AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2000

REGISTRATION NO. 333-75213

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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POST-EFFECTIVE AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE GOLDMAN SACHS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 6211 13-4019460
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

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85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

ROBERT J. KATZ
GREGORY K. PALM
GOLDMAN, SACHS & CO.
85 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 902-1000

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:

RICARDO A. MESTRES, JR. ALAN L. BELLER
JOHN P. MEAD CHRISTOPHER E. AUSTIN
DAVID B. HARMS CHRISTOPHER J. WALTON
ROBERT W. REEDER III CLEARY, GOTTLIEB, STEEN & HAMILTON
SULLIVAN & CROMWELL ONE LIBERTY PLAZA
125 BROAD STREET NEW YORK, NEW YORK 10006
NEW YORK, NEW YORK 10004 (212) 225-2000
(212) 558-4000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE POST-EFFECTIVE AMENDMENT TO
THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

Subject to Completion. Dated February 14, 2000.

THE GOLDMAN SACHS GROUP, INC.
[GOLDMAN SACHS LOGO]
6.65% Notes due 2009

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The Goldman Sachs Group, Inc. will pay interest on the notes on May 15 and
November 15 of each year, beginning on November 15, 1999. If Goldman Sachs
becomes obligated to pay additional amounts to non-U.S. investors due to changes
in U.S. withholding tax requirements, Goldman Sachs may redeem the notes before
their stated maturity at a price equal to 100% of the principal amount redeemed
plus accrued interest to the redemption date.

The notes are listed on the Luxembourg Stock Exchange.

See "Risk Factors" beginning on page 10 to read about factors you should
consider before investing in the notes.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

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Goldman, Sachs & Co., a subsidiary of Goldman Sachs, will and other
affiliates of Goldman Sachs may use this prospectus in connection with offers
and sales of the notes in market-making transactions.

GOLDMAN, SACHS & CO.

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Prospectus dated February , 2000.

OUR BUSINESS PRINCIPLES

1. Our clients' interests always come first. Our experience shows that if we
serve our clients well, our own success will follow.

2. Our assets are our people, capital and reputation. If any of these is ever
diminished, the last is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.

3. Our goal is to provide superior returns to our shareholders. Profitability
is critical to achieving superior returns, building our capital and attracting
and keeping our best people. Significant employee stock ownership aligns the
interests of our employees and our shareholders.

4. We take great pride in the professional quality of our work. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.

5. We stress creativity and imagination in everything we do. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.

6. We make an unusual effort to identify and recruit the very best person for
every job. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.

7. We offer our people the opportunity to move ahead more rapidly than is
possible at most other places. We have yet to find the limits to the
responsibility that our best people are able to assume. Advancement depends
solely on ability, performance and contribution to the firm's success, without
regard to race, color, religion, sex, age, national origin, disability, sexual
orientation, or any other impermissible criterion or circumstance.

8. We stress teamwork in everything we do. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of the
interests of the firm and its clients.

9. The dedication of our people to the firm and the intense effort they give
their jobs are greater than one finds in most other organizations. We think that
this is an important part of our success.

10. We consider our size an asset that we try hard to preserve. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the
esprit de corps that we all treasure and that contribute greatly to our success.

11. We constantly strive to anticipate the rapidly changing needs of our
clients and to develop new services to meet those needs. We know that the world
of finance will not stand still and that complacency can lead to extinction.

12. We regularly receive confidential information as part of our normal client
relationships. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.

13. Our business is highly competitive, and we aggressively seek to expand our
client relationships. However, we must always be fair competitors and must never
denigrate other firms.

14. Integrity and honesty are at the heart of our business. We expect our
people to maintain high ethical standards in everything they do, both in their
work for the firm and in their personal lives.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the notes. You should read the entire prospectus carefully,
especially the risks of investing in the notes discussed under "Risk Factors" on
pages 10-20.

THE GOLDMAN SACHS GROUP, INC.

Goldman Sachs is a leading global investment banking and securities firm
that provides a wide range of financial services worldwide to a substantial and
diversified client base. Our activities are divided into two business segments:

- - Global Capital Markets; and

- - Asset Management and Securities Services.

Our goal is to be the advisor of choice for our clients and a leading
participant in global financial markets. We seek to achieve this goal by
maintaining an intense commitment to our clients, focusing on our core
businesses and key opportunities, and operating as an integrated franchise.

For our fiscal year ended November 26, 1999, our net revenues were $13.3
billion and our net earnings were $2.7 billion. As of November 26, 1999, our
total assets were
$250.5 billion and our stockholders' equity was $10.1 billion.

Because we believe that the needs of our clients are global and that
international markets have high growth potential, we have built upon our
strength in the United States to achieve leading positions in other parts of the
world. Today, we have a strong global presence as evidenced by the geographic
breadth of our transactions, leadership in our core products and the size of our
international operations. As of November 26, 1999, we operated offices in over
20 countries and 37% of our 15,361 employees were based outside the United
States.

We are committed to a distinctive culture and set of core values. These
values are reflected in our Business Principles, which emphasize placing our
clients' interests first, integrity, commitment to excellence and innovation,
and teamwork.

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SUMMARY FINANCIAL DATA
($ in millions)

YEAR ENDED NOVEMBER
---------------------------
1997 1998 1999
---- ---- ----

Net revenues
Global Capital Markets.................................... $5,513 $5,747 $10,132
Asset Management and Securities Services.................. 1,934 2,773 3,213
------ ------ -------
Total net revenues.......................................... $7,447 $8,520 $13,345
====== ====== =======
Ratio of earnings to fixed charges(1)(2).................... 1.23x 1.21x 1.16x

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Read the table above in conjunction with the footnotes to "Selected Consolidated
Financial Data" as well as the following footnotes:

(1) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in operating expenses in 1997 or 1998 and, therefore, the pre-tax
earnings in these years are not comparable to 1999.

(2) For purposes of the ratio of earnings to fixed charges, "earnings" represent
pre-tax earnings plus fixed charges and "fixed charges" represent interest
expense plus that portion of rent expense that, in our opinion, approximates
the interest factor included in rent expense. For a pro forma ratio of
earnings to fixed charges reflecting our conversion to corporate form,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Pro Forma Operating
Results".

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STRATEGY AND PRINCIPAL BUSINESS LINES

Our strategy is to grow our three core businesses -- Investment Banking and
Trading and Principal Investments, which together comprise Global Capital
Markets, and Asset Management and Securities Services -- in markets throughout
the world. Our leadership position in investment banking provides us with access
to governments, financial institutions and corporate clients globally. Trading
and principal investing has been an important part of our culture and earnings,
and we remain committed to these businesses irrespective of their volatility.
Managing wealth is one of the fastest growing segments of the financial services
industry, and we are positioning our asset management and securities services
businesses to take advantage of that growth.

GLOBAL CAPITAL MARKETS

INVESTMENT BANKING. Investment Banking represented 33% of fiscal 1999 net
revenues. We are a market leader in both the Financial Advisory and Underwriting
businesses, serving over 3,000 clients worldwide. Financial Advisory includes
advisory assignments with respect to mergers and acquisitions, divestitures,
corporate defense activities, restructurings and spin-offs. Underwriting
includes public offerings and private placements of equity and debt securities.

