   |                            |   |   |   |
| Net proceeds from (payments for):                                                                       |   |                            |   |   |   |
| Short-term borrowings                                                                                   |   | 5,184                           |   | 2,560 |   |
| Securities sold under agreements to repurchase, net  of securities purchased under agreements to resell |   | (12,405                         | )      | 9,384 |   |
| Capital contribution from CSFBI                                                                         |   | 75                              |   | — |   |
| Redemption of Series B preferred stock                                                                  |   | (4                              | )      | — |   |
| Issuances of long-term borrowings                                                                       |   | 2,788                           |   | 7,773 |   |
| Redemptions and maturities of long-term borrowings                                                      |   | (2,072                          | )      | (1,435 | ) |
| Net cash (used in) provided by financing activities                                                     |   | (6,434                          | )      | 18,282 |   |
|                                                                                                    |   |                            |   |   |   |
| Decrease in cash and cash equivalents                                                                   |   | (38                             | )      | (247 | ) |
|                                                                                                    |   |                            |   |   |   |
| Cash and cash equivalents at beginning of period                                                        |   | 480                             |   | 1,752 |   |
| Cash and cash equivalents at end of period                                                              |   | $                               | 442    |   | $ | 1,505 |   |

 

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

 

7

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

**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

**June 30, 2003**

 

**1. Summary of Significant AccountingPolicies**

 

**TheCompany**

 

Credit Suisse First Boston (USA), Inc.,formerly known as Donaldson, Lufkin & Jenrette, Inc., and its subsidiaries(the “Company”), is a leading integrated investment bank serving institutional,corporate, government and high-net worth individual clients. The Companyprovides clients with a broad range of products and services that includessecurities underwriting, sales and trading, investment banking, financialadvisory services, private equity investments, full-service brokerage services,derivatives and risk management products and research.

 

**Basis ofPresentation**

 

The condensed consolidated financialstatements include Credit Suisse First Boston (USA), Inc. and itssubsidiaries. All significant intercompany balances and transactions have beeneliminated. The Company is a wholly owned subsidiary of Credit Suisse FirstBoston, Inc. (“CSFBI”) and was acquired on November 3, 2000 (the“Acquisition”). No adjustments of the historical carrying values of theCompany’s assets and liabilities to reflect the Acquisition were recorded inthe Company’s historical consolidated financial statements.  Accordingly, although the Acquisition gaverise to goodwill, none of this goodwill was “pushed down” to the Company. Forfurther discussion of the Acquisition, see the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2002.

 

Certain financial information that isnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States 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 financial conditionand income for the interim periods presented.

 

The results of operations for interim periodsare not necessarily 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 Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.

 

To prepare condensed consolidated financialstatements in accordance with accounting principles generally accepted in the UnitedStates, management must estimate certain amounts that affect the reportedamounts of assets and liabilities, disclosure of contingent assets andliabilities, and reported amounts of revenues and expenses.  Actual results could differ materially fromthose estimates.

 

**Certainreclassifications have been made to prior year condensed consolidated financialstatements to conform to the 2003 presentation.**

 

**NewAccounting Pronouncements**

 

In November 2002, the Financial AccountingStandards Board (“FASB”)  issued FASBInterpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure.Requirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers – an Interpretation of FASB Statements No. 5, 57, and 107 and Rescissionof FASB Interpretation No. 34” (“FIN 45”). FIN 45 requires additionaldisclosures by a guarantor about its obligations under certain of itsguarantees. FIN 45 also requires a guarantor to recognize, at the inception ofa guarantee, a liability for the fair value of the obligations it hasundertaken in issuing such guarantees. The disclosure requirements of FIN 45 are effective for financialstatements of interim or annual periods ending after December 15, 2002. Therecognition and initial measurement provisions are to be applied only on aprospective basis to guarantees issued or modified after December 31, 2002. TheCompany adopted the disclosure requirements of FIN 45 as of December 31,2002.  The Company adopted therecognition requirements of FIN 45 on January 1, 2003.  The adoption of FIN 45 did not have amaterial impact on the Company’s condensed consolidated financial statements asof and for the three and six months ended June 30, 2003. See Note 13 for moreinformation.

 

FIN No. 46, “Consolidation of Variable InterestEntities,” an Interpretation of Accounting Research Bulletin No. 51,“Consolidated Financial Statements” (“FIN 46”), was issued in January 2003. FIN46 requires a company to consolidate a variable interest entity (“VIE”) if thecompany is the primary beneficiary, defined as the entity with the majority ofthe expected losses or expected residual returns, or both.  The guidance in FIN 46 is applicable formany special purpose entities and any other entity not explicitly excluded fromthe scope that does not meet the criteria set out in FIN 46 for determiningwhether

 

8

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analysis based on a majority ofvoting equity is appropriate. Generally, FIN 46 does not require consolidation of qualifying specialpurpose entities (“QSPEs”) that meet the requirements of Statement of FinancialAccounting Standards (“SFAS”) No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”).  See Note 6 for more information on theCompany’s QSPEs.

 

The consolidation requirements of FIN 46 areapplicable to all VIEs created after January 31, 2003 and, in the third quarterof 2003, will be applicable for entities that existed before February 1,2003.  FIN 46 imposes disclosurerequirements for all financial statements issued after January 31, 2003.  See Note 6 for more information.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“SFAS 149”), which amends and clarifies accounting and reporting forderivative instruments and hedging activities under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”) and requiresderivatives that contain a financing component to be disclosed in the statementof cash flows.  The statement iseffective for contracts entered into or modified after June 30, 2003.  The Company is evaluating the impact ofadopting SFAS 149.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”(“SFAS 150”).  SFAS 150 establishesstandards for an issuer’s classification of certain financial instruments thathave both liability and equity characteristics and imposes additionaldisclosure requirements.  SFAS 150 iseffective for financial instruments entered into or modified after May 31,2003, and is effective for interim periods beginning after June 15, 2003.  The adoption of SFAS 150 is not expected tohave an impact on the Company’s financial position or results of operations.

 

**RecentDevelopments**

 

On May 1, 2003, the Company sold its Pershingunit, which was part of the Financial Services segment, to The Bank of New YorkCompany, Inc. (“BONY”) for $2 billion in cash, the repayment of a $480 millionsubordinated loan and an additional contingent payment of up to $50 millionbased on future performance.  Inconnection with the closing, the Company entered into an amendment to the saleagreement that required it to deliver the Pershing unit with a total equityvalue of $645 million, an increase of $45 million.  The Company reported a pre-tax gain on the sale of the Pershingunit of approximately $1.3 billion and an after-tax gain of $852 million in thesecond quarter of 2003.  The Companypresented the assets and liabilities of its Pershing unit as “Assets held forsale” and “Liabilities held for sale” as of December 31, 2002 in the condensedconsolidated statements of financial condition. The operating results of thePershing unit, including the gain on the sale, have been presented as“Discontinued Operations” for all periods presented in the condensedconsolidated statements of income. See Note 2 for more information.

 

On March 20, 2003, the Company’s immediateparent company, CSFBI, transferred Credit Suisse First Boston ManagementCorporation to the Company as a capital contribution, and the Company wassubsequently converted to the Delaware limited liability company Credit SuisseFirst Boston Management LLC (“Management LLC”).  Management LLC engages in derivatives transactions and holds aportfolio of private equity, distressed assets and real estate investments. Thederivatives transactions entered into by Management LLC have historically beendesigned to hedge certain trading and other positions held by Credit SuisseFirst Boston LLC (“CSFB LLC”). Prior to the transfer of Management LLC to theCompany, the Company’s results of operations reflected only these trading andother positions held by CSFB LLC without the offsetting effect of the relatedhedges maintained by Management LLC. The Company believes the transfer ofManagement LLC to the Company should reduce the Company’s earnings volatilitybecause its ongoing results of operations will reflect both the gains and lossesfrom trading and the offsetting effect of the related hedges. The transfer alsorepresents a further integration of the U.S. operations of the Credit SuisseFirst Boston business unit, of which the Company is a part, into the Company.

 

The transfer of Management LLC has beenaccounted for at historical cost in a manner similar to pooling-of-interestaccounting because Management LLC and the Company were under the common controlof CSFBI at the time of the transfer. The Company has restated financial informationto reflect the results of operations and financial position of Management LLCas if the Company had acquired it on November 3, 2000, the date that theCompany was acquired by CSFBI.

 

9

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In June 2003, the Company completed itsacquisition of Volaris Advisors (“Volaris”), a New York-based equity-optionsstrategies firm providing yield-enhancement and volatility managementservices.  The acquisition of Volaris isexpected to enhance the services of the private client services business.

 

**2. DiscontinuedOperations**

 

On May 1, 2003, the Company soldits Pershing unit to BONY.  The Companyreported a pre-tax gain of approximately $1.3 billion and an after-taxgain of $852 million in the second quarter of 2003.  See Note 1 for more information.

 

In accordancewith SFAS No. 144, “Accounting for Impairment or Disposal of Long-LivedAssets,” the Company presented the assets and liabilities of its Pershing unitas of December 31, 2002 as “Assets held for sale” and “Liabilities held forsale” in the condensed consolidated statements of financial condition. Theoperating results of the Pershing unit, including the gain on the sale, for allperiods presented are presented as “Discontinued operations” in the condensed consolidatedstatements of income.

 

The following table summarizes the results ofoperations of Pershing, excluding the gain on the sale, for the three and sixmonths ended June 30, 2003 and 2002. 

 
|                                                     |   | **Three  Months Ended  June 30,** |   | **Six Months Ended********June 30,** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------------|--------|
|                                                     |   | **2003**                          |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                     |   | **(In  millions)**                |   | **(In  millions)**                   |   |
| Total net revenues                                       |   | $                                 | 60     |                                 | $      | 204 |   | $ | 256 |   | $ | 438 |   |
| Total expenses                                           |   | 60                                |   | 177                                  |   | 219 |   | 369 |   |
| Income from discontinued  operations before income taxes |   | $                                 | — |                                 | $      | 27 |   | $ | 37 |   | $ | 69 |   |

 

10

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The followingtable presents Pershing’s “Assets held for sale” and “Liabilities held forsale” as of December 31, 2002.

 
|                                                                                                                      |   | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                      |   | **(In millions)**      |   |
| **ASSETS HELD FOR SALE**                                                                                                  |   |                   |   |
| Cash and cash equivalents                                                                                                 |   | $                      | 1,218  |   |
| Collateralized short-term  financings:                                                                                    |   |                   |   |
| Securities purchased under  agreements to resell (includes $3,085 of securities  segregated for regulatory purposes) |   | 3,445                  |   |
| Securities borrowed                                                                                                       |   | 1,932                  |   |
| Receivables:                                                                                                              |   |                   |   |
| Customers                                                                                                                 |   | 3,431                  |   |
| Brokers, dealers and other                                                                                                |   | 1,070                  |   |
| Financial instruments owned                                                                                               |   | 172                    |   |
| Other assets and deferred  amounts                                                                                        |   | 279                    |   |
| Total assets held for sale                                                                                                |   | $                      | 11,547 |   |
| **LIABILITIES HELD FOR SALE**                                                                                             |   |                   |   |
|                                                                                                                      |   |                   |   |
| Commercial paper and  short-term borrowings                                                                               |   | $                      | 251    |   |
| Collateralized short-term  financings:                                                                                    |   |                   |   |
| Securities sold under  agreements to repurchase                                                                           |   | 291                    |   |
| Securities loaned                                                                                                         |   | 351                    |   |
| Payables:                                                                                                                 |   |                   |   |
| Customers                                                                                                                 |   | 6,969                  |   |
| Brokers, dealers and other                                                                                                |   | 1,100                  |   |
| Financial instruments sold not  yet purchased                                                                             |   | 32                     |   |
| Other liabilities                                                                                                         |   | 1,473                  |   |
| Long-term borrowings                                                                                                      |   | 480                    |   |
| Total liabilities held for  sale                                                                                          |   | $                      | 10,947 |   |

 

11

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**3. Merger-RelatedCosts**

 

Merger-related costs represent retentionawards related to the Acquisition, which are being expensed over the vestingperiod. The vesting period was generally three years. The remaining retentionawards of $24 million as of June 30, 2003 are expected to be charged againstearnings in the following periods:

 
|                         |   | **Amounts to be  Charged** |   |
|------------------------------|--------|--------------------------------------|--------|
|                         |   | **(In millions)**               |   |
|                         |   |                                 |   |
| 2003 (remaining  six months) |   | $                                    | 12     |   |
| 2004                         |   | 12                                   |   |
|                         |   | $                                    | 24     |   |

 

**4. Related PartyTransactions**

 

Credit Suisse Group (“CSG”), through CSFBI,owns all of the Company’s outstanding voting common stock. The Company isinvolved in significant financing and other transactions, and has significantrelated party balances, with Credit Suisse First Boston, a Swiss banksubsidiary of CSG and an indirect parent of the Company, and certain of itssubsidiaries and affiliates. The Company generally enters into thesetransactions in the ordinary course of business and believes that thesetransactions are generally on market terms that could be obtained fromunrelated third parties.

 

The following table sets forth related partyassets and liabilities as of June 30, 2003 and December 31, 2002. The Companyhas presented the assets and liabilities of Pershing as of December 31, 2002 as“Assets held for sale” and “Liabilities held for sale” in the condensedconsolidated statements of financial condition and has excluded from the tablebelow transactions between Pershing and any CSG affiliate, including theCompany, as of December 31, 2002.

 
|                                                              |   | **June 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                              |   | **(In millions)**  |   |
| **Assets:**                                                       |   |               |   |                   |   |
| Securities  purchased under agreements to resell                  |   | $                  | 6,891  |                   | $      | 4,142 |   |
| Securities borrowed                                               |   | 1,376              |   | 1,409                  |   |
| Receivables  from customers                                       |   | 248                |   | 188                    |   |
| Receivables  from brokers, dealers and other                      |   | 2,071              |   | 408                    |   |
| Derivatives  contracts                                            |   | 3,004              |   | 2,254                  |   |
| Taxes  receivable (included in other assets and deferred amounts) |   | —             |   | 97                     |   |
| Loans receivable  from parent and affiliates                      |   | 18,150             |   | 16,412                 |   |
| Total assets                                                      |   | $                  | 31,740 |                   | $      | 24,910 |   |
|                                                              |   |               |   |                   |   |
| **Liabilities:**                                                  |   |               |   |                   |   |
| Securities sold  under agreements to repurchase                   |   | $                  | 16,044 |                   | $      | 14,394 |   |
| Securities  loaned                                                |   | 14,924             |   | 11,503                 |   |
| Short-term  borrowings                                            |   | 15,497             |   | 9,775                  |   |
| Payables to  brokers, dealers and other                           |   | 1,022              |   | 363                    |   |
| Derivatives  contracts                                            |   | 1,492              |   | 1,212                  |   |
| Taxes payable  (included in other liabilities)                    |   | 307                |   | —                 |   |
| Intercompany  payables (included in other liabilities)            |   | 168                |   | 703                    |   |
| Total  liabilities                                                |   | $                  | 49,454 |                   | $      | 37,950 |   |

 

12

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The followingtable sets forth the assets and liabilities of Pershing that were receivablefrom or payable to the Company at December 31, 2002. The assets and liabilitiesof Pershing at December 31, 2002, including amounts receivable from or payableto the Company, are presented as “Assets held for sale” and “Liabilities heldfor sale” in the condensed consolidated statements of financial condition.

 
|                                            |   | **December 31,  2002** |       |
|-------------------------------------------------|--------|------------------------|------------|
|                                            |   | **(In millions)**      |       |
|                                            |   |                   | ** ** |
| **Assets held for sale:**                       |   |                   |       |
| Securities purchased under agreements to resell |   | $                      | 1,885      |   |
| Securities borrowed                             |   | 1,687                  |       |
| Receivables from brokers, dealers and other     |   | 1                      |       |
| Other assets and deferred amounts               |   | 18                     |       |
| Total assets                                    |   | $                      | 3,591      |   |
|                                            |   |                   |       |
| **Liabilities  held for sale:**                 |   |                   |       |
| Securities sold under agreements to repurchase  |   | $                      | 74         |   |
| Securities loaned                               |   | 251                    |       |
| Payables to brokers, dealers and other          |   | 1                      |       |
| Other liabilities                               |   | 1,412                  |       |
| Long-term borrowings                            |   | 480                    |       |
| Total liabilities                               |   | $                      | 2,218      |   |

 

In addition, Pershing had total liabilitiesof $34 million at December 31, 2002 with CSG, its subsidiaries andaffiliates outside the Company, which are included in “Liabilities held forsale” in the condensed consolidated statements of financial condition.

 

Included in the condensedconsolidated statements of income are revenues and expenses resulting fromvarious securities trading, investment banking and financing activities withcertain affiliates, as well as fees for administrative services performed bythe Company under the terms of various service agreements. Service fees earnedare treated as a reduction of other operating expenses in the condensedconsolidated statements of income.

 

The followingtable sets forth the Company’s related party revenues and expenses, excludingtransactions with Pershing, for the three and six months ended June 30, 2003and 2002:

 
|                                                  |   | **Three Months Ended  June 30,** |   | **Six Months Ended********June 30,** |   |
|-------------------------------------------------------|--------|----------------------------------|--------|--------------------------------------|--------|
|                                                  |   | **2003**                         |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                  |   | **(In millions)**                |   | **(In millions)**                    |   |
|                                                  |   |                             |   |                                 |   |   |   |   |   |
| Principal transactions - net  (derivatives contracts) |   | $                                | (58    | )                                    | $      | (172 | ) | $ | 91 |   | $ | 52 |   |
| Commissions                                           |   | (16                              | )      | (14                                  | )      | (25 | ) | (16 | ) |
| Net interest expense                                  |   | (42                              | )      | (46                                  | )      | (61 | ) | (169 | ) |
| Total net revenues                                    |   | $                                | (116   | )                                    | $      | (232 | ) | $ | 5 |   | $ | (133 | ) |
|                                                  |   |                             |   |                                 |   |   |   |   |   |
| Other operating expenses                              |   | $                                | (34    | )                                    | $      | (40 | ) | $ | (74 | ) | $ | (79 | ) |
| Total expenses                                        |   | $                                | (34    | )                                    | $      | (40 | ) | $ | (74 | ) | $ | (79 | ) |

 

13

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The followingtable sets forth revenues and expenses of Pershing earned from or charged tothe Company for the three and six months ended June 30, 2003 and 2002. Theoperating results of Pershing for these periods are presented as “Discontinuedoperations” in the condensed consolidated statements of income.

 
|                            |   | **Three Months  Ended  June 30,** |       | **Six Months  Ended********June 30,** |       |
|---------------------------------|--------|-----------------------------------|------------|---------------------------------------|------------|
|                            |   | **2003**                          |       | **2002**                              |       | **2003** |   | **2002** |   |
|                            |   | **(In millions)**                 |       | **(In millions)**                     |       |
|                            |   |                              | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Commissions                     |   | $                                 | —     |                                  | $          | 11 |   | $ | 2 |   | $ | 21 |   |
| Net interest revenues (expense) |   | (1                                | )          | (4                                    | )          | (1 | ) | 8 |   |
| Total net revenues (expense)    |   | $                                 | (1         | )                                     | $          | 7 |   | $ | 1 |   | $ | 29 |   |

 

There were no revenues orexpenses of Pershing earned from or charged to CSG, its subsidiaries andaffiliates outside the Company for the three and six months ended June 30, 2003and 2002.