TRADING AND PRINCIPAL INVESTMENTS. Trading and Principal Investments
represented 43% of fiscal 1999 net revenues. We make markets in equity and fixed
income products, currencies and commodities; enter into swaps and other
derivative transactions; engage in proprietary trading and arbitrage; and make
principal investments. In trading, we focus on building lasting relationships
with our most active clients while maintaining leadership positions in our key
markets. We

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believe our research, market-making and proprietary activities enhance our
understanding of markets and ability to serve our clients.

ASSET MANAGEMENT AND SECURITIES SERVICES

The Asset Management and Securities Services segment represented 24% of
fiscal 1999 net revenues. We provide global investment management and advisory
services; earn commissions on agency transactions; manage merchant banking
funds; and provide prime brokerage, securities lending and financing services.
As of November 26, 1999, we had $258.0 billion of assets under management. We
manage merchant banking funds that had $17.3 billion of capital commitments as
of November 26, 1999.

Assets under supervision are comprised of assets under management and other
client assets. Assets under management typically generate fees based on a
percentage of their value. Other client assets are comprised of assets in
brokerage accounts of primarily high-net-worth individuals, on which we earn
commissions.

OUR HEADQUARTERS

Our headquarters are located at 85 Broad Street, New York, New York 10004,
telephone (212) 902-1000.

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THE NOTES

The notes were originally issued on May 19, 1999 in an underwritten public
offering. Goldman, Sachs & Co. will, and our other affiliates may, use this
prospectus in connection with offers and sales of the notes in market-making
transactions. The price at which you may purchase notes will be set forth in a
separate confirmation of sale to be provided to you by Goldman, Sachs & Co. or
another of our affiliates. Please refer to "Description of the Notes Being
Offered" and "Plan of Distribution" in this prospectus for more information
about the notes and these market-making transactions.

Notes offered.............. 6.65% Notes due 2009.

Issuer..................... The Goldman Sachs Group, Inc.

Original issue date........ May 19, 1999.

Stated maturity............ May 15, 2009.

Total principal originally
issued................... $1,800,000,000.

Ranking.................... The notes rank equally in right of payment with all
other senior, unsecured debt obligations of The
Goldman Sachs Group, Inc.

Interest rate.............. 6.65% annually.

Date interest started
accruing................... May 19, 1999.

Interest payment dates..... Every May 15 and November 15.

First interest payment
date....................... November 15, 1999.

Regular record dates for
interest................. May 1 for May 15 interest; November 1 for November
15 interest.

Payment of additional
amounts.................... We intend to make all payments on the notes without
deducting U.S. withholding taxes. If any deduction
is required on payments to non-U.S. investors, we
will pay additional amounts on those payments to
the extent described under "Description of the
Notes Being Offered -- Payment of Additional
Amounts".

Redemption features........ We will not be permitted to redeem the notes before
they mature unless we are obligated to pay
additional amounts due to changes in U.S.
withholding tax requirements. In that event, we may
redeem the outstanding notes in whole at any time,
at a price equal to 100% of their principal amount
plus accrued interest to the redemption date.

Book-entry issuance,
settlement and
clearance................ We issued the notes only in book-entry
form -- i.e., as global notes registered in the
name of The Depository Trust Company, New York, New
York, or its nominee. The sale of the notes will
settle in immediately available funds through DTC.
Investors may hold interests in a global note
through organizations that participate, directly or
indirectly, in the DTC system. Those organizations
include the Clearstream (previously commonly
referred to as Cedel) and Euroclear systems in
Europe.

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Listing.................... The notes are listed on the Luxembourg Stock
Exchange.

Use of proceeds............ We used the net proceeds from the sale of the notes
to provide additional funds for our operations and
for other general corporate purposes, including the
repayment of short-term obligations and the portion
of long-term obligations which came due during
calendar year 1999.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The summary historical consolidated income statement and balance sheet data
set forth below have been derived from our consolidated financial statements and
their notes. Our consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent public accountants, as of November 27,
1998 and November 26, 1999 and for the years ended November 28, 1997, November
27, 1998 and November 26, 1999. These financial statements are included
elsewhere in this prospectus, together with the reports thereon of
PricewaterhouseCoopers LLP.

The summary historical consolidated income statement and balance sheet data
set forth below as of November 24, 1995, November 29, 1996 and November 28,
1997, and for the years ended November 24, 1995 and November 29, 1996 have been
derived from our consolidated financial statements that are not included in this
prospectus.

The pro forma data set forth below for the year ended November 26, 1999
have been derived from the pro forma data set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Pro Forma Operating Results".

The summary consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the consolidated financial statements and their notes.

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SUMMARY CONSOLIDATED FINANCIAL DATA

AS OF OR FOR YEAR ENDED NOVEMBER
----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)

INCOME STATEMENT DATA
Net revenues.............................................. $ 4,483 $ 6,129 $ 7,447 $ 8,520 $ 13,345
Pre-tax earnings(1)....................................... 1,368 2,606 3,014 2,921 1,992(5)

BALANCE SHEET DATA
Total assets(2)........................................... $100,066 $152,046 $178,401 $217,380 $250,491
Long-term borrowings...................................... 13,358 12,376 15,667 19,906 20,952
Partners' capital......................................... 4,905 5,309 6,107 6,310 --
Stockholders' equity...................................... -- -- -- -- 10,145

PRO FORMA DATA (UNAUDITED)(3)
Pro forma net earnings.................................... -- -- -- -- $ 2,550
Pro forma ratio of earnings to fixed charges(4)........... -- -- -- -- 1.35x

SELECTED DATA AND RATIOS (UNAUDITED)
Ratio of earnings to fixed charges(1)(4).................. 1.14x 1.23x 1.23x 1.21x 1.16x
Assets under supervision
Assets under management................................. $ 52,358 $ 94,599 $135,929 $194,821 $258,045
Other client assets..................................... 57,716 76,892 102,033 142,018 227,424
-------- -------- -------- -------- --------
Total assets under supervision............................ $110,074 $171,491 $237,962 $336,839 $485,469
======== ======== ======== ======== ========

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(1) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in operating expenses in 1995, 1996, 1997 or 1998 and, therefore,
the pre-tax earnings in these years are not comparable to 1999.

(2) Total assets and liabilities were increased as of November 27, 1998 and
November 26, 1999 as a result of certain provisions of Statement of
Financial Accounting Standards No. 125.

(3) Reflects such adjustments as are necessary, in the opinion of management,
for a fair presentation of the results of operations of Goldman Sachs on a
pro forma basis. For more detailed information concerning these adjustments,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Pro Forma Operating Results".

(4) For purposes of the ratio of earnings to fixed charges, "earnings" represent
pre-tax earnings plus fixed charges and "fixed charges" represent interest
expense plus that portion of rent expense that, in our opinion, approximates
the interest factor included in rent expense.

(5) Reflects nonrecurring expenses of $2.26 billion associated with our
conversion to corporate form and the charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of our initial public
offering.

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RISK FACTORS

An investment in the notes involves a number of risks. You should carefully
consider the following information about these risks, together with the other
information in this prospectus, before investing in the notes.

THE RISKS WE FACE IN OUR BUSINESSES COULD REDUCE THE MARKET VALUE OF THE NOTES
AND IMPAIR OUR ABILITY TO REPAY THEM

We face a number of risks in our businesses, including market, liquidity,
credit, operational, legal and regulatory risks. Many of these risks are
substantial and inherent in our businesses. These risks could harm our operating
results, our business prospects or our financial condition. If that were to
occur, the value of an investment in the notes could also be reduced, in two
main ways.

Business Risks Could Hurt the Credit Ratings of the Notes and, Therefore, Their
Market Value and Marketability

The business risks we describe in this section entitled "Risk Factors"
could reduce our profitability and our ability to borrow or otherwise raise
cash. For example, we could incur large trading losses due to severe market
fluctuations, our investment banking revenues could decline due to a prolonged
market downturn or we could become unable to refinance our debt due to a
disruption in the credit markets. If this were to occur, the rating agencies
that provide the credit ratings assigned to the notes could withdraw or lower
their ratings or could place us on "credit watch" with negative implications. If
that happened, the market value of the notes could fall. In addition, the number
of potential investors who might be willing to purchase the notes, even at a
lower price, could decrease, thereby impairing your ability to sell the notes in
any trading market for the notes that may develop. Any of these developments
could reduce the value of your investment in the notes.

Even if the business risks we describe below did not have an immediate
impact on Goldman Sachs, they could harm our business prospects. For example,
serious employee misconduct could hurt our business reputation, we could become
the target of serious, protracted litigation or regulatory action or the
competition we face from other firms could hamper our ability to enhance or even
maintain our position in important markets in the future. Developments such as
these could harm our business prospects, which in turn could lead the rating
agencies to question our ability to meet our payment obligations in a timely
manner and thus to lower our credit ratings.

If Severe Enough, Business Risks Could Also Impair Our Ability to Obtain the
Cash We Will Need to Pay Interest or Principal on the Notes

The business risks we describe below could, if severe or protracted,
prevent us from obtaining the cash we will need to make timely payments on our
debt, including the notes. This could occur, for example, if our revenues
declined or our expenses increased relative to our revenues. In addition, we may
be unable to raise the funds needed to pay our obligations if our ability to
borrow in the credit markets were impaired, either because of a general
disruption in those markets or because of a decline in our credit ratings due to
events affecting our financial position in particular or our industry generally.
Similarly, our available cash could be reduced if we were unable to sell
securities or other assets we hold as needed or if The Goldman Sachs Group, Inc.
were unable to obtain sufficient funds from its subsidiaries because of
regulatory restrictions or financial problems affecting them. A significant and
sustained reduction in the cash available to The Goldman Sachs Group, Inc. could
make it difficult for us to meet our payment obligations on our debt, including
the notes, in a timely manner.

MARKET FLUCTUATIONS COULD HARM OUR
BUSINESSES IN MANY WAYS AND,
CONSEQUENTLY, COULD LOWER THE VALUE
OF AN INVESTMENT IN THE NOTES

As an investment banking and securities firm, our businesses are materially
affected by conditions in the financial markets and eco-

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nomic conditions generally, both in the United States and elsewhere around the
world. The financial markets in the United States and elsewhere have achieved
record or near record levels, and the favorable business environment in which we
operate will not continue indefinitely. In the event of a market downturn, our
businesses could be adversely affected in many ways, including those described
below. Our revenues are likely to decline in such circumstances and, if we were
unable to reduce expenses at the same pace, our profit margins would erode. For
example, in the second half of fiscal 1998, we recorded negative net revenues
from our Trading and Principal Investments business and from mid-August to
mid-October the number of equity underwritings and announced mergers and
acquisitions transactions in which we participated declined substantially due to
adverse economic and market conditions. Even in the absence of a market
downturn, we are exposed to substantial risk of loss due to market volatility.

Developments such as lower revenues, declining profit margins and losses
from trading and investment activities could negatively affect the credit
ratings of the notes and, therefore, their market value. In addition, if
sufficiently severe, these developments could reduce the cash available to us to
make payments on our debt, including the notes. In the following paragraphs, we
describe several ways in which these developments could occur.

We May Incur Significant Losses from Our Trading and Investment Activities Due
to Market Fluctuations and Volatility

We generally maintain large trading and investment positions, including
merchant banking investments, in the fixed income, currency, commodity and
equity markets, and in real estate and other assets. To the extent that we own
assets, i.e., have long positions, in any of those markets, a downturn in those
markets could result in losses from a decline in the value of those long
positions. Conversely, to the extent that we have sold assets we do not own,
i.e., have short positions, in any of those markets, an upturn in those markets
could expose us to potentially unlimited losses as we attempt to cover our short
positions by acquiring assets in a rising market. We may from time to time have
a trading strategy consisting of holding a long position in one asset and a
short position in another, from which we expect to earn revenues based on
changes in the relative value of the two assets. If, however, the relative value
of the two assets changes in a direction or manner that we did not anticipate or
against which we are not hedged, we might realize a loss in those paired
positions. In addition, we maintain substantial trading positions that can be
adversely affected by the level of volatility in the financial markets, i.e.,
the degree to which trading prices fluctuate over a particular period, in a
particular market, regardless of market levels.

Our Investment Banking Revenues May Decline in Adverse Market or Economic
Conditions

Unfavorable financial or economic conditions would likely reduce the number
and size of transactions in which we provide underwriting, mergers and
acquisitions advisory and other services. Our Investment Banking revenues, in
the form of financial advisory, and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. In particular,
our results of operations would be adversely affected by a significant reduction
in the number or size of mergers and acquisitions transactions.

We May Generate Lower Revenues from Commissions and Asset Management Fees

A market downturn would likely lead to a decline in the volume of
transactions that we execute for our customers and, therefore, to a decline in
the revenues we receive from commissions and spreads. In addition, because the
fees that we charge for managing our clients' portfolios are in many cases based
on the value of those portfolios, a market downturn that reduces the value of
our clients' portfolios or increases the amount of withdrawals would reduce the
revenue we receive from our asset management business.

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Even in the absence of a market downturn, below-market performance by our
mutual funds may result in increased withdrawals and reduced inflows, which
would reduce the revenue we receive from our asset management business.

Holding Large and Concentrated Positions May Expose Us to Large Losses

Concentration of risk in the past has increased the losses that we have
incurred in our arbitrage, market-making, block trading, underwriting and
lending businesses and may continue to do so in the future. Goldman Sachs has
committed substantial amounts of capital to these businesses, which often
require Goldman Sachs to take large positions in the securities of a particular
issuer or issuers in a particular industry, country or region. Moreover, the
trend in all major capital markets is towards larger and more frequent
commitments of capital in many of these activities. In particular, as described
under "Business -- Global Capital Markets -- Trading and Principal
Investments -- Equities", we are experiencing an increase in the number and size
of block trades that we execute, and we expect this trend to continue.