 

Pursuant to an agreement, theCompany sold at cost, without recourse, to CSFBI, the right, title and interestin certain assets with an aggregate value of $326 million and$410 million at June 30, 2003 and 2002, respectively.

 

As of June 30, 2003, the management of certain private equity fundswith approximately $4.1 billion of committed capital was transferred tothe Company’s private equity business from the Company’s affiliate, CreditSuisse Asset Management, which will reimburse the private equity business forall costs and expenses incurred in connection with managing the funds.

 

The CSG stock plan (the “Plan”)provides for equity-based awards to the Company’s employees based on CSGshares. Pursuant to the Plan, employees of the Company may be granted, ascompensation, stock or other equity-based awards. The provisions of the Planinclude a provision to deliver CSG shares to the employees as compensation forservices performed. CSFBI purchases the shares from CSG but does not requirereimbursement from the Company.  Amountsare considered a capital contribution to the Company and credited topaid-in-capital. Amounts contributed by CSFBI relating to compensation for thesix months ended June 30, 2003 and 2002 were $201 million and$489 million, net of taxes, respectively.

 

Certain of the Company’s directors, officers and employees and those ofthe Company’s affiliates and their subsidiaries maintain margin accounts withCSFB LLC and other affiliated broker-dealers in the ordinary course ofbusiness. In addition, certain of such directors, officers and employees hadinvestments or commitments to invest in various private funds sponsored by theCompany, pursuant to which the Company has made loans to such directors,officers and employees, to the extent permitted by law. CSFB LLC and otheraffiliated broker-dealers, from time to time and in the ordinary course ofbusiness, enter into, as principal, transactions involving the purchase or saleof securities from or to such directors, officers and employees and members oftheir immediate families.

 

**5. Income Taxes**

 

The Company is included in a consolidatedfederal income tax return and combined New York State and New York City incometax returns filed by CSFBI. CSFBI allocates federal, state and local incometaxes to its subsidiaries on a separate return basis. Any resulting liabilityis paid currently to CSFBI. Any credits for losses are paid by CSFBI to theCompany to the extent that such credits are for tax benefits that have beenused in the consolidated federal or combined state and local income tax return.CSFBI allocated to the Company a current income tax benefit of $13 millionand $16 million for the six months ended June 30, 2003 and 2002,respectively, related to continuing operations.

 

14

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Provision(benefit) for income taxes from continuing operations included in the condensedconsolidated statements of income includes the following:

 
|                                                   |   | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------|--------|--------------------------------|--------|
|                                                   |   | **2003**                       |   | **2002** |   |
|                                                   |   | **(In millions)**              |   |
| Current:                                               |   |                           |   |   |   |
| U.S. federal                                           |   | $                              | (17    | ) | $ | (17 | ) |
| Foreign                                                |   | 1                              |   | 3 |   |
| State and local                                        |   | 3                              |   | (2 | ) |
| Total current                                          |   | (13                            | )      | (16 | ) |
|                                                   |   |                           |   |   |   |
| Deferred:                                              |   |                           |   |   |   |
| U.S. federal                                           |   | 74                             |   | 287 |   |
| Total deferred                                         |   | 74                             |   | 287 |   |
| Provision for income taxes from continuing  operations |   | $                              | 61     |   | $ | 271 |   |

 

Excluded from the table above is a provisionfor income taxes for the six months ended June 30, 2003 and 2002 of$485 million and $24 million, respectively, related to discontinuedoperations.

 

The followingtable summarizes the difference between the federal statutory tax rate and theeffective tax rate on income from continuing operations for the six monthsended June 30, 2003 and 2002:

 
|                                                      |   | **Six Months Ended June 30,** |   |
|-----------------------------------------------------------|--------|-------------------------------|--------|
|                                                      |   | **2003**                      |   | **2002** |   |
|                                                      |   | **Amount**                    |   | **Percent of  Pre-tax Income** |   | **Amount** |   | **Percent of  Pre-tax (Loss)** |   |
|                                                      |   | **(In millions)**        |   |   |   | **(In millions)** |   |   |   |
|                                                      |   |                          |   |   |   |   |   |   |   |
| Computed  expected tax provision                          |   | $                             | 87     |   | 35.0 | % | $ | 271 |   | 35.0 | % |
| Increase  (decrease) due to:                              |   |                          |   |   |   |   |   |   |   |
| Dividend  exclusion                                       |   | (15                           | )      | (5.9 | ) | (12 | ) | (1.5 | ) |
| Entertainment  expense                                    |   | 2                             |   | 0.9 |   | 3 |   | 0.4 |   |
| Tax exempt  income                                        |   | (6                            | )      | (2.7 | ) | (1 | ) | (0.1 | ) |
| Other                                                     |   | (9                            | )      | (3.6 | ) | 11 |   | 1.4 |   |
| State and local  taxes, net of federal income tax effects |   | 2                             |   | 1.0 |   | (1 | ) | (0.1 | ) |
| Provision for  income taxes from continuing operations    |   | $                             | 61     |   | 24.7 | % | $ | 271 |   | 35.1 | % |

 

15

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Deferred taxassets and deferred tax liabilities are generated by the following temporarydifferences: 

 
|                                                                         |   | **June 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                                         |   | **(In millions)**  |   |
| Deferred tax assets:                                                         |   |               |   |                   |   |
| Inventory                                                                    |   | $                  | 238    |                   | $      | 168 |   |
| Investments                                                                  |   | 256                |   | 259                    |   |
| Other liabilities and accrued expenses, primarily compensation and  benefits |   | 1,331              |   | 1,573                  |   |
| Office facilities                                                            |   | 17                 |   | 21                     |   |
| State and local taxes                                                        |   | 43                 |   | 46                     |   |
| Total deferred tax assets                                                    |   | $                  | 1,885  |                   | $      | 2,067 |   |
| Deferred tax liabilities:                                                    |   |               |   |                   |   |
| Inventory                                                                    |   | $                  | (52    | )                      | $      | (60 | ) |
| Investments                                                                  |   | (186               | )      | (191                   | )      |
| Office facilities                                                            |   | (44                | )      | (44                    | )      |
| Other                                                                        |   | (29                | )      | (41                    | )      |
| Total deferred tax liabilities                                               |   | (311               | )      | (336                   | )      |
| Deferred tax assets net of deferred tax liabilities                          |   | 1,574              |   | 1,731                  |   |
| Valuation allowance for state and local taxes                                |   | (43                | )      | (46                    | )      |
| Net deferred tax asset                                                       |   | $                  | 1,531  |                   | $      | 1,685 |   |

 

Management hasdetermined that the realization of the recognized gross deferred tax asset of$1.9 billion and $2.1 billion at June 30, 2003 and December 31,2002, respectively, is more likely than not, based on anticipated futuretaxable income. In addition, for federal income tax purposes, the Company hasplanning strategies available that may enhance its ability to use these taxbenefits. However, if estimates of future taxable income are reduced, theamount of the deferred tax asset 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 continues to maintain a full valuation allowance against itsdeferred state and local tax assets, which were $43 million and$46 million at June 30, 2003 and December 31, 2002, respectively.

 

**6. Transfersand Servicing of Financial Assets**

 

As of June 30, 2003 and December 31, 2002,the fair market value of assets that the Company pledged to counterparties was$151.9 billion and $147.0 billion, respectively, of which$50.3 billion and $49.7 billion, respectively, are included infinancial instruments owned in the condensed consolidated statements offinancial condition.

 

The carrying value and classification of thefinancial instruments owned by the Company that have been pledged are asfollows:

 
|                                    |   | **June 30,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                    |   | **(In millions)**  |   |
| Financial  instruments owned:           |   |               |   |                   |   |
| U.S. government  and agencies           |   | $                  | 24,389 |                   | $      | 25,969 |   |
| Corporate debt                          |   | 9,362              |   | 8,865                  |   |
| Mortgage whole  loans                   |   | 8,054              |   | 8,556                  |   |
| Equities                                |   | 8,469              |   | 6,305                  |   |
| Total  securities pledged as collateral |   | $                  | 50,274 |                   | $      | 49,695 |   |

 

The Company has also received similar assetsas collateral where it has the right to re-pledge or sell the assets.  The Company routinely re-pledges or lendsthese assets to third parties.  As ofJune 30, 2003 and December 31, 2002, the fair market value of the assetspledged to the Company was $150.7 billion and $140.3 billion,respectively.

 

16

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**SecuritizationActivities**

 

The Company originates and purchasescommercial mortgages and purchases residential mortgages for the purpose ofsecuritization. The Company transfers these mortgage loans to QSPEs. The QSPEissues securities that pay amounts based upon the return on the assetstransferred to the QSPE. CSFB LLC is an underwriter of, and makes a market in,these securities. Investors typically have recourse to the assets in the QSPE.The investors and the QSPEs have no recourse to the Company.

 

The Company purchases loans andother debt obligations from clients for the purpose of securitization. Theloans and other debt obligations are transferred by the Company directly, orindirectly through affiliates, to QSPEs or other VIEs that issue collateralizeddebt obligations (“CDOs”).  CSFB LLCstructures, underwrites and makes a market in these CDOs.  Pursuant to FIN 46, the Company is now consolidatingVIEs formed after January 31, 2003 in which it will absorb a majority ofexpected losses, receive a majority of the expected residual returns, or both,and, in the third quarter of 2003, will consolidate all such VIEs formed beforeFebruary 1, 2003.  Under FIN 46, theCompany will not be required to consolidate other VIEs in which the Company hassignificant investments, including equity (less than a majority) and debt butwill absorb less than the majority of expected losses or receive less than themajority of the expected residual returns, or both. The Company may retain interestsin these CDO VIEs in connection with its underwriting and market-makingactivities.

 

The Company’s exposure in itssecuritization activities is limited to its retained interests. Retainedinterests in securitized financial assets are included at fair value infinancial instruments owned in the condensed consolidated statements offinancial condition. Any changes to the fair value of these retained interestsare recognized in the condensed consolidated statements of income. The fairvalues of retained interests are determined using present value of estimatedfuture cash flows valuation techniques that incorporate assumptions that marketparticipants customarily use in their estimates of values.

 

The following table presents the proceeds andgain or loss related to the securitization of commercial mortgage loans,residential mortgage loans and other debt obligations for the six months endedJune 30, 2003 and 2002: 

 
|                               |   | **Six Months Ended June 30, 2003** |   | **Six Months Ended June 30, 2002** |   |
|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                               |   | **Commercial  mortgage  loans**    |   | **Residential  mortgage  loans**   |   | **Collateralized  debt  obligations** |   | **Commercial  mortgage  loans** |   | **Residential  mortgage  loans** |   | **Collateralized  debt********obligations** |   |
|                               |   | **(In millions)**             |   |
| Proceeds from  new securitizations |   | $                                  | 3,740  |                               | $      | 14,986 |   | $ | 2,618 |   | $ | 1,437 |   | $ | 14,123 |   | $ | 5,650 |   |
| Gain (loss) on  securitizations(1) |   | $                                  | 157    |                               | $      | (58 | ) | $ | 24 |   | $ | 26 |   | $ | (30 | ) | $ | 51 |   |

 

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(1)                                  Includesthe effects of hedging, underwriting and retained interest gains and losses andexcludes all gains or losses, including net interest revenues, on assets priorto securitization.  The net revenuesearned while holding the residential mortgage loans prior to securitizationsignificantly exceeded the amount of the losses from securitization.

 

17

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The followingtable sets forth the fair value of retained interests from securitizations notconsolidated as of June 30, 2003, key economic assumptions used to determinethe fair value, and the sensitivity of the current fair value to immediateadverse changes in those assumptions:

 
|                                                                   |   | **June 30, 2003**               |   |
|------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                   |   | **Commercial  mortgage  loans** |   | **Residential  mortgage  loans** |   | **Collateralized  debt  obligations** |   |
|                                                                   |   | **(Dollars in millions)**       |   |
| Carrying  amount/fair value of retained interests                      |   | $                               | 183    |   | $ | 365 |   | $ | 267 |   |
| Weighted-average  life (in years)                                      |   | 3.0                             |   | 3.8 |   | 3.9 |   |
| Prepayment  speed assumptions (“PSA”) (in rate per annum)(1) |   | N/A                             | (2)    | 300 PSA |   | N/A | (3) |
| Impact on fair  value of 10% adverse change                            |   | N/A                             | (2)    | $ | 2 |   | N/A | (3) |
| Impact on fair  value of 20% adverse change                            |   | N/A                             | (2)    | $ | 4 |   | N/A | (3) |
| Cash flow  discount rate (in rate per annum)(4)                        |   | 7.8                             | %      | 36.4 | % | 2.9 | % |
| Impact on fair  value of 10% adverse change                            |   | $                               | 3      |   | $ | 7 |   | $ | 4 |   |
| Impact on fair  value of 20% adverse change                            |   | $                               | 6      |   | $ | 13 |   | $ | 8 |   |
| Expected credit  losses (in rate per annum)(5)                         |   | N/A                             | (5)    | N/A | (5) | N/A | (5) |
| Impact on fair  value of 10% adverse change(6)                         |   | $                               | — |   | $ | 1 |   | $ | 1 |   |
| Impact on fair  value of 20% adverse change(6)                         |   | $                               | 1      |   | $ | 1 |   | $ | 1 |   |

 

Key economicassumptions used in measuring the fair value of the retained interests at thedate of securitization resulting from securitizations completed during the sixmonths ended June 30, 2003 were as follows:

 
|                                           |   | **Commercial  mortgage  loans** |   | **Residential  mortgage********Loans** |   | **Collateralized  debt  obligations** |   |
|------------------------------------------------|--------|---------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                           |   |                            |   |                                   |   |                                  |   |
| Weighted-average life (in years)               |   | 3.2                             |   | 4.6                                    |   | 6.7                                   |   |
| PSA (in rate per annum)(1)                     |   | N/A                             | (2)    | 200 PSA to 325 PSA           |   | N/A                                   | (3)    |
| Cash flow discount rate (in rate per annum)(4) |   | 7.8% to 12.8                    | %      | 4.3% to 37.5                           | %      | 2.9% to 6.9                           | %      |
| Expected credit losses (in rate per annum)(5)  |   | N/A                             | (5)    | N/A                                    | (5)    | N/A                                   | (5)    |

 

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(1)                                  PSAis an industry standard prepayment speed metric used for projecting prepaymentsover the life of a residential mortgage loan. PSA utilizes the ConstantPrepayment Rate (“CPR”) assumptions. A 100% prepayment assumption assumes aprepayment rate of 0.2% per annum of the outstanding principal balance ofmortgage loans in the first month. This increases by 0.2% thereafter during theterm of the mortgage loan, leveling off to a constant prepayment rate of 6.0%per annum beginning in the thirtieth month and each month thereafter during theterm of the mortgage loan. 100 PSA equals 6 CPR.

 

(2)                                  Todeter prepayment, commercial mortgage loans typically have prepaymentprotection in the form of prepayment lockouts and yield maintenances.

 

(3)                                  CDOdeals are generally structured to be protected from prepayment risk.

 

(4)                                  Therate is based on the weighted average yield on the retained interest of theportfolio.

 

(5)                                  Expectedcredit losses are not expected to be significant because substantially allbeneficial interests retained represent investment-grade interests.

 

(6)                                  Theimpact of adverse changes in credit spreads was calculated based on thenon-investment grade retained interests because the expected credit losses oninvestment-grade retained interests were not considered material.

 

18

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Thesesensitivities are hypothetical and do not reflect the benefits of hedgingactivities and therefore should be used with caution. Changes in fair valuebased on a 10% or 20% variation in assumptions generally cannot be extrapolatedbecause the relationship of the change in assumption to the change in fairvalue may not be linear. Also, the effect of a variation in a particularassumption on the fair value of the retained interests is calculated withoutchanging any other assumption.  Inpractice, changes in one assumption may result in changes in other assumptions(for example, increases in market interest rates may result in lowerprepayments and increased credit losses), which may magnify or counteract thesensitivities.

 

**VariableInterest Entities**

 

Pursuant to FIN 46, the Company is nowconsolidating VIEs formed after January 31, 2003 for which it is the primarybeneficiary, defined as the entity that will absorb a majority of expectedlosses, receive a majority of the expected residual returns, or both.  In the third quarter of 2003, the Companywill consolidate all VIEs in which the Company is the primary beneficiary andwill disclose those unconsolidated VIEs in which the Company has significantinterests.  The following disclosure isa result of the Company’s analysis to date. As implementation efforts proceed,the actual impact may differ as a result of the identification of additionalentities as VIEs.

 

The Company has variable interests in severalCDO VIEs formed before February 1, 2003. As described under “—Securitization Activities,” in the normal course ofits business, the Company purchases loans and other debt obligations from andon behalf of clients for the purpose of securitization.  These assets are sold to and warehoused byaffiliates and, at the end of a warehousing period, the assets are sold toQSPEs or VIEs for securitization.  TheCDO entities may have static or unmanaged (“closed”) portfolios or activelymanaged (“open”) portfolios.

 

CSFB LLC acts as structurer, underwriter andmarket maker of these CDOs.  Inconnection with its underwriting and market-making activities, the Companyretains interests in several CDOs.  Theclosed CDO transactions are structured to use QSPEs, which are not currentlyconsolidated, and will not be consolidated, into the Company’s financialstatements.  The Company’s maximumexposure to loss at June 30, 2003 was $65 million, which is the amount ofthe Company’s retained interests in closed CDOs, carried at fair value infinancial instruments owned in the condensed consolidated statements offinancial condition.

 

Open CDO entities are managed by collateralmanagers and do not qualify for QSPE status. The Company may retain interests in these open CDO VIEs that range fromsmall minority to majority debt and equity interests.  The Company will consolidate, in the third quarter of 2003, thoseCDO VIEs formed prior to February 1, 2003 in which the Company is the primarybeneficiary. The estimated impact of consolidation of these CDO VIEs at June30, 2003 is an increase in Other assets of $1.3 billion and an increase inOther liabilities of $1.3 billion.  TheCompany’s maximum exposure to loss at June 30, 2003 was the difference of$42 million, which is the amount of the Company’s retained interests,carried at fair value in financial instruments owned in the condensedconsolidated statements of financial condition.

 

Since January 31, 2003, the Company hasformed certain open CDOs in which it is the primary beneficiary and which ithas consolidated.  The impact of theconsolidation of these CDO VIEs is an increase in Other assets of$406 million and an increase in Other liabilities of $312 million asof June 30, 2003.  The difference of$94 million, which is the amount of the Company’s retained interests, waseliminated in consolidation.  Thecreditors of the VIEs do not have recourse to the Company in the event ofdefault.