Our Hedging Strategies May Not Prevent Losses

If any of the variety of instruments and strategies we utilize to hedge our
exposure to various types of risk are not effective, we may incur losses. Many
of our strategies are based on historical trading patterns and correlations. For
example, if we hold a long position in an asset, we may hedge this position by
taking a short position in an asset where the short position has, historically,
moved in a direction that would offset a change in value in the long position.
However, these strategies may not be fully effective in mitigating our risk
exposure in all market environments or against all types of risk. Unexpected
market developments may affect our hedging strategies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management" for a discussion of the policies and procedures we use to identify,
monitor and manage the risks we assume in conducting our businesses.

A Prolonged Market Downturn Could Impair Our Operating Results

While we encountered extremely difficult market conditions in mid-August to
mid-October 1998, the financial markets rebounded late in the fourth quarter of
fiscal 1998. At some time in the future, there may be a more sustained period of
market decline or weakness that will leave us operating in a difficult market
environment and subject us to the risks that we describe in this section for a
longer period of time.

Market Risk May Increase the Other Risks That We Face

In addition to the potentially adverse effects on our businesses described
above, market risk could exacerbate other risks that we face. For example, if we
incur substantial trading losses, our need for liquidity could rise sharply
while our access to liquidity could be impaired. In addition, in conjunction
with a market downturn, our customers and counterparties could incur substantial
losses of their own, thereby weakening their financial condition and increasing
our credit risk to them. Our liquidity risk and credit risk are described below.

OUR RISK MANAGEMENT POLICIES AND
PROCEDURES MAY LEAVE US EXPOSED TO
UNIDENTIFIED OR UNANTICIPATED RISK

We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the future.
Nonetheless, our hedging strategies and other risk management techniques may not
be fully effective in mitigating our risk exposure in all market environments or
against all types of risk, including risks that are unidentified or
unanticipated. Some of our methods of managing risk are based upon our use of
observed historical market behavior. As a result, these methods may not predict
future risk exposures, which could be significantly greater than the historical
measures indicate. For example, the market movements of the late third and early
fourth

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14

quarters of fiscal 1998 were larger and involved greater divergences in relative
asset values than we anticipated. This caused us to experience trading losses
that were greater and recurred more frequently than some of our risk measures
indicated were likely to occur. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management" for a
discussion of the policies and procedures we use to identify, monitor and manage
the risks we assume in conducting our businesses.

Other risk management methods depend upon evaluation of information
regarding markets, clients or other matters that is publicly available or
otherwise accessible by Goldman Sachs. This information may not in all cases be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risk requires, among other things, policies and procedures
to record properly and verify a large number of transactions and events, and
these policies and procedures may not be fully effective.

If we were unable to manage our risk exposure effectively, the rating
agencies could lower our credit ratings, which could reduce the market value of
the notes and your ability to resell them at attractive prices. If we suffer
serious losses due to an inability to manage risk, this could also diminish our
available cash and make it difficult for us to make timely payments on our debt,
including the notes.

A LACK OF LIQUIDITY COULD HURT AN INVESTMENT IN THE NOTES BY IMPAIRING OUR
ABILITY TO FUND OUR OPERATIONS OR, IN SOME CASES, TO PAY AMOUNTS WE OWE ON OUR
DEBT

Liquidity, i.e., ready access to funds, is essential to our businesses. In
addition to maintaining a cash position, we rely on three principal sources of
liquidity: borrowing in the debt markets; access to the repurchase and
securities lending markets; and selling securities and other assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" for a discussion of our sources of liquidity.

If we were unable to meet our liquidity needs, we could find it necessary
to reduce our business activities or it could become difficult to continue them
in their current form. This could lead the rating agencies to reduce our credit
ratings, lowering the market value of the notes and making it harder for
investors to sell them. Moreover, if our ability to obtain financing or sell
assets were sufficiently impaired, we would be unable to obtain the cash we need
to meet our payment obligations on our debt, including the notes. In the
following paragraphs, we describe our liquidity needs and the risks we face in
meeting them.

An Inability to Access the Debt Markets Could Impair Our Liquidity

We depend on continuous access to the debt capital markets to finance our
day-to-day operations. An inability to raise money in the long-term or
short-term debt capital markets, or an inability to access the repurchase and
securities lending markets, could have a substantial negative effect on our
liquidity. Our access to debt in amounts adequate to finance our activities
could be impaired by factors that affect Goldman Sachs in particular or the
financial services industry in general. For example, lenders could develop a
negative perception of our long-term or short-term financial prospects if we
incurred large trading losses, if the level of our business activity decreased
due to a market downturn, if regulatory authorities took significant action
against us or if we discovered that one of our employees had engaged in serious
unauthorized or illegal activity. Our ability to borrow in the debt markets also
could be impaired by factors that are not specific to Goldman Sachs, such as a
severe disruption of the financial markets or negative views about the prospects
for the investment banking, securities or financial services industries
generally.

We also depend on banks to finance our day-to-day operations. As a result
of the recent consolidation in the banking industry, some of our lenders have
merged or consolidated with other banks and financial institutions. While we
have not been materially adversely affected to date, it is possible that further
consolidation could lead to a loss of a number of our key banking relationships
and

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15

a reduction in the amount of credit extended to us.

An Inability to Access the Short-Term Debt Markets Could Impair Our Liquidity

We depend on the issuance of commercial paper and promissory notes as a
principal source of unsecured short-term funding for our operations. As of
November 26, 1999, Goldman Sachs had $20.5 billion of outstanding commercial
paper and promissory notes with a weighted-average maturity of approximately 90
days. Our liquidity depends to an important degree on our ability to refinance
these borrowings on a continuous basis. Investors who hold our outstanding
commercial paper and promissory notes have no obligation to purchase new
instruments when the outstanding instruments mature.

Our Liquidity Could Be Adversely Affected If Our Ability to Sell Assets Is
Impaired

If we were unable to borrow in the debt capital markets, we would need to
liquidate assets in order to meet our maturing liabilities, perhaps including
the notes. In certain market environments, such as times of market volatility or
uncertainty, overall market liquidity may decline. In a time of reduced
liquidity, we may be unable to sell some of our assets, or we may have to sell
assets at depressed prices, which could adversely affect our results of
operations and financial condition.

Our ability to sell our assets may be impaired if other market participants
are seeking to sell similar assets into the market at the same time. In the late
third and early fourth quarters of fiscal 1998, for example, the markets for
some assets were adversely affected by simultaneous attempts by a number of
institutions to sell similar assets.

A Reduction in Our Credit Ratings Could Adversely Affect Our Liquidity and
Competitive Position and Increase Our Borrowing Costs

Our borrowing costs and our access to the debt capital markets depend
significantly on our credit ratings. These ratings are assigned by rating
agencies, which may reduce or withdraw their ratings or place Goldman Sachs on
"credit watch" with negative implications at any time. Credit ratings are also
important to Goldman Sachs when competing in certain markets and when seeking to
engage in longer-term transactions, including over-the-counter derivatives. A
reduction in our credit ratings could increase our borrowing costs and limit our
access to the capital markets. This, in turn, could reduce our earnings and
adversely affect our liquidity and competitive position. In addition, a
reduction in the credit rating of the notes could adversely affect their market
value or your ability to sell the notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity -- Credit
Ratings" for additional information concerning our credit ratings.

LOSSES DUE TO FINANCIAL OR OTHER PROBLEMS EXPERIENCED BY THIRD PARTIES COULD
IMPAIR AN INVESTMENT IN THE NOTES

We are exposed to the risk that third parties that owe us money, securities
or other assets will not perform their obligations. These parties include our
trading counterparties, customers, clearing agents, exchanges, clearing houses
and other financial intermediaries as well as issuers whose securities we hold.
These parties may default on their obligations to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. This risk may arise, for
example, from holding securities of third parties; entering into swap or other
derivative contracts under which counterparties have long-term obligations to
make payments to us; executing securities, futures, currency or commodity trades
that fail to settle at the required time due to non-delivery by the counterparty
or systems failure by clearing agents, exchanges, clearing houses or other
financial intermediaries; and extending credit to our clients through bridge or
margin loans or other arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Management -- Credit Risk"
for a further discussion of the credit risks to which we are exposed.

Significant failures by third parties to perform their obligations to us
could reduce our revenue and make it difficult for us to

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16

borrow in the credit markets. If severe enough, these developments could reduce
the amount of funds available to us to meet our payment obligations on our debt,
including the notes, in a timely manner. Even in less severe cases, these
developments could raise concerns about our financial condition and lead the
rating agencies to lower our credit ratings. Thus, even if our ability to repay
the notes were not impaired, their market value could decline. In the following
paragraphs, we describe the ways in which we are exposed to these credit risks.

We May Suffer Significant Losses from Our Credit Exposures

In recent years, we have significantly expanded our swaps and other
derivatives businesses and placed a greater emphasis on providing credit and
liquidity to our clients. As a result, our credit exposures have increased in
amount and in duration. In addition, we have also experienced, due to
competitive factors, pressure to assume longer-term credit risk, extend credit
against less liquid collateral and price more aggressively the credit risks that
we take.

Our Clients and Counterparties May Be Unable to Perform Their Obligations to Us
as a Result of Economic or Political Conditions

Country, regional and political risks are components of credit risk, as
well as market risk. Economic or political pressures in a country or region,
including those arising from local market disruptions or currency crises, may
adversely affect the ability of clients or counterparties located in that
country or region to obtain foreign exchange or credit and, therefore, to
perform their obligations to us. See "-- We Are Exposed to Special Risks in
Emerging and Other Markets, Which Could Impair Our Ability to Fund Payments on
Our Debt" for a further discussion of our exposure to these risks.

Defaults by a Large Financial Institution Could Adversely Affect Financial
Markets Generally and Us Specifically

The commercial soundness of many financial institutions may be closely
interrelated as a result of credit, trading, clearing or other relationships
between the institutions. As a result, concerns about, or a default by, one
institution could lead to significant liquidity problems, losses or defaults by
other institutions. This is sometimes referred to as "systemic risk" and may
adversely affect financial intermediaries, such as clearing agencies, clearing
houses, banks, securities firms and exchanges, with which we interact on a daily
basis, and could adversely affect Goldman Sachs.

The Information That We Use in Managing Our Credit Risk May Be Inaccurate or
Incomplete

Although we regularly review our credit exposure to specific clients and
counterparties and to specific industries, countries and regions that we believe
may present credit concerns, default risk may arise from events or circumstances
that are difficult to foresee or detect, such as fraud. We may also fail to
receive full information with respect to the trading risks of a counterparty. In
addition, in cases where we have extended credit against collateral, we may find
that we are undersecured, for example, as a result of sudden declines in market
values that reduce the value of collateral.

OPERATIONAL RISKS MAY DISRUPT OUR
BUSINESSES, RESULT IN REGULATORY ACTION
AGAINST US OR LIMIT OUR GROWTH

We face operational risk arising from mistakes made in the confirmation or
settlement of transactions or from transactions not being properly recorded,
evaluated or accounted for. Our businesses are highly dependent on our ability
to process, on a daily basis, a large number of transactions across numerous and
diverse markets in many currencies, and the transactions we process have become
increasingly complex. Consequently, we rely heavily on our financial, accounting
and other data processing systems. If any of these systems do not operate
properly or are disabled, we could suffer financial loss, a disruption of our
businesses, liability to clients, regulatory intervention or reputational
damage. The inability of our systems to accommodate an increasing volume of
transactions could also constrain our ability

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to expand our businesses. In recent years, we have substantially upgraded and
expanded the capabilities of our data processing systems and other operating
technology, and we expect that we will need to continue to upgrade and expand in
the future to avoid disruption of, or constraints on, our operations.

If sufficiently severe and protracted, problems caused by our inability to
manage our operations effectively could lead the rating agencies to question our
controls and financial condition and to lower the credit ratings of the notes.
Problems of this kind could also reduce our profitability or make lenders less
willing to provide funding to us. If these two important sources of liquidity
were impaired, we could find it difficult to obtain the cash we need to make
payments on our debt, including payments on the notes.

LEGAL AND REGULATORY RISKS ARE INHERENT AND
SUBSTANTIAL IN OUR BUSINESSES AND COULD
LEAD TO A REDUCTION IN OUR CREDIT RATINGS
OR IN OUR ABILITY TO REPAY THE NOTES

Substantial legal liability or a significant regulatory action against
Goldman Sachs could have a material adverse financial effect or cause
significant reputational harm to Goldman Sachs, which in turn could seriously
harm our business prospects. In that event, the credit ratings, and therefore
the market value, of the notes could decline. In some cases, these developments
could have a negative effect on the willingness of our lenders to provide us
with the funds we may need to meet our payment obligations on our debt,
including the notes, in a timely manner.

Our Exposure to Legal Liability Is Significant

We face significant legal risks in our businesses and the volume and amount
of damages claimed in litigation against financial intermediaries are
increasing. These risks include potential liability under securities or other
laws for materially false or misleading statements made in connection with
securities and other transactions, potential liability for the "fairness
opinions" and other advice we provide to participants in corporate transactions
and disputes over the terms and conditions of complex trading arrangements. We
also face the possibility that counterparties in complex or risky trading
transactions will claim that we improperly failed to tell them of the risks or
that they were not authorized or permitted to enter into these transactions with
us and that their obligations to Goldman Sachs are not enforceable. Particularly
in our rapidly growing business focused on high net worth individuals, we are
increasingly exposed to claims against Goldman Sachs for recommending
investments that are not consistent with a client's investment objectives or
engaging in unauthorized or excessive trading. During a prolonged market
downturn, we would expect these types of claims to increase. We are also subject
to claims arising from disputes with employees for alleged discrimination or
harassment, among other things. These risks often may be difficult to assess or
quantify and their existence and magnitude often remain unknown for substantial
periods of time. We incur significant legal expenses every year in defending
against litigation, and we expect to continue to do so in the future. See
"Business -- Legal Proceedings" for a discussion of some of the legal matters in
which we are currently involved.