 

The Company also retains significant debt andequity interests in open CDO VIEs that will not be consolidated because theCompany is not the primary beneficiary. The total assets in these CDO VIEs as of June 30, 2003 were$2.1 billion.  The Company’smaximum exposure to loss at June 30, 2003 is $13 million, which is theamount of the Company’s retained interests, carried at fair value in financialinstruments owned in the condensed consolidated statements of financialcondition.

 

In addition, the Company retains small,minority debt and equity interests in open CDO VIEs.  These VIEs are also not expected to be consolidated because theCompany is not the primary beneficiary. The Company’s maximum exposure to loss in those VIEs at June 30, 2003 is$147 million, which is the amount of the retained interests carried atfair value in financial instruments owned in the condensed consolidatedstatements of financial condition.

 

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**7. Borrowings**

 

Short-termborrowings are generally demand obligations with interest approximating thefederal funds rate, LIBOR or other money market indices. Such borrowings aregenerally used to facilitate the securities settlement process, to financesecurities inventories and to finance securities purchased by customers onmargin. At June 30, 2003 and December 31, 2002, there were no short-termborrowings secured by Company-owned securities.

 

The Company had letters of credit of$433 million and $543 million at June 30, 2003 and December 31,2002, respectively, that the Company obtained to satisfy counterpartycollateral requirements.

 

The Company has two commercial paper programsexempt from registration under the Securities Act of 1933 that allow theCompany to issue up to $7.0 billion in commercial paper.  At June 30, 2003 and December 31, 2002,$980 million and $2.1 billion, respectively, of commercial paper wasoutstanding under these programs.

 

In April 2002, the Company filed withthe SEC a shelf registration statement that allows the Company to issue fromtime to time up to $10.0 billion of senior and subordinated debt securities,and warrants to purchase such securities. Under that shelf registrationstatement, the Company had, at August 8, 2003, approximately$5.8 billion available for issuance.

 

The following table sets forth the Company’slong-term borrowings:

 
|                                                                     |   | **June 30, 2003**      |   | **December 31, 2002** |   |
|--------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                     |   | **(In millions)** |   |
|                                                                     |   |                   |   |                  |   |
| Senior notes  4.63%-8.00%, due various dates through 2032           |   | $                      | 15,170 |                  | $      | 14,735 |   |
| Medium-term  notes 1.06%-7.53%, due various dates through 2032      |   | 8,834                  |   | 8,185                 |   |
| Structured  borrowings, 7.06%-7.34%, due various dates through 2014 |   | 136                    |   | 174                   |   |
| Total long-term  borrowings                                              |   | $                      | 24,140 |                  | $      | 23,094 |   |
| Current  maturities of long-term borrowings                              |   | $                      | 2,651  |                  | $      | 3,589 |   |

 

For the sixmonths ended June 30, 2003 and 2002, interest paid on all borrowings and financingarrangements was $2.4 billion and $2.2 billion, respectively.  At June 30, 2003 and December 31, 2002long-term borrowings included unrealized appreciation of approximately$1.5 billion and $1.2 billion, respectively, associated with fair valuehedges under SFAS 133. At June 30, 2003 and December 31, 2002, the Companyhad entered into interest rate and currency swaps on $14.4 billion and$15.0 billion, respectively, of the Company’s long-term borrowings for hedgingpurposes. Substantially all of these swaps qualified as fair value hedges underSFAS 133. See Note 11 for more information.

 

TheCompany maintains a committed revolving credit facility with various banksthat, if drawn upon, would bear interest at short-term rates related to eitherthe federal funds rate or LIBOR. In May 2003, the Company replaced its $3.0billion revolving credit facility with a 364-day $1.0 billion revolvingfacility available to the Company as borrower. Proceeds from borrowings underthis facility can be used for general corporate purposes, and this facility isguaranteed by CSG. The facility contains customary covenants that the Companybelieves will not impair its ability to obtain funding. As of June 30, 2003, noborrowings were outstanding under this facility.

 

**2003Financings:**

 

During the six months ended June 30, 2003,the Company issued $1.2 billion in medium-term notes under its shelfregistration statement and $1.5 billion in medium-term notes under a$5 billion Euromarket program established in July 2001.

 

During the six months ended June 30, 2003,the Company repaid approximately $2.1 billion of medium-term notes.

 

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**8. PrivateEquity and Other Long-Term Investments**

 

Private equity and other long-terminvestments include direct investments and investments in investment vehiclesthat are generally structured as limited partnerships that in turn make privateequity and related investments in various portfolio companies and funds. TheCompany categorizes its private equity investments and other long-terminvestments into two categories, public securities and private securities.Private securities are further classified as CSFB-managed funds, directinvestments or third-party managed funds. These investments generally have noreadily available market or may be otherwise restricted as to resale under theSecurities Act of 1933; therefore, these investments are carried at estimatedfair value.

 

The Company’s subsidiaries, generally actingas managing general partner, manage many private equity partnerships (the“Funds”). When the investment performance on CSFB-managed funds exceedsspecific thresholds, the Company and certain other general partners (the “GPs”)may be entitled to receive a carried interest distribution. Carried interestdistributions are based on the cumulative investment performance of each Fundat the time the distribution is made. As a result, the Company, in its capacityas a GP (or general partner or managing member of a GP), may be obligated toreturn to investors in the Funds all or a portion of the carried interestdistributions received by the GPs if the GPs have received excess carriedinterest payments over the life of the Funds under the governing documents ofthe Funds. The amount of such contingent obligation is based upon theperformance of the Funds but cannot exceed the amount received by the GPs. AtJune 30, 2003 and December 31, 2002, the maximum amount of such contingentobligations was $216 million and $155 million, respectively, assumingthe Funds’ remaining investments were worthless. Assuming the Funds’ remaininginvestments were sold at their current carrying values at June 30, 2003 andDecember 31, 2002, the contingent obligations would have been $14 millionand $31 million, respectively. The Company recorded liabilities of$12 million and $13 million at June 30, 2003 and December 31,2002, respectively, related to these obligations.

 

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 bysuch Funds. At June 30, 2003 and December 31, 2002, the maximum amount of suchcontingent obligations was $40 million and $37 million, respectively,assuming the Funds’ remaining investments were worthless. Assuming the Funds’remaining investments were sold at their current carrying values at both June30, 2003 and December 31, 2002, the contingent obligations would have been$1 million.

 

At both June 30, 2003 and December 31, 2002,the Company had investments in private equity and other long-term investmentsof $1.0 billion and had commitments to invest up to an additional$1.6 billion and $1.7 billion at June 30, 2003 and December 31, 2002,respectively.  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.

 

**9. Net Capital**

 

The Company’s principal wholly ownedsubsidiary, CSFB LLC, is a registered broker-dealer, registered futurescommission merchant and member firm of the New York Stock Exchange Inc.(“NYSE”). As such, it is subject to the NYSE’s net capital rule, which conformsto the uniform net capital rule pursuant to Rule 15c3-1 of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Under the alternativemethod permitted by this rule, the required net capital may not be less thantwo percent of aggregate debit balances arising from customer transactions orfour percent 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. At June 30, 2003,CSFB LLC’s net capital of approximately $1.8 billion was 17% of aggregatedebit balances and in excess of the minimum requirement by approximately$1.6 billion. The Company’s over-the-counter (“OTC”) derivatives dealersubsidiary, Credit Suisse First Boston Capital LLC, is also subject to theuniform net capital rule, but calculates its net capital requirements underAppendix F of Rule 15c3-1.

 

Certain other subsidiaries are subject tocapital adequacy requirements. At June 30, 2003, the Company and itssubsidiaries complied with all applicable regulatory capital adequacyrequirements.

 

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

 

In compliance with the Commodity ExchangeAct, CSFB LLC segregates funds deposited by customers and funds accruing tocustomers as a result of trades or contracts. As of June 30, 2003 and December31, 2002, cash and securities aggregating $2.6 billion and$1.8 billion, respectively, were segregated or secured by CSFB LLC inseparate accounts exclusively for the benefit of customers.

 

In accordance with the SEC’s no-action letterdated November 3, 1998, CSFB LLC computed a reserve requirement for theproprietary accounts of introducing broker-dealers. As of June 30, 2003 andDecember 31, 2002, CSFB LLC segregated securities aggregating $184 millionand $41 million, respectively, on behalf of introducingbroker-dealers.  As of December 31,2002, Pershing LLC, which was sold in connection with the Pershing sale,segregated $283 million on behalf of introducing broker-dealers.

 

In addition, CSFB LLC segregated U.S.Treasury securities with a market value of $5.5 billion and$2.3 billion as of June 30, 2003 and December 31, 2002, respectively, in aspecial reserve bank account exclusively for the benefit of customers asrequired by Rule 15c3-3 of the Exchange Act.  Pershing LLC segregated $2.8 billion in a special reserveaccount exclusively for the benefit of customers as of December 31, 2002.

 

**11. Derivatives Contracts**

 

The Company uses derivatives contracts fortrading and hedging purposes and to meet client needs. These derivativesinclude options, forwards, futures and swaps.

 

**Non-tradingDerivatives**

 

The Company manages its interest rateexposure on its fixed-rate debt by using interest rate swaps.  These swaps are considered hedginginstruments and qualify as fair value hedges under SFAS 133. Forqualifying fair value hedges, the changes in fair value of both the hedginginstrument and the underlying debt are included in other revenues in thecondensed consolidated statements of income.

 

The effectiveness of a qualifying hedgingrelationship is evaluated using quantitative measures of correlation. If ahedge relationship is not found to be highly effective, the hedge relationshipno longer qualifies for hedge accounting under SFAS 133.  As such, any subsequent gains or lossesattributable to the hedged item cease to be recognized, while the subsequentchanges in the derivative instrument’s fair value are recognized in earnings,in each reporting period.  In addition,the fair value adjustment of the debt due to hedge accounting is amortized overthe remaining life of the debt as a yield adjustment.

 

The gains and losses related to theineffective component of the fair value hedges were not material for the sixmonths ended June 30, 2003 and 2002.

 

Other derivatives used for hedging purposesthat do not qualify as hedges under SFAS 133 are carried at fair valuewith changes in value included in principal transactions-net in the condensedconsolidated statements of income. For the six months ended June 30, 2003 and2002, the Company recognized a gain of $3 million and a loss of$6 million, respectively, for these derivatives.

 

**TradingDerivatives**

 

The Company enters into various transactionsusing derivatives for trading purposes, hedging or to provide products to itsclients. These derivatives include options, forwards and swaps.

 

*Options*

 

The Company writes option contractsspecifically designed to meet customer needs or for hedging purposes. Theoptions do not expose the Company to credit risk because the Company, not itscounterparty, is obligated to perform. At the beginning of the contract period,the Company receives a cash premium. During the contract period, the Companybears the risk of unfavorable changes in the value of the financial instrumentsunderlying the options. To manage this market risk, the Company purchases orsells cash or derivative financial instruments on a proprietary basis. Suchpurchases and sales may include debt and equity securities, forward and futurescontracts and options.

 

22

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The Company also purchases options fortrading purposes. With purchased options, the Company gets the right, for afee, to buy or sell the underlying instrument at a fixed price on or before aspecified date. The underlying instruments for these options include fixedincome securities, equities, foreign currencies and interest rate instrumentsor indices. The counterparties to these option contracts are reviewed todetermine whether they are creditworthy.

 

*Forwards*

 

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

 

For forward contracts, cash is generally notrequired at inception; cash equal to the contract value is required atsettlement. For futures contracts, the original margin is required generally incash at inception; cash equal to the change in market value is required daily.

 

Because forward contracts are subject to thefinancial reliability of the counterparty, the Company is exposed to creditrisk. To mitigate this credit risk, the Company limits transactions withspecific counterparties, reviews credit limits and adheres to internallyestablished credit extension policies. For futures contracts and options onfutures contracts, the change in the market value is settled with a clearingbroker in cash each day. As a result, the credit risk with the clearing brokeris limited to the net positive change in the market value for a single day.

 

*Swaps*

 

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

 

Trading derivative contracts are carried atfair value with changes in unrealized gains and losses and realized gains andlosses included in principal transactions-net in the condensed consolidatedstatements of income.

 

**QuantitativeDisclosures for All Derivatives**

 

The fairvalues of all derivatives contracts outstanding at June 30, 2003 and December31, 2002 were as follows: 

 
|              |   | **June 30, 2003** |   | **December 31, 2002** |   |
|-------------------|--------|-------------------|--------|-----------------------|--------|
|              |   | **Assets**        |   | **Liabilities**       |   | **Assets** |   | **Liabilities** |   |
|              |   | **(In millions)** |   |
|              |   |              |   |                  |   |   |   |   |   |
| Options           |   | $                 | 2,376  |                  | $      | 2,404 |   | $ | 830 |   | $ | 1,110 |   |
| Forward contracts |   | 916               |   | 964                   |   | 719 |   | 655 |   |
| Swaps             |   | 3,179             |   | 1,383                 |   | 2,407 |   | 1,084 |   |
| Total             |   | $                 | 6,471  |                  | $      | 4,751 |   | $ | 3,956 |   | $ | 2,849 |   |

 

These assets and liabilities areincluded as derivatives contracts in financial instruments owned/sold not yetpurchased, respectively, in the condensed consolidated statements of financialcondition.

 

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**12. Commitments**

 

The followingtable sets forth certain of the Company’s long-term commitments, including thecurrent portion, at June 30, 2003:

 
|                              |   | **Commitment Expiration Per Period** |   |
|-----------------------------------|--------|--------------------------------------|--------|
|                              |   | **Less than 1  year**                |   | **1-3  years** |   | **4-5  years** |   | **Over  5 years** |   | **Total  commitments** |   |
|                              |   | **(In millions)**                    |   |
|                              |   |                                 |   |   |   |   |   |   |   |   |   |
| Standby repurchase  agreements(1) |   | $                                    | — |   | $ | 75 |   | $ | — |   | $ | — |   | $ | 75 |   |
| Operating leases(2)               |   | 200                                  |   | 351 |   | 333 |   | 1,607 |   | 2,491 |   |
| Private equity(3)                 |   | 101                                  |   | 204 |   | 438 |   | 849 |   | 1,592 |   |
| Total commitments                 |   | $                                    | 301    |   | $ | 630 |   | $ | 771 |   | $ | 2,456 |   | $ | 4,158 |   |

 

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(1)                                  Inthe ordinary course of business, the Company maintains certain standbyrepurchase agreement facilities that commit the Company to enter into resaleagreements with customers at current market rates.

 

(2)                                  Excludessublease revenue of $499 million.

 

(3)                                  Representscommitments to invest in various partnerships that make private equity andrelated investments in various portfolio companies or other private equityfunds.

 

In addition, at June 30, 2003 the Company hadcertain commitments that expire within one year, including commitments to enterinto resale agreements of $10.5 billion.

 

The Company has contractualobligations related to certain information technology and mainframe systems. AtJune 30, 2003, these obligations were not significant. The Company had nocapital lease obligations as of June 30, 2003. For certain of the Company’sadditional commitments, see Notes 7, 8 and 13.

 

**13. Guarantees**

 

In the ordinary course of business theCompany enters into guarantee contracts. On December 31, 2002, the Companyadopted the disclosure requirements for guarantees in accordance with FIN 45.On January 1, 2003, the Company adopted the recognition requirements ofFIN 45 whereby the Company recognizes a liability at the inception of certainguarantees for obligations it has undertaken in issuing the guarantee,including its ongoing obligation to stand ready to perform over the term of theguarantee in the event that certain events or conditions occur. With certainexceptions, these recognition requirements pertain to any new guaranteesentered into, or current guarantees that are modified, after December 31,2002.

 

The guarantees covered by FIN 45 may requirethe Company to make payments to the guaranteed party based on changes relatedto an asset, a liability or an equity security of the guaranteed party. TheCompany may also be contingently required to make payments to the guaranteedparty based on another entity’s failure to perform under an agreement, or theCompany may have an indirect guarantee of the indebtedness of others, eventhough the payment to the guaranteed party may not be based on changes relatedto an asset, liability or equity security of the guaranteed party.

 

In addition, FIN 45 coverscertain indemnification agreements that contingently require the Company tomake payments to the indemnified party based on changes related to an asset,liability or equity security of the indemnified party, such as an adversejudgment in a lawsuit or the imposition of additional taxes due to either achange in the tax law or an adverse interpretation of the tax law.

 

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The followingtable sets forth the maximum contingent liability associated with the Company’sguarantees at June 30, 2003 by maturity:

 
|                     |   | **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   |   | $                                                  | — |   | $ | — |   | $ | — |   | $ | 131 |   | $ | 131 |   |
| Market value guarantees  |   | 12,011                                             |   | 2,741 |   | 1,072 |   | 990 |   | 16,814 |   |
| Related party guarantees |   | 33                                                 |   | — |   | — |   | 1,500 |   | 1,533 |   |
| Total guarantees         |   | $                                                  | 12,044 |   | $ | 2,741 |   | $ | 1,072 |   | $ | 2,621 |   | $ | 18,478 |   |

 

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.

 

**PerformanceGuarantees**

 

In the ordinary course of business, the Company enters into contractsthat would require the Company, as the guarantor, to make payments to theguaranteed party based on a third party’s failure to perform under anagreement. At June 30, 2003, the Company had a maximum contingent liability of$131 million under performance guarantees.

 

As part of theCompany’s residential mortgage securitization activities, the Company at timesguarantees the collection by the servicer of prepayment penalties.  The Company is not able to estimate themaximum exposure of these guarantees. However, the amount is not expected to be material.

 

**MarketValue Guarantees**

 

In theordinary course of business, the Company enters into OTC contracts thatcontingently require it, as the guarantor, to make payments based on changes inan underlying security. Included in this category are certain written OTC putoption contracts, pursuant to which the counterparty can potentially force theCompany to acquire the underlying financial instrument or require the Companyto make a cash payment in an amount equal to the decline in value of thefinancial instrument underlying the OTC put option. Also included in thiscategory are credit derivatives that may subject the Company to credit spreador issuer default risk because the change in credit spreads or the creditquality of the underlying financial instrument may obligate the Company to makea payment.  The Company seeks to managethese OTC derivatives exposures by engaging in various hedging strategies toreduce its exposure such as purchasing an option to sell the related securityor entering into other offsetting derivatives contracts.

 

FIN 45 does not requiredisclosures about derivatives if they can be cash settled and the Company hasno basis to conclude that it is probable that the counterparties held theunderlying instruments related to the derivative at the inception of thecontract.  Derivatives meeting thiscriteria are not disclosed in the table above.

 

At June 30, 2003, the Companyrecorded $534 million in market value guarantees. These guarantees arereflected as derivatives contracts in the condensed consolidated statements offinancial condition. The maximum gross contingent liability, excluding anypotential offset from hedging activities of these contracts, is$16.8 billion, of which $5.7 billion is with CSG affiliates, andrepresents the obligation of the Company in the event that all the underlyingsecurities are worthless, the likelihood of which the Company believes isremote.

 

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**RelatedParty Guarantees**

 

For purposesof FIN 45, related party guarantees refer to any guarantees issued by theCompany for obligations of any company (“affiliates”) controlled by CSG, theCompany’s ultimate parent, unless it is one of the Company’s consolidatedsubsidiaries. Guarantees issued by the Company for the obligations of itsconsolidated subsidiaries are excluded because they do not create anyincremental liability.

 

The Company issues guarantees tocustomers with respect to certain obligations of its affiliates in the ordinarycourse of business, including, but not limited to, certain derivativestransactions. Failure to perform by an affiliate would require the Company toperform under the guarantee. The maximum contingent liability of futurepayments of guarantees issued to counterparties of affiliates as of June 30, 2003was $1.5 billion. While the maximum contingent liability may be indicativeof the extent to which such guarantees are used, the Company believes that thelikelihood of nonperformance by these affiliates is remote. Excluded from themaximum contingent liability above are certain guarantees for which an estimatecannot be made because the exposure is unlimited and therefore impossible toestimate.

 

***Indemnifications***

 

*Indemnifications issued in connection with asset sales*

* *

In connection with sales of certain assets orbusinesses, the Company has provided purchasers customary indemnificationprovisions based on changes in an underlying asset or liability of the assetssold. These indemnification provisions are negotiated with the purchaser of theassets or businesses and vary in their scope and duration. Theseindemnification provisions generally shift the risk of certain unquantifiableand unknowable loss contingencies (e.g., relating to litigation, tax andintellectual property matters) from the purchaser to the seller, as known orquantifiable loss contingencies generally are reflected in the value of theassets or businesses being sold. The Company has determined that it is notpossible to make an estimate of the maximum amount that the Company could beobligated to pay under these indemnification provisions. To date, the Company’sactual payments arising from these indemnification provisions have been inconnection with litigation matters and have not been material.

 

*Private equity clawback arrangements*

* *

Under certain circumstances, the Company hasprovided investors in private equity funds sponsored by the Company guaranteesof potential obligations of certain GPs to return amounts previously paid ascarried interest to those GPs. To manage its exposure, the Company generallywithholds a portion of carried interest distributions to cover any repaymentobligations.  The amounts of suchguarantees are included in the contingent obligations disclosed in Note 8.

 

*Tax gross-up arrangements*

* *

The Company provides indemnificationsto certain counterparties in connection with its normal operating activities.The Company has determined that it is not possible to make an estimate of themaximum amount it could be obligated to pay. As a normal part of issuing itsown securities, the Company typically agrees to reimburse holders foradditional tax withholding charges or assessments resulting from changes inapplicable tax laws. Securities that include these agreements to pay additionalamounts generally also include a related redemption or call provision if theobligation to pay the additional amounts results from a change in law or itsinterpretation and the obligation cannot be avoided by the issuer takingreasonable steps to avoid the payment of additional amounts. Since suchpotential obligations are dependent on future changes in tax laws, the relatedliabilities the Company may incur as a result of such changes cannot bereasonably estimated. In light of the related call provisions typicallyincluded, the Company does not expect any potential liabilities to be material.

 

**OtherGuarantees**

 

The Company isa member of numerous securities exchanges and clearinghouses, and may, as aresult of its membership arrangements, be required to perform if another memberdefaults.  The Company has determinedthat it is not possible to estimate the maximum amount of these obligations andbelieves that any potential requirement to make payments under thesearrangements is remote.

 

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**14. IndustrySegment and Geographic Data**

 

The Company operates and managesits businesses through two operating segments: the Institutional Securitiessegment, consisting of the Investment Banking, Equity and Fixed Incomedivisions, and the Financial Services segment.

 

The Company’s segments aremanaged based on types of products and services offered and their relatedclient bases. The Company evaluates the performance of its segments basedprimarily on income (loss) before income taxes, discontinued operations, extraordinaryitems and cumulative effect of a change in accounting principle.

 

In theInstitutional Securities segment:

 

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

 

•                  the Equitydivision engages in sales and trading in equity and equity-related products,including listed and OTC derivatives and risk management products, securitieslending and borrowing and prime brokerage; and

 

•                  the Fixed Incomedivision is active in underwriting, trading, prime brokerage and distributingfixed-income financial instruments and offers derivatives and risk managementproducts.

 

The Financial Services segmentprovides investment advisory services to high-net-worth individuals and thefinancial intermediaries that represent them. The range of services includessingle-stock brokerage, hedging and sales of restricted securities andinvestment management products, such as third-party managed accounts and alternativeinvestments. The presentation of Pershing results, including the gain on thesale in the second quarter of 2003, as “Discontinued operations” for allperiods presented resulted in a material decrease in the Financial Servicessegment’s revenues as the Pershing business contributed materially to the netrevenues of the Financial Services segment.

 

The Company allocates to itssegments a pro rata share of certain centrally managed costs, such as leasedfacilities and equipment costs, employee benefits and certain general overheadexpenses based upon specified amounts, usage criteria or agreed rates, andallocates interest expense based upon the type of asset. The segmentalallocation of some costs, such as incentive bonuses, has been estimated.

 

The Company has not allocatedmerger-related and certain other costs and charges to its segments because noneof these costs represents normal operating costs. Instead, these costs are inthe Elimination & Other category in the table below. The Company’sresults from the legacy private equity and distressed businesses are alsoincluded in the Elimination & Other category in the table below.  All other accounting policies of thesegments are the same as those described in the summary of significantaccounting policies in the Company’s Annual Report on Form 10-K for the yearended December 31, 2002.

 

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The following table sets forththe net revenues excluding net interest, net interest revenue (expense), totalnet revenues, total expenses and income (loss) from continuing operationsbefore provision (benefit) for income taxes and discontinued operations of theCompany’s segments and reconciles the Company’s segment totals to the Company’scondensed consolidated results.

 
|                                     |   | **Institutional Securities** |       | **Institutional  Securities** |       | **Financial  Services** |       | **Total  for  Reported  Segments** |       | **Elimination  & Other (2)** |       | **Total** |       |
|------------------------------------------|--------|------------------------------|------------|-------------------------------|------------|-------------------------|------------|------------------------------------|------------|----------------------------------|------------|-----------|------------|
| **Investment  Banking**                  |   | **Equity**                   |       | **Fixed  Income**             |
|                                     |
|                                     |   | **(In millions)**            |       |
| **Three Months Ended  June 30, 2003:**   |   |                         |       |                          |       |                    |       |                               |       |                             |       |      |       |   |   |   |   |
| Net revenues excluding net interest      |   | $                            | 404        |                          | $          | 315                     |       | $                                  | 83         |                             | $          | 802       |       | $ | 54 |   | $ | 856 |   | $ | 15 |   | $ | 871 |   |
| Net interest revenue (expense)           |   | 8                            |       | 50                            |       | 517                     |       | 575                                |       | 3                                |       | 578       |       | (4 | ) | 574 |   |
| Total net revenues                       |   | 412                          |       | 365                           |       | 600                     |       | 1,377                              |       | 57                               |       | 1,434     |       | 11 |   | 1,445 |   |
| Total expenses                           |   | 310                          |       | 300                           |       | 420                     |       | 1,030                              |       | 64                               |       | 1,094     |       | 192 |   | 1,286 |   |
| Income (loss)(1)                         |   | $                            | 102        |                          | $          | 65                      |       | $                                  | 180        |                             | $          | 347       |       | $ | (7 | ) | $ | 340 |   | $ | (181 | ) | $ | 159 |   |
|                                     |   |                         | ** ** |                          | ** ** |                    | ** ** |                               | ** ** |                             | ** ** |      | ** ** |   | ** ** |   | ** ** |
| **Three Months Ended  June 30, 2002:**   |   |                         |       |                          | ** ** |                    | ** ** |                               | ** ** |                             | ** ** |      | ** ** |   | ** ** |   | ** ** |
| Net revenues excluding net interest      |   | $                            | 500        |                          | $          | 395                     |       | $                                  | 94         |                             | $          | 989       |       | $ | 82 |   | $ | 1,071 |   | $ | 30 |   | $ | 1,101 |   |
| Net interest revenue (expense)           |   | 8                            |       | 24                            |       | 461                     |       | 493                                |       | 4                                |       | 497       |       | (8 | ) | 489 |   |
| Total net revenues                       |   | 508                          |       | 419                           |       | 555                     |       | 1,482                              |       | 86                               |       | 1,568     |       | 22 |   | 1,590 |   |
| Total expenses                           |   | 441                          |       | 309                           |       | 458                     |       | 1,208                              |       | 92                               |       | 1,300     |       | 41 |   | 1,341 |   |
| Income (loss)(1)                         |   | $                            | 67         |                          | $          | 110                     |       | $                                  | 97         |                             | $          | 274       |       | $ | (6 | ) | $ | 268 |   | $ | (19 | ) | $ | 249 |   |
|                                     |   |                         | ** ** |                          | ** ** |                    | ** ** |                               | ** ** |                             | ** ** |      | ** ** |   | ** ** |   | ** ** |
| **Six Months Ended  June 30, 2003:**     |   |                         |       |                          | ** ** |                    | ** ** |                               | ** ** |                             | ** ** |      | ** ** |   | ** ** |   | ** ** |
| Net revenues excluding net interest      |   | $                            | 680        |                          | $          | 574                     |       | $                                  | 211        |                             | $          | 1,465     |       | $ | 108 |   | $ | 1,573 |   | $ | 5 |   | $ | 1,578 |   |
| Net interest revenue (expense)           |   | 11                           |       | 63                            |       | 1,003                   |       | 1,077                              |       | 4                                |       | 1,081     |       | (14 | ) | 1,067 |   |
| Total net revenues                       |   | 691                          |       | 637                           |       | 1,214                   |       | 2,542                              |       | 112                              |       | 2,654     |       | (9 | ) | 2,645 |   |
| Total expenses                           |   | 619                          |       | 593                           |       | 807                     |       | 2,019                              |       | 128                              |       | 2,147     |       | 249 |   | 2,396 |   |
| Income (loss)(1)                         |   | $                            | 72         |                          | $          | 44                      |       | $                                  | 407        |                             | $          | 523       |       | $ | (16 | ) | $ | 507 |   | $ | (258 | ) | $ | 249 |   |
| **Segment assets at June 30, 2003**      |   | $                            | 1,669      |                          | $          | 64,790                  |       | $                                  | 177,060    |                             | $          | 243,519   |       | $ | 45 |   | $ | 243,564 |   | $ | 473 |   | $ | 244,037 |   |
|                                     |   |                         |       |                          |       |                    |       |                               |       |                             |       |      |       |   |   |   |   |
| **Six Months Ended  June 30, 2002:**     |   |                         |       |                          |       |                    |       |                               |       |                             |       |      |       |   |   |   |   |
| Net revenues excluding net interest      |   | $                            | 947        |                          | $          | 800                     |       | $                                  | 347        |                             | $          | 2,094     |       | $ | 165 |   | $ | 2,259 |   | $ | 430 |   | $ | 2,689 |   |
| Net interest revenue (expense)           |   | 13                           |       | 28                            |       | 843                     |       | 884                                |       | 8                                |       | 892       |       | (23 | ) | 869 |   |
| Total net revenues                       |   | 960                          |       | 828                           |       | 1,190                   |       | 2,978                              |       | 173                              |       | 3,151     |       | 407 |   | 3,558 |   |
| Total expenses                           |   | 857                          |       | 626                           |       | 909                     |       | 2,392                              |       | 190                              |       | 2,582     |       | 202 |   | 2,784 |   |
| Income (loss)(1)                         |   | $                            | 103        |                          | $          | 202                     |       | $                                  | 281        |                             | $          | 586       |       | $ | (17 | ) | $ | 569 |   | $ | 205 |   | $ | 774 |   |
| **Segment assets at  December 31, 2002** |   | $                            | 1,487      |                          | $          | 52,900                  |       | $                                  | 169,748    |                             | $          | 224,135   |       | $ | 92 |   | $ | 224,227 |   | $ | 11,870 |   | $ | 236,097 |   |

 

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(1)                                  Income(loss) from continuing operations before provision (benefit) for income taxesand discontinued operations (including gain on the sale of Pershing).

 

(2)                                  TheCompany has not allocated merger-related costs to reported segments becausenone of these costs represents normal operating costs. These costs are includedin the Elimination and Other category. Also included in this category are:

 

•                  Intercompanyaccounts/intersegmental revenue charges that are eliminated in consolidationand other revenues and expenses that are not directly attributable to theCompany’s segments;

 

•                  The results forthe broker-dealers, CSFB*direct*LLC, DLJ*direct* Ltd. andAutranet, LLC up to the time of, and the gain resulting from, their sale in thefirst quarter of 2002;

 

•                  Certain expensesrelated to deferred compensation and return-on-equity (“ROE”) units, the valueof which is tied to the return on equity of CSFB over a three-year period; and

 

•                  The results fromlegacy private equity and distressed businesses.

 

The Company’sprincipal operations are located in the United States.  The Company maintains sales offices inEurope, Latin America and Asia.  TheCompany’s foreign revenues are not significant.

 

**15. Legal Proceedings**

 

The Company is involved in a number ofjudicial, regulatory and arbitration proceedings concerning matters arising inconnection with the conduct of its businesses. These actions have been broughton behalf of various classes of claimants and, unless otherwise specified, seekdamages of material and/or indeterminate amounts. The Company believes, basedon currently available information and advice of counsel, that the results ofsuch proceedings, in the aggregate, will not have a material adverse effect onits financial condition but might be material to operating results for anyparticular period, depending, in part, upon the operating results for suchperiod.  For a discussion of theCompany’s legal proceedings, see “Legal Proceedings” in Part II, Item 1.

 

**16. Subsequent Events**

 

OnAugust 5, 2003, the Company adopted the fair value recognition provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), asamended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transitionand Disclosure,” on a prospective basis. Under the prospective method, compensation expense is recognized for allstock options and restricted stock granted, modified or settled for servicesprovided after January 1, 2003.  Pastoption awards related to periods prior to the adoption of SFAS 123, if notsubsequently modified, will continue to be accounted for under the recognitionand measurement provisions of Accounting Principals Board Opinion No. 25,“Accounting for Stock Issued to Employees.” Therefore, no compensation expense has been or will be recognized forthose option awards, which had no intrinsic value on the date of grant.

 

TheCompany will introduce three-year vesting for all stock option awards grantedin future compensation cycles.  Forrestricted stock awards, the Company will also introduce three-year vesting inline with investment banking industry practice.  All option and restricted stock awards will be subject toforfeiture penalties.

 

The financial statement impact of the adoption of SFAS 123 and thechange in vesting of the option awards will be to expense issued option awardsat fair value as they vest over the three-year period, with the vesting tobegin in 2004.  With respect to previousrestricted stock awards, including such awards granted in January 2003 forservices provided in the prior year, the awards were expensed in full duringthe year the services were provided by employees because the restricted stockwas fully vested.  Future restrictedstock awards, beginning with grants expected in January 2004, will be expensedover a three-year period beginning in 2004 because of the new three-yearvesting arrangements.  As a result ofthis change in vesting, the Company’s accrued compensation expense foranticipated restricted stock awards for the first half of 2003 will be adjustedin the third quarter of 2003 to reduce the compensation accrual by $85million.  If the Company had not changedthe vesting, compensation expense relating to restricted stock awards in thesecond half of 2003 would have been dependent on a variety of factors,including performance.

 

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OnAugust 6, 2003, CSG launched an option reduction program, which entitlesemployees to exchange certain of their existing options with a strike price ofCHF 60 or higher for new options or restricted stock of CSG and to exchangecertain of their existing options with a strike price between CHF 30 and CHF 60for restricted stock of CSG.  Theexchange will take place on a value-for-value basis, which means that theaggregate value of new options and restricted stock granted to each participantis expected to be equal to the aggregate value of the participant’s optionscancelled in connection with the offer.

 

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**Independent Accountants’ Review Report**

 

The Board of Directors andStockholder

Credit Suisse First Boston(USA), Inc.:

 

We have reviewed the accompanying condensedconsolidated statement of financial condition of Credit Suisse First Boston(USA), Inc. and subsidiaries (formerly known as Donaldson, Lufkin &Jenrette, Inc. and subsidiaries) as of June 30, 2003, the related condensedconsolidated statements of income for the three-month and six-month periodsended June 30, 2003 and 2002, andthe related condensed consolidated statements of changes in stockholders’equity and cash flows for the six-month periods ended June 30, 2003 and 2002. These condensed consolidated financial statements are the responsibilityof the Company’s management.

 

We conducted our reviews in accordance withstandards established by the American Institute of Certified Public Accountants.A review of interim financial information consists principally of applyinganalytical procedures and making inquiries of persons responsible for financialand accounting matters.  It issubstantially less in scope than an audit conducted in accordance with auditingstandards generally accepted in the United States of America, the objective ofwhich is the expression of an opinion regarding the financial statements takenas a whole.  Accordingly, we do notexpress such an opinion.

 

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

 

We have previously audited, in accordancewith auditing standards generally accepted in the United States of America, theconsolidated statement of financial condition of Credit Suisse First Boston(USA), Inc. and subsidiaries as of December 31, 2002, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for the year then ended (not presented herein); and in our report datedFebruary 19, 2003, we expressed an unqualified opinion on those consolidatedfinancial statements.  In our opinion,the information set forth in the accompanying condensed consolidated statementof financial condition as of December 31, 2002 is fairly stated, in allmaterial respects, in relation to the consolidated statement of financialcondition from which it has been derived.

 
| /s/ KPMG LLP        |   |   |
|---------------------|--------|--------|
| New York,  New York |   |
| July 24,  2003      |   |

 

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

 

**ITEM2:  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

We are a leading integrated investment bankserving institutional, corporate, government and individual clients. We arepart of the Credit Suisse First Boston business unit, which we call CSFB, ofCredit 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” and the “Company,” we mean CreditSuisse First Boston (USA), Inc., a Delaware corporation, and itsconsolidated subsidiaries.

 

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

 

**BUSINESSENVIRONMENT**

 

Our principal business activities, investmentbanking and private equity, securities underwriting and sales and trading, are,by their nature, highly competitive and subject to general market conditionsthat include volatile trading markets and fluctuations in the volume of marketactivity. Consequently, our results have been, and are likely to continue tobe, subject to wide fluctuations reflecting the impact of many factors beyondour control, including securities market conditions, the level and volatilityof interest rates, competitive conditions, the size and timing of transactionsand the geopolitical environment.

 

The U.S. economy showed mixed signs ofrecovery in the second quarter of 2003, with modest growth but continued lowlevels of corporate spending and high levels of unemployment.  Expectations of future economic growth as aresult of low interest rates, tax cuts, a weakened U.S. dollar and easing ofgeopolitical tensions helped spark a rally in the U.S. equity markets. For thesix months ended June 30, 2003, the Dow Jones Industrial Average was up 8%, theStandard & Poor’s 500 stock index increased 11%, and the NASDAQ compositeindex rose 22%.