Extensive Regulation of Our Businesses Limits Our Activities and May Subject Us
to Significant Penalties

Goldman Sachs, as a participant in the financial services industry, is
subject to extensive regulation by governmental and self-regulatory
organizations in the United States and in virtually all other jurisdictions in
which it operates around the world.

The requirements imposed by our regulators are designed to ensure the
integrity of the financial markets and to protect customers and other third
parties who deal with Goldman Sachs and are not designed to protect our
shareholders or debtholders. Consequently, these regulations often serve to
limit our activities, including through net capital, customer protection and
market conduct requirements. We face the risk of significant intervention by
regulatory authorities, including extended investigation and surveillance
activity, adoption of costly or restrictive new

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regulations and judicial or administrative proceedings that may result in
substantial penalties. Among other things, we could be fined or prohibited from
engaging in some of our business activities. See "Business -- Regulation" for a
further discussion of the regulatory environment in which we conduct our
businesses.

Legal Restrictions on Our Clients May Reduce the Demand for Our Services

New laws or regulations or changes in enforcement of existing laws or
regulations applicable to our clients may also adversely affect our businesses.
For example, changes in antitrust enforcement could affect the level of mergers
and acquisitions activity and changes in regulation could restrict the
activities of our clients and, therefore, the services we provide on their
behalf.

INVESTORS IN THE NOTES FACE ADDITIONAL RISK BECAUSE THE GOLDMAN SACHS GROUP,
INC. IS A HOLDING COMPANY

Because The Goldman Sachs Group, Inc. is a holding company, it depends on
dividends, distributions and other payments from its subsidiaries to fund all
payments on its debt obligations, including its obligations to make payments on
the notes. The Goldman Sachs Group, Inc.'s right to participate in a
distribution of assets of any of its subsidiaries, whether on liquidation,
reorganization or otherwise, however, will be subject to the prior claims of the
creditors of that subsidiary. The ability of holders of the notes to benefit
from distributions of assets from The Goldman Sachs Group, Inc.'s subsidiaries
will also be subject to those prior claims. Consequently, the notes will be
effectively subordinated to all existing and future liabilities and obligations
of The Goldman Sachs Group, Inc.'s subsidiaries. This means that, if any
subsidiary of The Goldman Sachs Group, Inc. were to become bankrupt or
insolvent, its assets would be used to satisfy its own liabilities and
obligations before The Goldman Sachs Group, Inc. could use those assets to make
payment on The Goldman Sachs Group, Inc.'s own liabilities and obligations,
including the notes.

THE VALUE OF THE NOTES MAY BE IMPAIRED
BECAUSE WE DEPEND ON FUNDS
FROM OUR REGULATED SUBSIDIARIES

Many of our subsidiaries, including Goldman, Sachs & Co., our principal
U.S. subsidiary, are subject to laws that authorize regulatory bodies to block
or reduce the flow of funds from those subsidiaries to The Goldman Sachs Group,
Inc. Regulatory action of that kind could impede our access to the funds we need
to make payments on our debt, including the notes.

WE MAY BE LIABLE TO CREDITORS
OF OUR PARTNERSHIP SUBSIDIARIES

Goldman, Sachs & Co. is structured as a partnership in which The Goldman
Sachs Group, Inc. is a general partner, and we may structure other subsidiaries
the same way. A general partner of a partnership may be liable for the
partnership's obligations. Thus, for example, if there were a bankruptcy or
liquidation proceeding with respect to any partnership subsidiary in which The
Goldman Sachs Group, Inc. is a general partner and the assets of that subsidiary
were insufficient to meet all its outstanding liabilities and obligations, The
Goldman Sachs Group, Inc.'s own assets could become available to the
subsidiary's creditors. This could reduce the assets of The Goldman Sachs Group,
Inc. that are available to satisfy The Goldman Sachs Group, Inc.'s direct
creditors, including investors in the notes.

WE MAY BE ABLE TO OBTAIN WAIVERS OF
SOME OF OUR COVENANTS UNDER THE NOTES
WITHOUT YOUR APPROVAL

The indenture governing the notes permits us to issue an unlimited amount
of debt securities in different series from time to time. The notes are a
single, distinct series of debt securities under the indenture. If we want to
make some types of changes to the indenture or obtain a waiver of compliance
with our covenants under it, we must obtain the approval of the holders of a
majority in principal amount of all series of debt securities that we issue
under the indenture and that are affected by the change or waiver, taken
together as a single class. In many cases, the approval of those holders will be
sufficient for

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us to make the change or to obtain the waiver, even if it affects the notes and
the holders of a majority in principal amount of the notes do not grant their
approval. For a description of provisions governing consents and waivers, see
"Description of the Notes Being Offered -- Modification and Waiver of
Covenants -- Changes Requiring Majority Approval".

EMPLOYEE MISCONDUCT IS DIFFICULT TO
DETECT AND DETER AND COULD HARM GOLDMAN SACHS AND REDUCE THE VALUE OF THE NOTES

There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct by
employees could include binding Goldman Sachs to transactions that exceed
authorized limits or present unacceptable risks, or hiding from Goldman Sachs
unauthorized or unsuccessful activities, which, in either case, may result in
unknown and unmanaged risks or losses. Employee misconduct could also involve
the improper use or disclosure of confidential information, which could result
in regulatory sanctions and serious reputational or financial harm. It is not
always possible to deter employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all cases.

Employee misconduct could hurt our business, operations or financial
condition and could lead to a decline in our credit ratings and the
marketability of the notes. If these problems were severe enough, they could
also make it difficult for us to obtain from our operations or our lenders the
cash we may need to repay the notes when they come due.

THE FINANCIAL SERVICES INDUSTRY IS INTENSELY
COMPETITIVE AND RAPIDLY CONSOLIDATING

The financial services industry -- and all of our businesses -- are
intensely competitive, and we expect them to remain so. We compete on the basis
of a number of factors, including transaction execution, our products and
services, innovation, reputation and price. We have experienced intense price
competition in some of our businesses in recent years, such as underwriting fees
on investment grade debt offerings and privatizations. We believe that we may
experience pricing pressures in these and other areas in the future as some of
our competitors seek to obtain market share by reducing prices.

If we were unable to compete effectively, or if competition became too
costly, our business and operations could suffer. This in turn could lead to a
decline in the credit ratings of the notes. In the following paragraphs, we
describe some of the ways in which competition could affect us.

We Face Increased Competition Due to a Trend Toward Consolidation

In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry. In particular, a number of
large commercial banks, insurance companies and other broad-based financial
services firms have established or acquired broker-dealers or have merged with
other financial institutions. Many of these firms have the ability to offer a
wide range of products, from loans, deposit-taking and insurance to brokerage,
asset management and investment banking services, which may enhance their
competitive position. They also have the ability to support investment banking
and securities products with commercial banking, insurance and other financial
services revenues in an effort to gain market share, which could result in
pricing pressure in our businesses. Recently enacted federal financial reform
legislation significantly expands the activities permissible for firms
affiliated with a U.S. bank. This legislation may accelerate consolidation and
increase competition in the financial services industry and will enable banking
organizations to compete more effectively across a broad range of activities.