 

In an effort to increase the pace ofsustainable economic growth, the Federal Reserve Board lowered its target forthe federal funds rate from 1.25% to 1.00% in June and indicated that there maybe a future rate cut if the economy failed to show signs of sustainable growth.

 

The dollar value of U.S. equity andequity-related underwriting for the six months ended June 30, 2003 declined 17%compared with the first six months of 2002. There were 10 initial public offerings in the United States during thefirst six months of 2003 compared with 50 in the first six months of 2002.  Fixed income markets benefited from afavorable environment of declining interest rates, a steep yield curve andtightening spreads.  The dollar value ofU.S. debt underwriting climbed 14% compared with the first six months of 2002as homeowners and companies continued to refinance existing debt. Although thedollar value of mergers and acquisitions in the United States was down 17%compared with the first six months of 2002, improved investor confidence andhopes of an economic recovery spurred both friendly and hostile mergers in Juneand July as companies sought to acquire targets at existing stock prices.

 

**RECENTDEVELOPMENTS**

 

On May 1,2003, we sold our Pershing unit, which was part of the Financial Servicessegment, to The Bank of New York Company, Inc., or BONY, for $2 billion incash, the repayment of a $480 million subordinated loan and an additionalcontingent payment of up to $50 million based on future performance.  In connection with the closing, we enteredinto an amendment to the sale agreement that required us to deliver thePershing unit with a total equity value of $645 million, an increase of $45million.  We reported a pre-tax gainfrom the sale of the Pershing unit of approximately $1.3 billion and anafter-tax gain of $852 million in the second quarter of 2003. We presented theassets and liabilities of our Pershing unit as “Assets held for sale” and“Liabilities held for sale” as of December 31, 2002 in the condensedconsolidated statements of financial condition. The operating results of thePershing unit, including the gain on the sale, have been presented as“Discontinued operations” for all periods presented in the condensedconsolidated statements of income.

 

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On March 20,2003, our immediate parent company, Credit Suisse First Boston, Inc., or CSFBI,transferred Credit Suisse First Boston Management Corporation to us as acapital contribution, and subsequently, the Company was converted to theDelaware limited liability company Credit Suisse First Boston Management LLC,or Management LLC. Management LLC engages in derivatives transactions and holdsa portfolio of private equity, distressed assets and real estate investments.The derivatives transactions entered into by Management LLC have historicallybeen designed to hedge certain trading and other positions held by CreditSuisse First Boston LLC, or CSFB LLC. Prior to the transfer of Management LLCto us, our results of operations reflected only these trading and otherpositions held by CSFB LLC without the offsetting effect of the related hedgesmaintained by Management LLC. We believe the transfer of Management LLC to usshould reduce our earnings volatility because our ongoing results of operationswill reflect both the gains and losses from trading and the offsetting effectof the related hedges. The transfer also represents a further integration ofthe Credit Suisse First Boston business unit’s U.S. operations into theCompany.

 

The transfer of Management LLC was accounted for at historical cost in amanner similar to pooling-of-interest accounting because Management LLC and wewere under the common control of CSFBI at the time of the transfer. We haverestated financial information to reflect the results of operations andfinancial position of Management LLC as if we had acquired it on November 3, 2000,the date that we were acquired by CSFBI.

 

In June 2003, we completedour acquisition of Volaris Advisors, or Volaris, a New York-basedequity-options strategies firm providing yield-enhancement and volatilitymanagement services.  The acquisition ofVolaris is expected to enhance the services of the private client servicesbusiness.

 

On August 1, 2003, JeffreyPeek resigned as Vice Chairman of CSFB, Managing Director and Head of CSFB’sFinancial Services business and from the Board of Directors of the Company.

 

**CRITICALACCOUNTING POLICIES**

 

In order to prepare thecondensed consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America, or U.S. GAAP, wemust make estimates and assumptions based on judgment and availableinformation. The reported amounts of assets and liabilities and revenues andexpenses are affected by these estimates and assumptions.  Actual results could differ from theseestimates and the differences could be material.

 

Our significant accountingpolicies are disclosed in Note 1 of the consolidated financial statementsin Part II, Item 8 in our Annual Report on Form 10-K for the year endedDecember 31, 2002. We believe that the critical accounting policies discussedbelow involve the most complex judgments and assessments. We believe that theestimates and assumptions used in the preparation of the condensed consolidatedfinancial statements are prudent and reasonable.

 

**Fair Value**

 

As is the normal practice in ourindustry, the values we report in the condensed consolidated financialstatements with respect to “Financial instruments owned” and “Financialinstruments sold not yet purchased” are in most cases based on fair value, withrelated unrealized and realized gains or losses included in the condensedconsolidated statements of income. Commercial mortgage whole loans and certainresidential mortgage whole loans held for sale are carried at the lower ofaggregate cost or fair value.

 

Fair value may be objective, asis the case for exchange-traded instruments, for which quoted prices inprice-efficient and liquid markets generally exist, or as is the case where afinancial instrument’s fair value is derived from actively quoted prices orpricing parameters. Fair value may also be subjective and dependent on varyingdegrees of judgment depending on liquidity, concentration, uncertainty ofmarket factors and pricing assumptions and other risks affecting the specificinstrument; as such, valuation adjustments are made in such circumstances toreflect these investments at management’s best estimate of fair value.  In addition, there are circumstances inwhich financial instruments that are ordinarily valued on quoted prices may bedistorted in times of market dislocation.

 

***Controls OverFair Valuation Process***

 

Control processes are applied toensure that the fair values reported in our condensed consolidated financialstatements are appropriate and measured on a reliable basis. These controlprocesses include price verification procedures and reviews of models used toprice financial instruments by personnel with relevant expertise who areindependent of the trading and investment functions. For further discussion ofour risk management policies and procedures, see “Quantitative and QualitativeDisclosure About Market Risk” in our Annual Report on Form 10-K for the yearended December 31, 2002.

 

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***Valuation***

 

The fair valueof the vast majority of our financial instruments owned and financialinstruments sold, not yet purchased is based on quoted market prices orobservable market parameters or is derived from such prices or parameters. Thefair value of our cash positions in U.S. government and agency securities andcorporate debt, equity and commercial paper is based principally on observablemarket prices (*i.e.,* dealerquotes or exchange-traded prices) or derived from observable market prices. Forthose cash positions in corporate debt and equity that are thinly traded or notquoted, more judgment is required in the determination of fair value. Examplesof cash products with no quoted prices or that are thinly traded are certainhigh-yield debt, certain collateralized mortgage obligations, distressed debtsecurities and equity securities that are not publicly traded. Generally, thetechniques used to determine fair value for these positions are based on thetype of product. For certain debt securities for which market prices are notavailable, value is based on yields reflecting the perceived risk of the issueror country rating and the maturity of the security, which may involve somejudgment. For other thinly traded securities, including convertible securitiesand asset-backed securities, internal and external models are used that take intoconsideration the input parameters such as underlying stock price, dividendrates, credit spreads, foreign exchange rates, prepayment rates and equitymarket volatility. For certain asset-backed securities, pricing modelsemploying prepayment scenarios are used.

 

Financial instruments held inthe distressed portfolio are typically issued by private companies undersignificant financial duress and/or near bankruptcy. Due to the less liquidnature of these financial instruments, valuation techniques often includeearnings-multiple analyses, similar market transactions and default recoveryanalyses. In addition, liquidity and credit concerns are also considered in thedetermination of fair value. All of these factors contribute to significantsubjectivity in the valuation of these financial instruments. As of June 30,2003 and December 31, 2002, the fair value of our distressed financialinstruments, net of reserves, was $210 million and $208 million,respectively.

 

For residential mortgage loans,valuations are based on market information on similar loans trading in thecurrent market. Proprietary models employing prepayment scenarios and MonteCarlo simulations are also used. Commercial real estate loans are valued usingorigination spreads, loan-to-value ratios, debt service coverage ratios,geographic location, prepayment considerations and current yield curves. Inaddition, current written offers or contract prices are considered in thevaluation process.

 

Our derivatives portfolioincludes both exchange-traded and over-the-counter, or OTC, derivatives. Thefair value of exchange-traded derivatives is typically derived from theobservable exchange price and/or observable market parameters. Our primaryexchange-traded derivatives include futures and certain option agreements. OTCderivatives include forwards, swaps and options on foreign exchange, interestrates, equities and credit products. Fair values for OTC derivatives aredetermined on the basis of internally developed proprietary models using variousinput parameters. The input parameters include those characteristics of thederivative that have a bearing on the economics of the instrument and marketparameters. In well-established derivatives markets, the use of a particularmodel may be widely accepted. For example, the Black-Scholes model is widelyused to calculate the fair value of many types of options. These models areused to calculate the fair value of OTC derivatives and to facilitate theeffective risk management of the portfolio. The determination of the fair valueof many derivatives involves only limited subjectivity because the requiredinput parameters are observable in the marketplace. The pricing of theseinstruments is referred to as “direct.” For other more complex derivatives, subjectivityrelating to the determination of input parameters reduces price transparency.The pricing of these instruments is referred to as “indirect.” Specific areasof subjectivity include long-dated volatilities on OTC option transactions andrecovery rate assumptions for credit derivative transactions. Uncertainty ofpricing assumptions and liquidity are also considered as part of the valuationprocess. As of June 30, 2003 and December 31, 2002, substantially all of thereplacement values reported in our condensed consolidated statement offinancial condition were derived using direct pricing.

 

***Private EquityInvestments***

 

Private equityand other long-term investments include direct investments and investments inpartnerships that make private equity and related investments in variousportfolio companies and funds. The Company categorizes its private equityinvestments and other long-term investments into two categories, publicsecurities and private securities. Private securities are further classified asCSFB-managed funds, direct investments or funds managed by third parties. Theseinvestments generally have no readily available market or may be otherwiserestricted as to resale; therefore, these investments are carried at estimatedfair value. Fair value for private equity and other long-term investments isbased upon a number of factors as described below.

 

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***Public Securities***

 

Publiclytraded investments are valued based upon readily available market quotes withthe appropriate adjustments for liquidity as a result of holding large blocksand/or having trading restrictions. As of June 30, 2003 and December 31, 2002,the fair value of public securities in our private equity portfolio was$41 million and $57 million, respectively.

 

***Private Securities***

 

*CSFB-Managed Funds.*  CSFB-managed funds are funds for which CSFBacts as fund advisor and makes investment decisions. The investments in thefunds are valued taking into account a number of factors, such as the mostrecent round of financing involving unrelated new investors, earnings multipleanalyses using comparable companies or discounted cash flow analysis. Theinvestments in fund of funds partnerships are valued based on periodicstatements received from the underlying fund manager. As of June 30, 2003 andDecember 31, 2002, the fair value of CSFB-managed funds was $516 millionand $486 million, respectively.

 

*Direct Investments.*  Direct investments are generallyside-by-side investments in portfolio companies of CSFB-managed orthird-party-managed funds. The investments are valued in accordance with theprocedures for CSFB-managed or third-party-managed funds. As of June 30, 2003and December 31, 2002, the fair value of direct investments in our private equityportfolio was $263 million and $288 million, respectively.

 

*Funds Managed by Third Parties.*  Funds managed by third parties are limitedpartnership interests in a fund managed by an external fund manager. Thesefunds are valued based on periodic statements received from the general partnerof the fund. As of June 30, 2003 and December 31, 2002, the fair value of fundsmanaged by third parties in our private equity portfolio was $165 millionand $125 million, respectively.

 

**Deferred TaxAssets**

 

Deferred tax assets andliabilities are recognized for the estimated future tax effects of operatingloss carry-forwards and temporary differences between the carrying amounts ofexisting assets and liabilities and their respective tax bases at the balancesheet date.

 

The realization of deferred taxassets on temporary differences is dependent upon the generation of taxableincome during the periods in which those temporary differences becomedeductible. The realization of deferred tax assets on net operating losses isdependent upon the generation of taxable income during the periods prior totheir expiration, if any. Periodically, management evaluates whether deferredtax assets can be realized. If management considers it more likely than notthat all or a portion of a deferred tax asset will not be realized, acorresponding valuation allowance is established. In evaluating whetherdeferred tax assets can be realized, management considers projected futuretaxable income, the scheduled reversal of deferred tax liabilities and taxplanning strategies.

 

This evaluation requiressignificant management judgment, primarily with respect to projected taxableincome. The estimate of future taxable income can never be predicted withcertainty. It is derived from budgets and strategic business plans but isdependent on numerous factors, some of which are beyond our control.Substantial variance of actual results from estimated future taxable profits,or changes in our estimate of future taxable profits, could lead to changes indeferred tax assets being realizable or considered realizable, and wouldrequire a corresponding adjustment to the valuation allowance.

 

As of June 30, 2003, we haddeferred tax assets resulting from temporary differences that could reducetaxable income in future periods. The condensed consolidated statements offinancial condition as of June 30, 2003 and December 31, 2002 includes deferredtax assets of $1.9 billion and $2.1 billion, respectively, anddeferred tax liabilities of $311 million and $336 million, respectively.Due to uncertainty concerning our ability to generate the necessary amount andmix of state and local taxable income in future periods, we maintain a fullvaluation allowance against our deferred state and local tax assets in the amountof $43 million and $46 million as of June 30, 2003 and December 31, 2002,respectively.  See Note 5 of thecondensed consolidated financial statements in Part I, Item 1.

 

**LitigationContingencies**

 

From time to time, we areinvolved in a variety of legal, regulatory and arbitration matters inconnection with the conduct of our business. It is inherently difficult topredict the outcome of many of these matters, particularly those cases in whichthe matters are brought on behalf of various classes of claimants, seek damagesof unspecified or indeterminate amounts or involve novel legal claims. Inpresenting the consolidated financial statements, management makes estimatesregarding the outcome of

 

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legal, regulatory andarbitration matters and takes a charge to income when losses with respect tosuch matters are probable and can be reasonably estimated. Charges, other thanthose taken periodically for cost of defense, are not established for matterswhen losses cannot be reasonably estimated. Estimates, by their nature, arebased on judgment and currently available information and involve a variety offactors, including, but not limited to, the type and nature of the litigation,claim or proceeding, the progress of the matter, the advice of legal counseland other advisers, our defenses and our experience in similar cases orproceedings. See “Legal Proceedings” in Part II, Item 1.

 

**RESULTSOF OPERATIONS**

 

The assets and liabilities ofPershing as of December 31, 2002 have been presented as “Assets held forsale” and “Liabilities held for sale,” respectively, in the condensedconsolidated statements of financial condition. The results of operations forPershing, including the gain on the sale, for all periods presented have beenpresented as “Discontinued operations” in the condensed consolidated statementsof income. The presentation of the Pershing results as “Discontinuedoperations” for the periods presented results in a decrease in commissionrevenues and net interest and a material decrease in the Financial Servicessegment net revenues as the Pershing business contributed materially to the netrevenues of that segment. We present the condensed consolidated statements ofcash flows for all periods presented as if the assets and liabilities ofPershing as of December 31, 2002 were not presented as “Assets held forsale” and “Liabilities held for sale” in the condensed consolidated statementsof financial condition and the results of operations of Pershing were notpresented as “Discontinued operations” in the condensed consolidated statementsof income.

 

The following table sets forth asummary of our financial results:

 
|                                                                                              |   | **Three Months Ended  June 30,** |       | **Six Months Ended********June 30,** |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------------|------------|
|                                                                                              |   | **2003**                         |       | **2002**                             |       | **2003** |   | **2002** |   |
|                                                                                              |   | **(In  millions)**               |       |
|                                                                                              |   |                             | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Total net  revenues                                                                               |   | $                                | 1,445      |                                 | $          | 1,590 |   | $ | 2,645 |   | $ | 3,558 |   |
| Total expenses                                                                                    |   | 1,286                            |       | 1,341                                |       | 2,396 |   | 2,784 |   |
| Income from  continuing operations before provision for income taxes and discontinued  operations |   | 159                              |       | 249                                  |       | 249 |   | 774 |   |
| Provision for  income taxes                                                                       |   | 30                               |       | 85                                   |       | 61 |   | 271 |   |
| Income from  continuing operations before discontinued operations                                 |   | 129                              |       | 164                                  |       | 188 |   | 503 |   |
| Income from  discontinued operations, net of income taxes                                         |   | 852                              |       | 18                                   |       | 876 |   | 45 |   |
| Net income                                                                                        |   | $                                | 981        |                                 | $          | 182 |   | $ | 1,064 |   | $ | 548 |   |

 

The Company’s results (including the legacy privateequity and distressed businesses included in Elimination and Other) and thoseof the Fixed Income business of the Institutional Securities segment wereimpacted by the transfer of Management LLC to us as a capital contribution onMarch 20, 2003. See “—Recent Developments.”

 

The Company’s 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 ThatMay Affect Our Results of Operations” in the Company’s Annual Report on Form10-K for the year ended December 31, 2002.

 

**Three Months Ended June 30, 2003 Compared to Three MonthsEnded June 30, 2002**

 

TheCompany recorded net income of $981 million for the three months endedJune 30, 2003 compared to net income of $182 million in the same period in2002, with both revenues and expenses declining. The increase in net income wasdue to the gain of $852 million from the sale of Pershing during thesecond quarter of 2003.

 

Netrevenues decreased $145 million, or 9%, to $1.4 billion for the three monthsended June 30, 2003, as investment banking and commission revenue declinedcompared to the three months ended June 30, 2002.  The decline in investment banking revenues reflected theindustry-wide reduction in mergers and acquisitions and equity new issuanceactivity.  Second quarter 2003 mergersand acquisitions and equity new issuance activity improved compared with thefirst quarter of 2003.

 

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Commissions declined as aresult of lower single-stock trading volumes and competitive pricingpressure.  Principal transactionsrevenues were higher for the three months ended June 30, 2003 compared with thethree months ended June 30, 2002, primarily due to unrealized and realizedgains from private equity investments and the effect of the favorable interestrate environment, which benefited net interest income.

 

Expensesdecreased 4% for the three months ended June 30, 2003 compared to the sameperiod in 2002, primarily as a result of reduced headcount and continuingcost-reduction efforts.  See“—Expenses.”

 

**SixMonths Ended June 30, 2003 Compared to Six Months Ended June 30, 2002**

 

TheCompany recorded net income of $1.1 billion for the six months ended June 30,2003 compared to $548 million in the same period in 2002, with bothrevenues and expenses declining. The increase in net income was due primarilyto the after-tax gain of $852 million from the sale of Pershing during thesecond quarter of 2003.  The results forthe six months ended June 30, 2002 include a pre-tax gain of $528 millionfrom the sale of three broker-dealers, CSFB*direct*LLC, DLJ*direct* Ltd. and Autranet,LLC, in the first quarter of 2002.

 

Netrevenues decreased $913 million, or 26%, to $2.6 billion for the sixmonths ended June 30, 2003, as investment banking, commissions and otherrevenues all declined compared to the six months ended June 30, 2002.  The decline in investment banking revenuesreflects the industry-wide reduction in mergers and acquisitions and equity newissuance activity. Commissions declined as a result of lower single-stocktrading volumes and competitive pricing pressure.  A significant part of the decline in other revenues resulted fromthe inclusion in 2002 of the gain from the sale of three of the Company’sbroker-dealers. Net revenues, excluding the $528 million gain on the saleof the three broker-dealers, declined 13% in the six months ended June 30, 2003compared with the six months ended June 30, 2002. Principal transactionsrevenues were higher for the six months ended June 30, 2003 compared to the sixmonths ended June 30, 2002, primarily due to unrealized and realized gains fromprivate equity investments and the effect of the favorable interest rateenvironment, which benefited net interest income.

 

Expensesdecreased 14% for the six months ended June 30, 2003 compared to the sameperiod in 2002, primarily as a result of reduced headcount, continuingcost-reduction efforts, reduced merger-related costs and consolidation ofoffice facilities, and, in 2002, the impact from the sale of the threebroker-dealers.  See “—Expenses.”

 

**Resultsby Segment**

** **

The discussion of net revenues is presentedby segment. We operate and manage our business through two principal operatingsegments: the Institutional Securities segment and the Financial Servicessegment. The Institutional Securities segment consists of the InvestmentBanking, Equity and Fixed Income divisions. Our segments are managed based ontypes of products and services offered and their related client bases. We evaluatethe performance of our segments based primarily on income (loss) fromcontinuing operations before provision (benefit) for income taxes anddiscontinued operations.

 

For divisional reporting of net revenues andexpenses, equity capital market underwriting fees are shared between theInvestment Banking division and the Equity division and debt capital marketunderwriting fees are shared between the Investment Banking division and theFixed Income division.

 

The cost structure of each ofour 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 the type ofasset. The allocation of some costs, such as incentive bonuses, has beenestimated. The timing and magnitude of changes in our incentive bonus accrualcan have a significant effect on our operating results for a given period.

 

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The following table sets forththe net revenues, total expenses and income (loss) from continuing operationsbefore provision (benefit) for income taxes and discontinued operations,including the gain on the sale of Pershing, of the Company’s segments:

 
|                                   |   | **Institutional Securities** |   |       |   |              |   |
|----------------------------------------|--------|------------------------------|--------|------------|--------|-------------------|--------|
|                                   |   | **Investment  Banking**      |   | **Equity** |   | **Fixed  Income** |   | **Institutional  Securities** |   | **Financial  Services** |   |
|                                   |   | **(In  millions)**           |   |
| **Three  Months Ended June 30, 2003**  |   |                         |   |       |   |              |   |   |   |   |   |
| Total net revenues                     |   | $                            | 412    |       | $      | 365               |   | $ | 600 |   | $ | 1,377 |   | $ | 57 |   |
| Total expenses                         |   | 310                          |   | 300        |   | 420               |   | 1,030 |   | 64 |   |
| Income  (loss)(1)                      |   | $                            | 102    |       | $      | 65                |   | $ | 180 |   | $ | 347 |   | $ | (7 | ) |
|                                   |   |                         |   |       |   |              |   |   |   |   |   |
| **Three  Months Ended June 30, 2002:** |   |                         |   |       |   |              |   |   |   |   |   |
| Total net  revenues                    |   | $                            | 508    |       | $      | 419               |   | $ | 555 |   | $ | 1,482 |   | $ | 86 |   |
| Total expenses                         |   | 441                          |   | 309        |   | 458               |   | 1,208 |   | 92 |   |
| Income  (loss)(1)                      |   | $                            | 67     |       | $      | 110               |   | $ | 97 |   | $ | 274 |   | $ | (6 | ) |
|                                   |   |                         |   |       |   |              |   |   |   |   |   |
|                                   |   | **Institutional Securities** |   |       |   |              |   |
|                                   |   | **Investment  Banking**      |   | **Equity** |   | **Fixed  Income** |   | **Institutional  Securities** |   | **Financial  Services** |   |
|                                   |   | **(In millions)**            |   |
| **Six  Months Ended June 30, 2003:**   |   |                         |   |       |   |              |   |   |   |   |   |
| Total net revenues                     |   | $                            | 691    |       | $      | 637               |   | $ | 1,214 |   | $ | 2,542 |   | $ | 112 |   |
| Total expenses                         |   | 619                          |   | 593        |   | 807               |   | 2,019 |   | 128 |   |
| Income  (loss)(1)                      |   | $                            | 72     |       | $      | 44                |   | $ | 407 |   | $ | 523 |   | $ | (16 | ) |
|                                   |   |                         |   |       |   |              |   |   |   |   |   |
| **Six  Months Ended June 30, 2002:**   |   |                         |   |       |   |              |   |   |   |   |   |
| Total net  revenues                    |   | $                            | 960    |       | $      | 828               |   | $ | 1,190 |   | $ | 2,978 |   | $ | 173 |   |
| Total expenses                         |   | 857                          |   | 626        |   | 909               |   | 2,392 |   | 190 |   |
| Income  (loss)(1)                      |   | $                            | 103    |       | $      | 202               |   | $ | 281 |   | $ | 586 |   | $ | (17 | ) |

 

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(1)                                  Beforeprovision for income taxes and discontinued operations.

 

***InstitutionalSecurities***

 

The Institutional Securities segment includes the Investment Banking,Equity and Fixed Income divisions. The Investment Banking division raises andinvests capital and provides financial advice to companies throughout theUnited States and abroad. Through the Investment Banking division, we manageand underwrite offerings of securities, arrange private placements, providefinancial advisory and other services, pursue private equity investments in avariety of areas and provide venture capital to companies. The Equity divisiontrades, originates and distributes equity securities and equity-relatedderivatives. The Fixed Income division trades, originates and distributes fixedincome securities and fixed income-related derivatives, and places private debtinstruments.

 

*Three Months Ended June 30, 2003 Compared toThree Months Ended June 30, 2002*

 

Net revenues for the Institutional Securitiessegment were $1.4 billion and $1.5 billion for the three months endedJune 30, 2003 and 2002, respectively, a decrease of 7%, reflecting declines inInvestment Banking and Equity net revenues partially offset by an increase inFixed Income net revenues.

 

Investment Banking net revenues decreased 19%to $412 million, primarily due to the industry-wide slowdown in mergersand acquisitions and equity new issuance activities.  This decline was partially offset by improved private equity netrevenues as a result of unrealized and realized gains.  Second quarter 2003 mergers and acquisitionsand equity new issuance activity improved compared to the first quarter of2003.

 

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Equity net revenues decreased 13% to$365 million, primarily due to lower commission revenues and reduced newissuance activity.  Commission revenuesdecreased primarily as a result of lower single-stock trading volumes andcompetitive pricing pressure.  New issuerevenues from equity capital markets activity declined, reflecting weak demandpartially offset by increased net revenues from convertible securities due totighter credit spreads and an increase in new issuances.

 

Fixed Income net revenues increased 8*%*to $600 million, primarily due to higher net revenues from mortgages andmortgage-backed securities, which continued to benefit from low interestrates.  The increase in net revenuesfrom mortgages and mortgage-backed securities was partially offset by decreasesin net revenues from investment-grade debt trading.  Investment-grade revenues declined due to lower investment-gradedebt trading volume, which was down from the very high levels in the threemonths ended June 30, 2002 when many investors moved to higher-credit qualityissuers in the wake of the Enron and Worldcom scandals.  High-yield debt new issuance and secondarytrading remained strong for the three months ended June 30, 2003.

 

*Six Months Ended June 30, 2003 Compared toSix Months Ended June 30, 2002*

 

Net revenues for the Institutional Securitiessegment were $2.5 billion and $3.0 billion for the six months endedJune 30, 2003 and 2002, respectively, a decrease of 15%, reflecting declines inInvestment Banking and Equity and a modest increase in Fixed Income netrevenues.

 

Investment Banking net revenues decreased 28%to $691 million, primarily due to the industry-wide slowdown in mergersand acquisitions and equity new issuance activities.  This decline was partially offset by improved private equity netrevenues as a result of unrealized and realized gains.

 

Equity net revenues decreased 23% to$637 million, primarily due to lower commission revenues and reduced newissuance activity.  Commission revenuesdecreased primarily as a result of lower single-stock trading volumes andcompetitive pricing pressure.  New issuerevenues from equity capital markets activity declined, reflecting weak demandpartially offset by increased net revenues from convertible securities due totighter credit spreads and an increase in new issuances.

 

Fixed Income net revenues increased 2% to $1.2 billion, primarilydue to higher net revenues from mortgages and mortgage-backed securities, whichcontinued to benefit from low interest rates. The increase in net revenues from mortgages and mortgage-backedsecurities was partially offset by decreases in net revenues frominvestment-grade debt trading. Investment-grade revenues declined due to lower investment-grade debttrading volume, which was down from the very high levels in the six monthsended June 30, 2002 when many investors moved to higher-credit quality issuersin the wake of the Enron and Worldcom scandals.  High-yield debt new issuance and secondary trading remainedstrong for the six months ended June 30, 2003.

 

***FinancialServices***

 

The Financial Services segment provides investmentadvisory services to high-net-worth individual investors and the financialintermediaries that represent them. The range of services includes single-stockbrokerage, hedging and sales of restricted securities and investment managementproducts such as third-party managed accounts and alternative investments.

 

***Three Months Ended June 30, 2003Compared to Three Months Ended June 30, 2002***

 

Net revenuesfor the Financial Services segment were $57 million and $86 millionfor the three months ended June 30, 2003 and 2002, respectively, a decrease of34%, primarily due to declines in new issuance revenues from equity capitalmarkets and lower commissions revenues. The decline in investment banking revenues reflects the reduction inequity capital markets activities.  Thedecline in commission revenues was due to lower transaction volumes and reducedfee revenue due to lower assets under management.

 

***Six Months EndedJune 30, 2003 Compared to Six Months Ended June 30, 2002***

 

Net revenues for the Financial Services segment were$112 million and $173 million for the six months ended June 30, 2003and 2002, respectively, a decrease of 35%, primarily due to declines in new issuance revenues fromequity capital markets and lower commissions revenues.  The decline in investment banking revenuesreflects the reduction in equity capital markets activities.  The decline in commission revenues was dueto lower transaction volumes and reduced fee revenue due to lower assets undermanagement.

 

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**Expenses**

 

The normal operating cost structure of eachof our segments is broadly similar to that of the Company as a whole.Merger-related and certain other costs and charges, which can be significant,do not represent normal operating costs and are not allocated to the segments.For these reasons, the discussion of expenses is presented on a company-widebasis.

 

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

 
|                               |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                               |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                               |   | **(In millions)**                |   |
| Employee compensation and benefits |   | $                                | 847    |                           | $      | 922 |   | $ | 1,571 |   | $ | 1,871 |   |
| Other expenses                     |   | 439                              |   | 419                            |   | 825 |   | 913 |   |
| Total expenses                     |   | $                                | 1,286  |                           | $      | 1,341 |   | $ | 2,396 |   | $ | 2,784 |   |

 

***Three Months EndedJune 30, 2003 Compared to Three Months Ended June 30, 2002***

 

Total expensesdecreased $55 million, or 4%, to $1.3 billion for the three months ended June30, 2003.  The decrease was principallydue to CSFB’s cost reduction efforts and reduced headcount.

 

Employeecompensation and benefits declined 8% in the second quarter of 2003 due toreduced headcount resulting in lower salaries and incentive compensation.  The declines were partially offset byincreases in deferred compensation tied to certain equity indices, which increasedin the second quarter of 2003, and certain compensation tied to CSFB’s returnon equity.

 

Other expenses principally consist of occupancy and equipment rental;brokerage, clearing and exchange fees; communications; professional fees andmerger-related costs. Other expenses increased 5% for the three months endedJune 30, 2003 compared to the three months ended June 30, 2002, primarily as aresult of increased professional fees, brokerage, clearing and exchange fees,partially offset by lower merger-related costs.

 

***Six Months EndedJune 30, 2003 Compared to Six Months Ended June 30, 2002***

 

Total expensesdecreased $388 million, or 14%, to $2.4 billion for the six months ended June30, 2003.  The decrease was principallydue to CSFB’s cost reduction efforts and reduced headcount.

 

Employeecompensation and benefits declined 16% for the six months ended June 30, 2003due to reduced headcount resulting in lower salaries and incentivecompensation.  The declines werepartially offset by increases in deferred compensation tied to certain equityindices, which increased in the second quarter of 2003, and certaincompensation tied to CSFB’s return on equity.

 

Other expenses decreased 10% for the six months ended June 30, 2003compared to the six months ended June 30, 2002, primarily as a result ofreduced headcount, the sale of the CSFB*direct*,DLJ*direct*, and Autranetbusinesses during the first quarter of 2002 and the consolidation of officefacilities. These reductions were partially offset by increases in professionalfees.

 

**Provision forIncome Taxes**

 

The provision for income taxesfrom continuing operations for the six months ended June 30, 2003 and 2002 was$61 million and $271 million, respectively. Excluded from theprovision for income taxes for the six months ended June 30, 2003 and 2002 wasa provision of $485 million and $24 million, respectively, fromdiscontinued operations.

 

The effectivetax rate for continuing operations changed from 35% for the six months endedJune 30, 2002 to 25% for the six months ended June 30, 2003.  The comparative change in the effective taxrate was primarily due to certain nonrecurring compensation-related taxbenefits recognized in the second quarter of 2003.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

**LiquidityManagement Oversight**

 

We believe that maintainingaccess to liquidity is fundamental for firms operating in the financialservices industry. We have therefore established a comprehensive process forthe management and oversight of our liquidity, funding and capital strategies.CSFB’s Capital Allocation and Risk Management Committee, or CARMC, has primaryoversight responsibility for these functional disciplines. CARMC periodicallyreviews and approves our liquidity management policies and targets and reviewsour liquidity position and other key risk indicators. The Corporate Treasurydepartment is responsible for the management of liquidity, long-term funding,certain short-term funding and capital, as well as relationships with creditorbanks and investors. It also maintains regular contact with rating agencies andregulators on liquidity and capital issues.

 

See “Liquidity Risk” in“Business—Certain Factors That May Affect Our Results of Operations” in ourAnnual Report on Form 10-K for the year ended December 31, 2002.

 

**BalanceSheet**

 

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

 

In addition to these liquidassets, as part of our investment banking and fixed income markets activities,we also maintain positions in less liquid assets, such as certain mortgagewhole 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 securities aregenerally financed with short-term unsecured financing or repurchaseagreements, as well as long-term borrowings and stockholders’ equity.

 

Because of changes relating tocustomer needs, economic and market conditions and proprietary trading andother strategies, our total assets or the individual components of total assetsmay vary significantly from period to period. As of June 30, 2003 andDecember 31, 2002, our total assets were $244.0 billion and$236.1 billion, respectively. As of June 30, 2003, we experienced asignificant increase in securities receivables from and payables tobroker-dealers of $12.3 billion and $12.9 billion, respectively, primarily dueto the inability across the industry for broker-dealers and other marketparticipants to be able to deliver certain U.S. government securities.

 

Included below is a discussionof our long-term contractual obligations, off-balance sheet arrangements andless liquid assets.

 

**FundingSources and Strategy**

 

The majority of our assets arefunded by collateralized short-term borrowings, which include securities soldunder agreements 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 our unsecuredfunding originates largely from two sources: we borrow from affiliates(principally Credit Suisse First Boston, a Swiss bank and our indirect parent)and we issue debt securities directly to the market. We lend funds as needed toour operating subsidiaries and affiliates on both a senior and subordinatedbasis, the latter typically to meet capital requirements of regulatedsubsidiaries. We generally try to ensure that loans to our operatingsubsidiaries and affiliates have maturities equal to or shorter than thematurities of our market borrowings.

 

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**LiquidityPlanning and Measurement**

 

We maintain a large secondarysource of liquidity, principally through our broker-dealers and various otheroperating subsidiaries. We have historically been able to access significantliquidity through the secured funding markets (securities sold under agreementsto repurchase, securities loaned and other collateralized financingarrangements), even in periods of market stress. We continually monitor overallliquidity by tracking the extent to which unencumbered marketable assets andalternative unsecured funding sources exceed both contractual obligations andanticipated contingent commitments.

 

The principal measure we use tomonitor our liquidity position is the “liquidity barometer,” which estimatesthe time period over which the adjusted market value of unencumbered assetsplus committed revolving credit facilities exceeds the aggregate value of ourmaturing unsecured liabilities plus anticipated contingent commitments. Theadjusted market value of unencumbered assets includes a reduction from marketvalue, or “haircut,” reflecting the amount that could be realized by pledgingan asset as collateral to a third-party lender in a secured fundingtransaction. Contingent commitments include such things as letters of credit,commitments to invest in private equity funds and collateralizationrequirements related to credit ratings. Our objective, as mandated by CARMC, isto ensure that the liquidity barometer equals or exceeds one year. We believethis will enable us to carry out our business plans during extended periods ofmarket stress, while minimizing, to the extent possible, disruptions to our business.

 

**ContractualObligations**

 

We havecontractual obligations to make future payments under long-term debt, long-termnon-cancelable lease agreements and other long-term obligations. The followingtable sets forth future cash payments on our contractual obligations pursuantto long-term borrowings and operating leases as of June 30, 2003:

 
|                          |   | **Contractual Obligations  Expiration Per Period** |       |           |   |
|-------------------------------|--------|----------------------------------------------------|------------|----------------|--------|
|                          |   | **Less than  1 year**                              |       | **1-3  years** |   | **4-5  years** |   | **Over  5 years** |   | **Total** |   |
|                          |   | **(In millions)**                                  | ** ** |
|                          |   |                                               |       |           |   |   |   |   |   |   |   |
| Long-term borrowings          |   | $                                                  | 2,651      |           | $      | 5,165 |   | $ | 7,561 |   | $ | 8,763 |   | $ | 24,140 |   |
| Operating leases              |   | 200                                                |       | 351            |   | 333 |   | 1,607 |   | 2,491 |   |
| Total contractual obligations |   | $                                                  | 2,851      |           | $      | 5,516 |   | $ | 7,894 |   | $ | 10,370 |   | $ | 26,631 |   |

 

Our long-term borrowings areunsecured. As of June 30, 2003, the weighted average maturity of our long-termborrowings was approximately 5.4 years. Our lease obligations are primarily forour principal offices in New York City and other locations.

 

We have contractual obligationsrelated to certain information technology, equipment leases and softwarelicenses. As of June 30, 2003, these obligations were not significant. We hadno capital lease obligations as of June 30, 2003.

 

For information on these andother material commitments, see Notes 7, 8, 12 and 13 of the condensedconsolidated financial statements in Part I, Item 1.