Consolidation Has Increased Our Need for Capital

This trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have

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had to commit capital to support our international operations and to execute
large global transactions.

Our Ability to Expand Internationally Will
Depend on Our Ability to Compete Successfully with Local Financial Institutions

We believe that some of our most significant challenges and opportunities
will arise outside the United States. In order to take advantage of these
opportunities, we will have to compete successfully with financial institutions
based in important non-U.S. markets, particularly in Europe. Some of these
institutions are larger and better capitalized, and have a stronger local
presence and a longer operating history in these markets.

Our Revenues May Decline Due to Competition from Alternative Trading Systems

Securities and futures transactions are now being conducted through the
Internet and other alternative, non-traditional trading systems, and it appears
that the trend toward alternative trading systems will continue and probably
accelerate. A dramatic increase in computer-based or other electronic trading
may adversely affect our commission and trading revenues, reduce our
participation in the trading markets and associated access to market information
and lead to the creation of new and stronger competitors.

WE ARE EXPOSED TO SPECIAL RISKS IN EMERGING
AND OTHER MARKETS, WHICH COULD IMPAIR
OUR ABILITY TO FUND PAYMENTS ON OUR DEBT

In conducting our businesses in major markets around the world, including
many developing markets in Asia, Latin America and Eastern Europe, we are
subject to political, economic, legal, operational and other risks that are
inherent in operating in other countries. These risks range from difficulties in
settling transactions in emerging markets to possible nationalization,
expropriation, price controls and other restrictive governmental actions. We
also face the risk that exchange controls or similar restrictions imposed by
foreign governmental authorities may restrict our ability to convert local
currency received or held by us in their countries into U.S. dollars or other
currencies, or to take those dollars or other currencies out of those countries.

To date, a relatively small part of our businesses has been conducted in
emerging and other markets. As we expand our businesses in these areas, our
exposure to these risks will increase.

If our business or operations were hurt by events in emerging and other
markets described below, the rating agencies could reduce the credit ratings of
the notes, making it more difficult for you to sell them at a favorable price.
If these events were severe enough, they could also diminish the cash generated
by our operations or impair our ability to borrow in the credit markets, making
it difficult for us to obtain the funds we need to meet our payment obligations
on the notes.

Turbulence in Emerging Markets May
Adversely Affect Our Businesses

In the last several years, various emerging market countries have
experienced severe economic and financial disruptions, including significant
devaluations of their currencies and low or negative growth rates in their
economies. The possible effects of these conditions include an adverse impact on
our businesses and increased volatility in financial markets generally.
Moreover, economic or market problems in a single country or region are
increasingly affecting other markets generally. For example, the economic crisis
in Russia in August 1998 adversely affected other emerging markets and led to
turmoil in financial markets worldwide. A continuation of these situations could
adversely affect global economic conditions and world markets and, in turn,
could adversely affect our businesses. Among the risks are regional or global
market downturns and, as noted above, increasing liquidity and credit risks,
particularly in Japan where we have significant exposure.

Compliance with Local Laws and Regulations May Be Difficult

In many countries, the laws and regulations applicable to the securities
and financial services industries are uncertain and evolving, and it may be
difficult for us to determine the exact requirements of local laws in every

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market. Our inability to remain in compliance with local laws in a particular
foreign market could have a significant and negative effect not only on our
businesses in that market but also on our reputation generally. We are also
subject to the risk that transactions we structure might not be legally
enforceable in all cases. See "-- Legal and Regulatory Risks Are Inherent and
Substantial in Our Businesses and Could Lead to a Reduction in Our Credit
Ratings or in Our Ability to Repay the Notes -- Our Exposure to Legal Liability
Is Significant" for additional information concerning these matters and
"Business -- Regulation" for a discussion of the regulatory environment in which
we conduct our businesses.

OUR CONVERSION TO CORPORATE FORM
MAY ADVERSELY AFFECT OUR ABILITY TO RECRUIT,
RETAIN AND MOTIVATE KEY EMPLOYEES

Our performance is largely dependent on the talents and efforts of highly
skilled individuals. Competition in the financial services industry for
qualified employees is intense. Our continued ability to compete effectively in
our businesses depends on our ability to attract new employees and to retain and
motivate our existing employees.

In connection with our initial public offering and the conversion of
Goldman Sachs from partnership to corporate form, the managing directors who
were profit participating limited partners received substantial amounts of
common stock in exchange for their interests in Goldman Sachs. Because these
shares of common stock were received in exchange for partnership interests,
ownership of these shares is not dependent upon these partners' continued
employment. While these shares are subject to certain restrictions on transfer
under a shareholders' agreement and under our plan of incorporation, the
transfer restrictions under the shareholders' agreement and the plan of
incorporation may be waived, as described under "Certain Relationships and
Related Transactions -- Shareholders' Agreement -- Transfer Restrictions" and
"-- Waivers". The steps we have taken to encourage the continued service of
these individuals after our initial public offering may not be effective. For a
description of the compensation plan for our senior professionals that we have
implemented in connection with our initial public offering, see
"Management -- The Partner Compensation Plan".

In connection with our initial public offering and conversion of Goldman
Sachs from partnership to corporate form, employees, other than the managing
directors who were profit participating limited partners, received grants of
restricted stock units, stock options or interests in a defined contribution
plan. The incentives to attract, retain and motivate employees provided by these
awards or by future arrangements may not be as effective as the opportunity,
which existed prior to conversion, to become a partner of Goldman Sachs. See
"Management -- The Employee Initial Public Offering Awards" for a description of
these awards.

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USE OF PROCEEDS

We received net proceeds from the original issuance and sale of the notes
of approximately $1.785 billion. We used the net proceeds to provide additional
funds for our operations and for other general corporate purposes, including the
repayment of short-term obligations and the portion of long-term obligations
which came due during calendar year 1999.

We have not received, and do not expect to receive, any proceeds from
resales of the notes by Goldman, Sachs & Co. or any of our other affiliates in
market-making transactions. We expect our affiliates to retain the proceeds of
their market-making resales and not to pay the proceeds to us.

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CAPITALIZATION

The following table sets forth the consolidated capitalization of Goldman
Sachs as of November 26, 1999 on an historical basis, which includes the notes
covered by this prospectus.

This table should be read in conjunction with the consolidated financial
statements and their notes included elsewhere in this prospectus.