 

The following table sets forthour short-term unsecured borrowings:

 
|                      |   | **June 30,  2003** |   | **December 31,********2002** |   |
|---------------------------|--------|--------------------|--------|------------------------------|--------|
|                      |   | **(In  millions)** |   |
| Bank loans                |   | $                  | 640    |                         | $      | 76 |   |
| Commercial  paper(1)      |   | 980                |   | 2,082                        |   |
| Loans from  affiliates(2) |   | 15,497             |   | 9,775                        |   |
| Total                     |   | $                  | 17,117 |                         | $      | 11,933 |   |

 

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(1)                                  Reflectsamounts outstanding under our $7.0 billion commercial paper programs.

 

(2)                                  Wehave significant financing transactions with Credit Suisse First Boston andcertain of its subsidiaries and affiliates. See “—Related Party Transactions.”

 

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**RevolvingCredit Facility**

 

We maintain a committed revolving creditfacility with various banks that, if drawn upon, would bear interest atshort-term rates related to either the federal funds rate or LIBOR. InMay 2003, we replaced our $3.0 billion revolving credit facility witha 364-day $1.0 billion revolving facility available to the Company as borrower.Proceeds from borrowings under this facility can be used for general corporatepurposes, and this facility is guaranteed by CSG. The facility containscustomary covenants that we believe will not impair our ability to obtainfunding. As of June 30, 2003, no borrowings were outstanding under thisfacility.

 

**Long-termFunding**

 

We issuelong-term debt through U.S. and Euromarket medium-term note programs, as wellas syndicated and privately placed offerings around the world.

 

Under theCompany’s currently effective $10.0 billion shelf registration statement onfile with the SEC, which allows the Company to issue from time to time seniorand subordinated debt securities and warrants to purchase such securities, theCompany had at August 8, 2003 approximately $5.8 billion available for issuance.

 

For the sixmonths ended June 30, 2003, the Company issued $1.2 billion in medium-termnotes under its $10.0 billion shelf registration statement and$1.5 billion in medium-term notes under a $5 billion Euromarketprogram established in July 2001.

 

During the six months ended June 30, 2003,the Company repaid approximately $2.1 billion of medium-term notes.

 

**CreditRatings**

 

Our access to the debt capitalmarkets and our borrowing costs depend significantly on our credit ratings.These ratings are assigned by agencies, which may raise, lower or withdrawtheir ratings or place us on “creditwatch” with positive or negativeimplications at any time. Credit ratings are important to us when competing incertain markets and when seeking to engage in longer-term transactions,including OTC derivatives. We believe agencies consider several factors indetermining our credit ratings, including such things as earnings performance,business mix, market position, financial strategy, level of capital, riskmanagement policies and practices and management team, in addition to thebroader outlook for the financial services industry.

 

A reduction in our creditratings could limit our access to capital markets, increase our borrowingcosts, require us to provide additional collateral and allow counterparties toterminate transactions under certain of our trading and collateralizedfinancing contracts. This, in turn, could reduce our liquidity and negativelyimpact our operating results and financial position. Our liquidity planningtakes into consideration those contingent events associated with a reduction inour credit ratings.

 

At August 8, 2003, our ratingsand ratings outlooks were as follows: 

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

 

**CapitalResources**

 

Certain of our businesses are capitalintensive. In addition to normal operating requirements, capital is required tocover financing and regulatory capital charges on securities inventories,private equity investments and investments in fixed assets. Our overall capitalneeds are regularly reviewed to ensure that our capital base can appropriatelysupport the anticipated needs of our business and the capital requirements(regulatory and other) of our subsidiaries. Based upon these analyses, webelieve that our capitalization is adequate for current operating levels.

 

***RegulatedSubsidiaries***

 

Our principal wholly owned subsidiary, CSFBLLC, is a registered broker-dealer, registered futures commission merchant andmember firm of the New York Stock Exchange Inc., or NYSE.  As such, it is subject to the NYSE’s netcapital rule, which conforms to the uniform net capital rule pursuant toRule 15c3-1 of the Securities Exchange Act of 1934, as

 

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amended, or the ExchangeAct.  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 capitalis less than four percent of aggregate debit balances, the NYSE may require thefirm to reduce its business. If a member firm’s net capital is less than fivepercent of aggregate debit balances, the NYSE may prevent the firm fromexpanding its business and declaring cash dividends. As of June 30, 2003, CSFBLLC’s net capital of approximately $1.8 billion was 17% of aggregate debitbalances and in excess of the minimum requirement by approximately$1.6 billion. Our OTC derivatives dealer subsidiary, Credit Suisse FirstBoston Capital LLC, is also subject to the uniform net capital rule, butcalculates its net capital requirements under Appendix F toRule 15c3-1.

 

Certain other of our subsidiaries are subjectto capital adequacy requirements. As of June 30, 2003, our subsidiariescomplied with all applicable regulatory capital adequacy requirements.

 

Our broker-dealer subsidiary, Pershing LLC,was sold to BONY in connection with the sale of our Pershing unit on May 1,2003.

 

**CashFlows**

 

Our condensed consolidated statements of cashflows classify cash flows into three broad categories: cash flows fromoperating activities, investing activities and financing activities. Thesestatements should be read in conjunction with “—Related Party Transactions” aswell as Notes 2 and 4 of the condensed consolidated financial statements inPart I, Item 1.

 

***For the SixMonths Ended June 30, 2003***

 

Cash and cash equivalentsdecreased by $38 million to $442 million as of June 30, 2003.  Cash provided by operating activities was$6.2 billion.  The change in cashprovided by operating activities resulted primarily from net increases inoperating assets of $19.1 billion and net increases in operatingliabilities of $25.2 billion, which occurred in the normal course ofoperations as a result of changes in customer needs, market conditions andproprietary trading and other strategies. As of June 30, 2003, we experienced a significant increase in securitiesreceivables from and payables to broker-dealers of $12.3 billion and$12.9 billion, respectively, primarily due to the inability across theindustry for broker-dealers and other market participants to be able to delivercertain U.S. government securities.

 

Cash of $177 million wasprovided by investing activities.  TheCompany provided additional funding to its affiliates of$1.7 billion.  The Company received$2.0 billion in cash as a result of the Pershing disposal.

 

Cash used infinancing activities was $6.4 billion, reflecting a decrease in netproceeds from financing arrangements of $12.4 billion.  Short-term borrowings increased$5.2 billion and the proceeds were used primarily to fund operating activities,including short-term cash requirements related to the fails described above. Inaddition, the Company had increases of $2.8 billion in long-termborrowings and repaid $2.1 billion in long-term borrowings.  The difference was used to fund its investingand other activities.

 

***For the SixMonths Ended June 30, 2002***

 

Cash and cash equivalentsdecreased by $247 million to $1.5 billion as of June 30, 2002. Cashused in operating activities was $10.2 billion. The change in cash used inoperating activities is primarily from net increases in operating assets of$2.7 billion and net decreases in operating liabilities of$8.4 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 $8.3 billion wasused in investing activities, reflecting the fact that the Company providesfunding to CSFBI, resulting in increases in receivables from affiliates of$9.0 billion. Prior to the acquisition of the Company, CSFBI issued itsown debt to fund its operating, investing and financing activities.  The Company received $674 million as aresult of the sale of three of its broker-dealer subsidiaries.

 

Cash provided by financingactivities was $18.3 billion, reflecting increases in net proceeds fromfinancing arrangements of $9.4 billion and short-term borrowings of$2.6 billion used primarily to fund operating activities.  In addition, the Company had increases of$7.8 billion in long-term borrowings and repaid $1.4 billion inlong-term borrowings.  The differencewas used to fund its investing and other activities.

 

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**OFF-BALANCESHEET ARRANGEMENTS**

 

We enter intooff-balance sheet arrangements in the ordinary course of business. Off-balancesheet arrangements are transactions, agreements or other contractualarrangements with or for the benefit of an entity that is not consolidated withus, and which include guarantees and similar arrangements, retained or contingentinterests in assets transferred to an unconsolidated entity, and obligationsand liabilities (including contingent obligations and liabilities) undermaterial variable interests in unconsolidated entities for the purpose ofproviding financing, liquidity, market risk or credit risk support.

 

We have notentered into any derivatives contracts indexed or linked to the stock of CreditSuisse Group.

 

**Guarantees**

 

In the course of our regularbusiness, we provide guarantees and indemnifications that contingently obligateus to make payments to the guaranteed or indemnified party based on changes inan asset, liability or equity security of the guaranteed or indemnified party.We may also be contingently obligated to make payments to a guaranteed partybased on another entity’s failure to perform, or we may have an indirectguarantee of the indebtedness of others. We have provided customaryindemnifications to purchasers in conjunction with the sale of assets orbusinesses, to investors in private equity funds sponsored by the firmregarding potential obligations of its employees to return amounts previouslypaid as carried interest and to investors in our securities and otherarrangements to provide “gross up” payments if there is a withholding ordeduction because of a tax assessment or other governmental charge. OnDecember 31, 2002, we adopted the disclosure requirements for theseguarantees in accordance with the Financial Accounting Standards Board, orFASB, Interpretation, or FIN No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others - an Interpretation of FASB Statements No. 5, 57,and 107 and Rescission of FASB Interpretation No. 34,” or FIN 45, whichrequires us to disclose our maximum potential payment obligations under theseguarantees to the extent it is possible to estimate them. From time to time weguarantee the obligations of subsidiaries of CSG that are not our consolidatedsubsidiaries, and these guarantees are included in the scope of the disclosurerequirements of FIN 45. On January 1, 2003, we adopted the recognitionrequirements of FIN 45 that require us to recognize a liability for the fairvalue of the guaranteed obligations for guarantees issued or amended after December 31,2002. The recognition of these liabilities did not have a material effect onour financial position or results of operations. See Notes 1 and 13 of thecondensed consolidated financial statements in Part I, Item 1.

 

**Retainedor Contingent Interests in Assets Transferred to Unconsolidated Entities**

 

We originate and purchasecommercial mortgages and purchase residential mortgages and sell these assetsdirectly or through affiliates to special purpose entities that are, in mostcases, qualified special purpose entities, or QSPEs. These QSPEs issuesecurities that are backed by the assets transferred to the QSPEs and pay areturn based on the returns on those assets. Investors in these mortgage-backedsecurities typically have recourse to the assets in the QSPE. The investors andthe QSPEs have no recourse to our assets.

 

These QSPEs are set up by oursubsidiaries. Our principal broker-dealer subsidiary, CSFB LLC, underwrites andmakes markets 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 securitization activitiesare generally structured to use QSPEs, and therefore the assets and liabilitiestransferred to QSPEs are not included in our financial statements.

 

We may retain interests in thesesecuritized assets if CSFB LLC holds the assets in connection with itsunderwriting or market-making activities. Retained interests in securitizedfinancial assets are included in the condensed consolidated statements offinancial condition at fair value. Any changes in fair value of these retainedinterests are recognized in the condensed consolidated statements of income. Weengage in these securitization activities to meet the needs of clients as partof our fixed income activities and to sell financial assets. These securitizationactivities do not provide a material source of our funding. See Note 6 ofthe condensed consolidated financial statements in Part I, Item 1.

 

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**VariableInterest Entities**

 

Wepurchase loans and other debt obligations from and on behalf of clients for thepurpose of securitization. The loans andother debt obligations are transferred by us directly, or indirectly throughaffiliates, to QSPEs or to variable interest entities, or VIEs, that issuecollateralized debt obligations, or CDOs. CSFB LLC structures, underwrites and makes a market in these CDOs, andwe may have retained interests in these CDOs in connection with CSFB LLC’sunderwriting and market-making activities.

 

Inconnection with our adoption of FIN No. 46, “Consolidation of Variable InterestEntities,” an Interpretation of Accounting Research Bulletin No. 51,“Consolidated Financial Statements” (“FIN 46”), issued by the FASB in January2003, we are consolidating VIEs formed afterJanuary 31, 2003 in which we are the primary beneficiary, defined as the entitythat will absorb a majority of expected losses, receive a majority of theexpected residual returns, or both.  Theimpact of the consolidation of CDO VIEs formed after January 31, 2003, is anincrease in Other assets of $406 million and an increase in Other liabilitiesof $312 million as of June 30, 2003. The difference of $94 million, which is the amount of our retainedinterests, was eliminated in consolidation.

 

In the third quarter of 2003, we will consolidate allVIEs formedbefore February 1, 2003 in which we are theprimary beneficiary.  Theestimated impact of consolidation of these CDO VIEs at June 30, 2003 would bean increase in Other assets of $1.3 billion and an increase in Otherliabilities of $1.3 billion.  Ourmaximum exposure to loss at June 30, 2003 in respect of such VIEs was thedifference of $42 million, which is the amount of our retained interests,carried at fair value in financial instruments owned in the condensed consolidatedstatements of financial condition.

 

Wealso retain significant debt and equity interests in CDO VIEs that we will notconsolidate because we are not the primary beneficiary.  The total assets in these CDO VIEs as ofJune 30, 2003 were $2.1 billion. Our maximum exposure to loss at June 30, 2003is $13 million, which is the amount of our retained interests, carried at fairvalue in financial instruments owned in the condensed consolidated statementsof financial condition.  Our retainedinterests in these CDO assets are included in the SFAS 140 disclosures in Note6 of the consolidated financial statements in Part I, Item 1.

 

Weengage in these CDO transactions to meet the needs of clients.  See Note6 of the condensed consolidated financial statements in Part I, Item 1.

 

**OTHERCOMMITMENTS**

 

We have commitments under avariety of commercial arrangements that are not recorded as liabilities in ourcondensed consolidated statements of financial condition. These commitments arein addition to guarantees and other arrangements discussed in “—Off-BalanceSheet Arrangements.” These commitments include standby letters of credit,standby repurchase agreement facilities that commit us to enter into reverserepurchase agreements with customers at market rates, commitments to invest invarious partnerships that make private equity and related investments invarious portfolio companies and in other private equity funds and commitmentsto enter into resale agreements. See Note 12 of the condensed consolidatedfinancial statements in Part I, Item 1.

 

**RELATEDPARTY TRANSACTIONS**

 

CSG, through CSFBI, owns all ofour outstanding voting common stock. We are involved in significant financingand other transactions, and have significant related party balances, withCredit Suisse First Boston and certain affiliates. We generally enter intothese transactions in the ordinary course of business and believe that thesetransactions are on market terms that could be obtained from unrelated thirdparties. See “—Derivatives” and Notes 4 and 13 of the condensed consolidatedfinancial statements in Part I, Item 1 for more information.

 

**LESSLIQUID ASSETS**

 

Certain of our assets, includingprivate equity and other long-term investments, distressed securities,high-yield debt, mortgage whole loans and other non-investment-grade debt, arenot highly liquid.

 

**PrivateEquity Activities**

** **

Our private equity and otherlong-term investment activities include direct investments and investments inpartnerships that make private equity and related investments in variousportfolio companies and funds. These investments are primarily in unlisted orilliquid equity or equity-related securities and are carried at estimated fairvalue based on a number of factors. See

 

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“Business—Products andServices—Investment Banking—Private Equity” in our Annual Report on Form 10-Kfor the year ended December 31, 2002 and “—Critical Accounting Policies—FairValue” in Part I, Item 2 for more information. At both June 30, 2003 andDecember 31, 2002, we had investments in private equity and otherlong-term investments of $1.0 billion and we had commitments to invest upto an additional $1.6 billion and $1.7 billion at June 30, 2003 andDecember 31, 2002, respectively.

 

**High-YieldDebt, Mortgage Whole Loans and Other Non-Investment-Grade Financial Instruments**

 

We underwrite,trade and hold high-yield debt, mortgage whole loans, loan participations,distressed financial instruments and other non-investment-grade financial instruments.  Due to credit considerations, liquidity ofsecondary trading markets and vulnerability to general economic conditions,these financial instruments and loans generally involve greater risk thaninvestment-grade financial instruments. We record high-yield debt, residentialmortgage whole loans, distressed financial instruments and othernon-investment-grade financial instruments at fair value, with the exception ofcertain residential mortgage whole loans that are held for sale and are carriedat the lower of cost or fair value. We record commercial mortgage whole loansheld for sale and loan participations at the lower of cost or fair value.  Timing of the securitization of our mortgagewhole loan inventory will affect the size of our positions at any given time.The following table sets forth our positions in these instruments as of June30, 2003 and December 31, 2002: 

 
|                                               |   | **June 30, 2003** |   | **December 31, 2002** |   |
|----------------------------------------------------|--------|-------------------|--------|-----------------------|--------|
|                                               |   | **Long**          |   | **Short**             |   | **Long** |   | **Short** |   |
|                                               |   | **(In millions)** |   |
|                                               |   |              |   |                  |   |   |   |   |   |
| High-yield debt                                    |   | $                 | 1,411  |                  | $      | 531 |   | $ | 1,620 |   | $ | 691 |   |
| Mortgage whole  loans                              |   | 9,252             |   | —                |   | 9,465 |   | — |   |
| Loan  participations                               |   | 141               |   | —                |   | 126 |   | — |   |
| Distressed  financial instruments                  |   | 210               |   | —                |   | 208 |   | — |   |
| Other  non-investment-grade financial instruments. |   | 12                |   | —                |   | 22 |   | — |   |
| Total                                              |   | $                 | 11,026 |                  | $      | 531 |   | $ | 11,441 |   | $ | 691 |   |

 

**DERIVATIVES**

 

We enter intovarious transactions involving derivatives. We use derivatives contracts forboth trading and hedging purposes and to provide products for our clients.These derivatives include options, forwards 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, Item1 for more information.

 

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**Sourcesand Maturities of OTC Derivatives**

 

The following table sets forththe distributions, by maturity, of substantially all of our exposure withrespect to OTC derivatives as of June 30, 2003, after taking into account theeffect of netting agreements. Fair values were determined on the basis ofpricing models and other valuation methods. See Note 11 of the condensed consolidated financial statements inPart I, Item 1 for more information.

 
|               |   | **Assets  Maturity Distribution as of June 30, 2003**      |   |
|--------------------|--------|------------------------------------------------------------|--------|
|               |   | **Less than  1 year**                                      |   | **1-3 years** |   | **4-5 years** |   | **Over 5 years** |   | **Total fair  value** |   |
|               |   | **(In millions)**                                          |   |
|               |   |                                                       |   |   |   |   |   |   |   |   |   |
| Options            |   | $                                                          | 133    |   | $ | 219 |   | $ | 13 |   | $ | 104 |   | $ | 469 |   |
| Forward contracts  |   | 861                                                        |   | 32 |   | 11 |   | 12 |   | 916 |   |
| Swaps              |   | 395                                                        |   | 725 |   | 318 |   | 1,741 |   | 3,179 |   |
| Total              |   | $                                                          | 1,389  |   | $ | 976 |   | $ | 342 |   | $ | 1,857 |   | $ | 4,564 |   |
|               |   |                                                       |   |   |   |   |   |   |   |   |   |
|               |   | **Liabilities  Maturity Distribution as of June 30, 2003** |   |
|               |   | **Less than  1 year**                                      |   | **1-3 years** |   | **4-5 years** |   | **Over 5 years** |   | **Total fair  value** |   |
|               |   | **(In millions)**                                          |   |
|               |   |                                                       |   |   |   |   |   |   |   |   |   |
| Options            |   | $                                                          | 173    |   | $ | 225 |   | $ | 8 |   | $ | 39 |   | $ | 445 |   |
| Forward  contracts |   | 900                                                        |   | 24 |   | 40 |   | — |   | 964 |   |
| Swaps              |   | 268                                                        |   | 437 |   | 114 |   | 564 |   | 1,383 |   |
| Total              |   | $                                                          | 1,341  |   | $ | 686 |   | $ | 162 |   | $ | 603 |   | $ | 2,792 |   |

 

The followingtable sets forth as of June 30, 2003 substantially all of our exposure withrespect to OTC derivatives, by counterparty credit rating and with affiliates,after taking into account the effect of netting agreements.

 
| **Credit  Rating(1)**        |   | **June 30,  2003** |   |
|------------------------------|--------|--------------------|--------|
|                         |   | **(In  millions)** |   |
| AAA                          |   | $                  | 140    |   |
| AA+/AA                       |   | 74                 |   |
| AA-                          |   | 224                |   |
| A+/A/A-                      |   | 571                |   |
| BBB+/BBB/BBB-                |   | 47                 |   |
| BB+ or lower                 |   | 46                 |   |
| Unrated                      |   | 458                |   |
| Derivatives  with affiliates |   | 3,004              |   |
| Total                        |   | $                  | 4,564  |   |

 

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(1)                                  Creditratings are determined by external rating agencies or by our Credit RiskManagement department.

 

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**DerivativesWith Related Parties**

 

We enter intoa substantial number of derivatives transactions with related parties. Thefollowing table sets forth derivatives transactions with related partiesconsisting primarily of interest rate swaps, foreign exchange forward contractsand credit default swaps. The fair values of derivatives contracts outstandingwith related parties as of June 30, 2003 and December 31, 2002 were as follows:

 
|              |   | **June 30, 2003** |   | **December 31, 2002** |   |
|-------------------|--------|-------------------|--------|-----------------------|--------|
|              |   | **Assets**        |   | **Liabilities**       |   | **Assets** |   | **Liabilities** |   |
|              |   | **(In millions)** |   |
|              |   |              |   |                  |   |   |   |   |   |
| Options           |   | $                 | 98     |                  | $      | 21 |   | $ | 125 |   | $ | 319 |   |
| Forward contracts |   | 124               |   | 150                   |   | 171 |   | 74 |   |
| Swaps             |   | 2,782             |   | 1,321                 |   | 1,958 |   | 819 |   |
| Total             |   | $                 | 3,004  |                  | $      | 1,492 |   | $ | 2,254 |   | $ | 1,212 |   |

 

**ITEM3:  Quantitative and QualitativeDisclosures About Market Risk**

 

**RISKMANAGEMENT AND VALUE AT RISK**

 

For a description of the Company’s riskmanagement policies and procedures and value-at-risk, or VAR, model, includingsuch model’s assumptions and limitations, see “Quantitative and QualitativeDisclosure About Market Risk” in Part II, Item 7A of the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002.

 

**MARKETRISK EXPOSURES**

 

**TradingPortfolios**

 

TheCompany-wide trading portfolio VAR was approximately $51 million and$41 million at June 30, 2003 and December 31, 2002, respectively.

 

Due to thebenefit of diversification, the Company-wide VAR is less than the sum of theindividual components. The two main components of market risk, expressed interms of theoretical fair values, had the following VAR:

 

**Company’s Market Risk Exposures in TradingPortfolios (Unaudited)**

 
|                       |   | **June 30,  2003** |   | **December 31,********2002** |   |
|----------------------------|--------|--------------------|--------|------------------------------|--------|
|                       |   | **(In millions)**  |   |
| **99%,  one-day VAR:**     |   |               |   |                         |   |   |   |
| Interest rate risk         |   | $                  | 51     |                         | $      | 37 |   |
| Equity risk                |   | 18                 |   | 8                            |   |
| Benefit of diversification |   | (18                | )      | (4                           | )      |
| Total                      |   | $                  | 51     |                         | $      | 41 |   |

 

The average,maximum and minimum daily trading revenue during 2003 is shown below:

 
|                   |   | **Three months ended********June 30,  2003** |   | **Three months ended********March 31,  2003** |   |
|------------------------|--------|----------------------------------------------|--------|-----------------------------------------------|--------|
|                   |   | **(In millions)**                            |   |
| Daily trading revenue: |   |                                         |   |                                          |   |
| Average                |   | $                                            | 18     |                                          | $      | 14 |   |
| Maximum                |   | 112                                          |   | 54                                            |   |
| Minimum                |   | $                                            | (39    | )                                             | $      | (28 | ) |

 

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**Non-tradingPortfolios**

 

We measure equity risk on non-trading positions using a sensitivityanalysis that estimates the potential change in the recorded value of theinvestments resulting from a 10% decline in the equity markets of G-21 nationsand a 20% decline in the equity markets of non-G-21 nations. The estimatedimpact of equityrisk on our non-trading financial instruments portfolio, which is mainlycomprised of our private equity investments, would be a decrease in the valueof the non-trading portfolio of approximately $95 million and $96 million atJune 30, 2003 and December 31, 2002, respectively.

 

The interestrate risk on non-trading positions is measured using a sensitivity analysisthat estimates the potential change in the value of the non-trading portfolioresulting from a 50 basis-points decline in the interest rates of G-21 nationsand a 200 basis-points decline in the interest rates of non-G-21 nations.  Due to the current low levels of U.S.interest rates, the calculation of non-trading portfolio interest rate risk waschanged from a 100-basis points decline to a 50-basis points decline ininterest rates for G-21 nations during the second quarter of 2003.  The estimated impact of interest rate riskon pre-tax net income would be a decrease of approximately $6 million and$28 million at June 30, 2003 and December 31, 2002, respectively.

 

The foreigncurrency exchange risk on non-trading positions is measured using a sensitivityanalysis that estimates the potential change in the value of the non-tradingportfolio resulting from a 10% strengthening of the U.S. dollar against G-21currencies and a 20% strengthening of the U.S. dollar against non-G-21currencies.

 

We do not havematerial foreign currency exchange or commodity price risks on our trading andnon-trading portfolios.

 

**ITEM4:  Controls and Procedures**

 

As of the end of the period covered by thisreport, an evaluation was carried out under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial and Accounting Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures.  There are inherent limitations to the effectiveness of any systemof disclosure controls and procedures, including the possibility of human errorand the circumvention or overriding of the controls and procedures.Accordingly, even effective disclosure controls and procedures can only providereasonable assurance of achieving their control objectives.  Based upon and as of the date of theevaluation, our Chief Executive Officer and Chief Financial and AccountingOfficer concluded that the design and operation of these disclosure controlsand procedures were effective in all material respects to provide reasonableassurance that information required to be disclosed in the reports we file andsubmit under the Exchange Act is recorded, processed, summarized and reportedas and when required. There were no changes in our internal control overfinancial reporting that occurred during the quarter ended June 30, 2003 thatmaterially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PARTIIOTHER INFORMATION**

 

**ITEM 1: Legal Proceedings**

 

Certain significant legal proceedings and matters havebeen previously disclosed in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2002 and Form 10-Q for the three months ended March 31,2003.  The following is an update ofsuch proceedings.

 

**Inre Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation**

 

On June 26, 2003, the district court denied the defendants’ motion todismiss both the consolidated purchaser class action and the consolidatedissuer class action on grounds of implied immunity.

 

**Governmental/RegulatoryInquiries Relating to IPO Allocation/Research-related Practices**

 

In April 2003, CSFB andother Wall Street firms finalized a global settlement agreement, or the GlobalSettlement, with a coalition of state and federal regulators andself-regulatory organizations.  TheGlobal Settlement will be implemented through a court order and is currentlyunder review by the U.S. District Court for the Southern District of New York,which has not yet issued an order effecting the Global Settlement.  The Global Settlement resolved industry-wideregulatory investigations relating to theindependence of equity research analysts and certain IPO allocationpractices.  CSFB LLC has executeda settlement agreement with the SecuritiesDivision of the Commonwealth of Massachusetts, and continues tonegotiate the final terms of similar agreements with other state regulators,whose agreements compose the “state” portion of the Global Settlement.

 

Certain proceedings andinvestigations relating to individuals are pending.  In particular, the New York State Attorney General continues toinvestigate whether potential wrongdoing by individuals occurred during thetime period that was covered by the Global Settlement.

 

On May 30, 2003, CSFB LLCand the other Wall Street firms that participated in the Global Settlementreceived a subpoena from the SEC and a document request from the NYSE, each ofwhich seeks the production of emails of a number of senior executives andcertain other documents relating primarily to equity research.  CSFB LLC is responding to these requests.

 

On or aboutJune 24, 2003, the Attorney General of West Virginia filed suit in the CircuitCourt of Marshall County, West Virginia, against CSFB LLC and the other firmsthat participated in the Global Settlement, basically restating the allegationscontained in the SEC complaints.  Thecomplaint alleges violations of state law and seeks monetary penalties.

 

**Litigation Relatingto IPO Allocation and Research-related Practices**

 

***IPOAllocation-related Litigation***

 

InJune 2003, the plaintiffs in the putative class action litigation pending inthe U.S. District Court for the Southern District of New York concerning IPOallocation practices, captioned *In re Initial Public Offering Securities Litigation*,announced a proposed settlement of their claims against the issuer defendantsand the issuers’ officers and directors named in the litigation.

 

***Research-relatedLitigation***

 

Several putative class action lawsuits havebeen filed against CSFB LLC in the wake of publicity surrounding variousgovernmental and regulatory investigations into the practices of equityresearch analysts.  In addition to thosepreviously disclosed, cases have been brought against CSFB LLC in the U.S.District Court for the Southern District of New York on behalf of purchasers ofshares of Winstar, Inc. and in the U.S. District Court for the District ofMassachusetts on behalf of purchasers of shares of Synopsys, Inc. and Winstar, Inc.  A class action was filed on May 15, 2003 inthe U.S. District Court for the District of Colorado, but does not identify anyparticular issuers.  The complaintsgenerally assert claims under Section 10(b) of the Exchange Act and Rule 10b-5promulgated thereunder, and Section 20(a) of the Exchange Act.

 

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The previously disclosed actionsrelating to AOL Time Warner Inc., Agilent Technologies, Inc. and Razorfish,Inc. have been consolidated in the U.S. District Court for the District ofMassachusetts.  The actions that involveLantronix, Inc., Synopsys, Inc., Winstar, Inc. and Atmel Corporation have yetto be consolidated, and no lead plaintiff or lead counsel has been appointed inany of those cases.

 

An action wasfiled in the Superior Court of the State of California for the County of SantaClara on behalf of a class of purchasers of shares of several issuers,including Agilent Technologies, Inc., Allaire, AOL Time Warner Inc., DIGI,Gemstar, Lantronix, Inc., Numerical, Razorfish, Inc., Synopsys, Inc. andWinstar, Inc.  That complaint allegesthat CSFB LLC violated Section 17200 of California’s Business and ProfessionsCode, which prohibits unfair business practices.

 

On June 30, 2003, the courtdismissed, with prejudice, the actions relating to Covad Communications Co.,which had been consolidated in the U.S. District Court for the SouthernDistrict of New York.

 

**Enron-relatedLitigation and Inquiries**

 

On April 24, 2003, the courtdenied the motions to dismiss brought by outside directors of Enron in the *Newby v. Enron Corp., et al* matter andlifted the stay on discovery.  Themotions to dismiss in the *Tittle, et al. v. Enron Corp., et al*matter, including CSFB LLC’s motion to dismiss, remain pending.  On May 14, 2003, the plaintiff in *Newby*filed an amended complaint that, among other things, adds as defendants twoCSFB affiliates (as well as affiliates of other previously named investmentbanks), expands the putative class to include purchasers of certain Enron-relatedsecurities, and asserts additional alleged violations of the federal securitieslaws.  On May 28, 2003, the plaintifffiled an amended motion for class certification of a more broadly defined classbased on the amended complaint.  On June18, 2003, the CSFB entities moved to dismiss the new claims asserted in theamended complaint.  On July 11, 2003,the court issued a scheduling order setting the *Newby* and *Tittle*cases for trial in October 2005.

 

On May 28,2003, the courts presiding over the consolidated Enron litigation and over theEnron bankruptcy proceedings jointly ordered the following parties intonon-binding court-ordered mediation: plaintiffs in *Newby, Tittle* and the cases in themulti-district litigation proceedings in Texas; eleven financial institutions,including CSFB LLC and certain affiliates; and Enron and its affiliated debtorsand others (including representatives of the Official Committee of UnsecuredCreditors).  The courts appointed SeniorJudge William C. Conner of the Southern District of New York as mediator.  The mediation is scheduled to commence inthe fall of 2003.

 

**AmeriServeFood Distribution Inc. Litigation**

 

In June 2003,the DLJ defendants in *GSC Recovery, Inc. v. DLJSecurities Corp, et. al* moved for summary judgment on allclaims.  The motion is pending beforethe court.

 

**Independent EnergyHoldings PLC Litigation**

 

On May 14,2003, the DLJ entities, lead plaintiffs and remaining parties executed astipulation of settlement.   On June 12,2003, the stipulation of settlement and related settlement papers werepreliminarily approved by the court. Subject to a final approval hearing scheduled for September 3, 2003,this will settle all claims asserted against the DLJ entities.

 

**NCFE-relatedLitigation**

 

SinceFebruary 2003, lawsuits have been filed against CSFB LLC with respect toservices that it rendered to National Century Financial Enterprises, Inc. andits affiliates or, collectively, NCFE. From January 1996 to May 2002, CSFB LLC acted as a placement agent for bondsissued by NCFE that were to be collateralized by health-care receivables, andin July 2002, as a placement agent for a sale of NCFE preferred stock.  NCFE filed for bankruptcy protection inNovember 2002.

 

Inthese lawsuits, which are currently pending in Arizona, Ohio and New Jerseyfederal courts, investors in NCFE’s securities have sued numerous defendants,including the founders and directors of NCFE, the trustees for the bondissuances, NCFE’s auditors and law firm, the rating agencies that rated NCFE’sbonds, and NCFE’s placement agents, including CSFB LLC.  The allegations include claims for breach ofcontract, negligence, fraud, and violation of federal and state securitieslaws.

 

Variousearly-stage motions are pending in the NCFE-related lawsuits.  A motion to consolidate all the lawsuits hasbeen filed with the Judicial Panel on Multidistrict Litigation.  Further, motions to stay each of thelawsuits pending a decision

 

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on the motion to consolidatehave been filed.  No substantive rulingshave been issued in any of the cases.

 

**U.K.Insurance Litigation**

** **

**               **OnAugust 7, 2003, a syndicate of insurance companies filed ConsolidatedParticulars of Claims against CSG, CSFB LLC and the Company in the LondonCommercial Court alleging that certain excess liability insurance policiesprovided to these entities should be invalidated. These insurance policies areintended to provide coverage for damages, expenses or settlements in excess ofdesignated deductibles and below designated caps resulting from certain legalproceedings involving CSG or its subsidiaries. The insurance syndicate allegesthat these insurance policies should be invalidated based on certain purportedmisrepresentations and misleading statements made by CSG and CSFB to theinsurance syndicate in connection with the underwriting of these policies.

 

We are involved in a number of judicial,regulatory and arbitration proceedings (including those described above andactions that have been separately described in previous filings) concerningmatters arising in connection with the conduct of our businesses.  Some of the actions have been brought onbehalf of various classes of claimants and, unless otherwise specified, seekdamages of material and/or indeterminate amounts.  We believe, based on currently available information and adviceof counsel, that the results of such proceedings, in the aggregate, will nothave a material adverse effect on our financial condition but might be materialto operating results for any particular period, depending in part upon theoperating results for such period. We intend to defend ourselves vigorouslyagainst all of the claims asserted in these matters.

 

**ITEMS 2, 3 and4:**

 

Pursuant to General Instruction H ofForm 10-Q, the information required by Items 2, 3 and 4 is omitted.

 

**ITEM 5: Other Information**

 

We have made in this Quarterly Report onForm 10-Q, including, without limitation, in “Legal Proceedings” inPart II, Item 1, and in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Part I, Item 2, and from time totime may otherwise make in our public filings and press releases,forward-looking statements concerning our operations, economic performance andfinancial condition, as well as our future plans and strategic objectives. Suchforward-looking statements are subject to various risks and uncertainties, andwe claim the protection afforded by the safe harbor for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.Actual results could differ materially from those anticipated herein or in anysuch other filings, releases or statements because of a number of factors,including without limitation, those detailed in “Business—Certain Factors ThatMay Affect Our Results of Operations” in Part I, Item 1 of our AnnualReport on Form 10-K for the year ended December 31, 2002, thosediscussed elsewhere herein, and in other public filings and press releases.These forward-looking statements are not historical facts but instead representonly our belief regarding future events, many of which, by their nature, areinherently uncertain and beyond our control. Forward-looking statements aretypically identified by the use of future or conditional verbs such as “will,”“should,” “would” or “could,” and by words or phrases such as “believe,”“expect,” “intend,” “estimate” and similar expressions. By identifying thesestatements for you in this manner, we are alerting you to the possibility thatour actual results may differ, possibly materially, from the results indicatedin these forward-looking statements. We undertake no obligation to update orrevise any forward-looking statements except as otherwise required byapplicable law.

 

**ITEM6:  Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibits

 
| 12   |   | Statement re computation of  ratio of earnings to fixed charges                                                                       |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
| 15   |   | Letter re unaudited interim  financial information                                                                                    |
| 31.1 |   | Certification  of Brian D. Finn, President and Chief Executive Officer, pursuant to Section  302 of the Sarbanes-Oxley Act of 2002    |
| 31.2 |   | Certification  of David C. Fisher, Chief Financial and Accounting Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32   |   | Section 1350  certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                |

 

(b)                                 Reports on Form 8-K

 

1.               Form 8-K dated April 25, 2003; Item 5

2.               Form 8-K dated May 1, 2003; Items 2 and 7

3.               Form 8-K dated May 13, 2003; Items 5 and 7

4.               Form 8-K dated June 13, 2003; Item 7

5.               Form 8-K dated August 5, 2003; Item 5

 

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**Signature**

 

Pursuant tothe 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 11, 2003 | By:                                     | /s/   David  C. Fisher |   |
|            |                                    | *Chief  Financial and Accounting Officer  (On behalf of the Registrant and as**Principal  Financial Officer)* |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit No.** |   | **Description**                                                                                                                       |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                  |
| 12              |   | Statement re  computation of ratio of earnings to fixed charges                                                                       |
| 15              |   | Letter re  unaudited interim financial information                                                                                    |
| 31.1            |   | Certification  of Brian D. Finn, President and Chief Executive Officer, pursuant to Section  302 of the Sarbanes-Oxley Act of 2002    |
| 31.2            |   | Certification  of David C. Fisher, Chief Financial and Accounting Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32              |   | Section 1350  certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                |

 

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