AS OF
NOVEMBER 26, 1999
-----------------
(in millions)

Short-term borrowings, including commercial paper(1)........ $37,756
=======
Long-term borrowings
Senior debt(2)............................................ $20,586
Junior subordinated debentures(3)......................... 366
-------
Total long-term borrowings......................... 20,952

Stockholders' equity
Preferred stock, par value $0.01 per share; 150,000,000
shares authorized, no shares issued and outstanding..... --
Common stock, par value $0.01 per share; 4,000,000,000
shares authorized, 441,421,899 shares issued and
outstanding(4).......................................... 4
Restricted stock units; 76,048,404 units issued and
outstanding(5).......................................... 4,339
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized and 7,440,362 shares
issued and outstanding.................................. --
Additional paid-in capital................................ 7,359
Retained earnings......................................... 444
Unearned compensation(6).................................. (2,038)
Accumulated other comprehensive income.................... 37
-------
Total stockholders' equity......................... 10,145
-------
Total capitalization............................. $31,097
=======

- ---------------

(1) Includes $10.82 billion of long-term borrowings maturing within one year.
See Note 5 to the consolidated financial statements included elsewhere in
this prospectus for further information regarding Goldman Sachs' short-term
borrowings.

(2) Includes long-term subordinated debt of Goldman, Sachs & Co. of $150
million.

(3) Represents the carrying value of junior subordinated debentures issued to
the retired limited partners as part of the incorporation transactions. See
"Certain Relationships and Related Transactions -- Incorporation
Transactions" for further information regarding the issuance of the
debentures.

(4) Common stock outstanding includes 12,660,685 shares of common stock
irrevocably contributed to the defined contribution plan. Common stock
outstanding excludes 40,359,666 shares of common stock deliverable pursuant
to the options awarded to employees on a discretionary basis. See
"Management -- The Employee Initial Public Offering Awards" for more
detailed information regarding these awards.

(5) Restricted stock units include 35,703,923 shares of common stock underlying
the restricted stock units awarded to employees for which no future service
is required as a condition to delivery of the common stock and 40,344,481
shares of common stock underlying the restricted stock units awarded to
employees for which future service is required.

(6) Unearned compensation relates to the restricted stock units awarded to
employees for which future service is required.

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24

SELECTED CONSOLIDATED FINANCIAL DATA

The selected historical consolidated income statement and balance sheet
data set forth below have been derived from Goldman Sachs' consolidated
financial statements and their notes. Goldman Sachs' consolidated financial
statements have been audited by PricewaterhouseCoopers LLP, independent public
accountants, as of November 27, 1998 and November 26, 1999 and for the years
ended November 28, 1997, November 27, 1998 and November 26, 1999. These
financial statements are included elsewhere in this prospectus, together with
the reports thereon of PricewaterhouseCoopers LLP.

The selected historical consolidated income statement and balance sheet
data set forth below as of November 24, 1995, November 29, 1996 and November 28,
1997 and for the years ended November 24, 1995 and November 29, 1996 have been
derived from consolidated financial statements of Goldman Sachs not included in
this prospectus.

The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and their notes included
elsewhere in this prospectus.

AS OF OR FOR YEAR ENDED NOVEMBER
--------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)

INCOME STATEMENT DATA
Total revenues............................ $ 14,324 $ 17,289 $ 20,433 $ 22,478 $ 25,363
Interest expense.......................... 9,841 11,160 12,986 13,958 12,018
-------- -------- -------- -------- --------
Net revenues.............................. 4,483 6,129 7,447 8,520 13,345
Compensation and benefits(1).............. 2,005 2,421 3,097 3,838 6,459
Other operating expenses.................. 1,110 1,102 1,336 1,761 4,894(6)
-------- -------- -------- -------- --------
Pre-tax earnings(1)....................... $ 1,368 $ 2,606 $ 3,014 $ 2,921 $ 1,992(6)
======== ======== ======== ======== ========
BALANCE SHEET DATA
Total assets(2)........................... $100,066 $152,046 $178,401 $217,380 $250,491
Long-term borrowings...................... 13,358 12,376 15,667 19,906 20,952
Total liabilities(2)...................... 94,686 145,753 171,864 210,996 240,346
Partners' capital......................... 4,905 5,309 6,107 6,310 --
Stockholders' equity...................... -- -- -- -- 10,145
PRO FORMA DATA (UNAUDITED)(3)
Pro forma net earnings.................... -- -- -- -- $ 2,550
Pro forma ratio of earnings to fixed
charges(4)............................. -- -- -- -- 1.35x

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25

SELECTED CONSOLIDATED FINANCIAL DATA

AS OF OR FOR YEAR ENDED NOVEMBER
--------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)

SELECTED DATA AND RATIOS
(UNAUDITED)
Ratio of earnings to fixed
charges(1)(4).............. 1.14x 1.23x 1.23x 1.21x 1.16x
Employees
United States.............. 5,356 5,818 6,879 8,349 9,746
International.............. 2,803 3,159 3,743 4,684 5,615
-------- -------- -------- -------- --------
Total employees(5)............ 8,159 8,977 10,622 13,033 15,361
======== ======== ======== ======== ========
Assets under supervision
Assets under management.... $ 52,358 $ 94,599 $135,929 $194,821 $258,045
Other client assets........ 57,716 76,892 102,033 142,018 227,424
-------- -------- -------- -------- --------
Total assets under
supervision................ $110,074 $171,491 $237,962 $336,839 $485,469
======== ======== ======== ======== ========

- ---------------

(1) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in operating expenses in 1995, 1996, 1997 or 1998 and, therefore,
the pre-tax earnings in these years are not comparable to 1999.

(2) Total assets and liabilities were increased as of November 27, 1998 and
November 26, 1999 as a result of certain provisions of Statement of
Financial Accounting Standards No. 125.

(5) Excludes employees of Goldman Sachs' property management subsidiaries.
Substantially all of the costs of these employees are reimbursed to Goldman
Sachs by the real estate investment funds to which these subsidiaries
provide property management services. For more detailed information
regarding our employees, see "Business -- Employees".

(6) Reflects nonrecurring expenses of $2.26 billion associated with our
conversion to corporate form and the charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of our initial public
offering.

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26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Our activities are divided into two segments:

GLOBAL CAPITAL MARKETS. This segment comprises Investment Banking, which
includes Financial Advisory and Underwriting, and Trading and Principal
Investments, which includes Fixed Income, Currency and Commodities (FICC),
Equities and Principal Investments (Principal Investments primarily represents
net revenues from our merchant banking investments); and

ASSET MANAGEMENT AND SECURITIES SERVICES. This segment comprises Asset
Management, Securities Services and Commissions.

All references to 1999, 1998 and 1997 refer to our fiscal year ended, or
the date, as the context requires, November 26, 1999, November 27, 1998 and
November 28, 1997, respectively.

When we use the terms "Goldman Sachs", "we" and "our", we mean, prior to
our conversion to corporate form, The Goldman Sachs Group, L.P., a Delaware
limited partnership, and its consolidated subsidiaries and, after our conversion
to corporate form, The Goldman Sachs Group, Inc., a Delaware corporation, and
its consolidated subsidiaries.

INITIAL PUBLIC OFFERING

On May 7, 1999, we converted from a partnership to a corporation and
completed our initial public offering. In that offering, we sold 51,000,000
shares of common stock.

BUSINESS ENVIRONMENT

We operated in a particularly favorable business environment in 1999, as
global equity and many fixed income markets recovered from the turbulent
conditions of the second half of 1998, though government bond markets in the
United States and Europe experienced a significant rise in yields. The improved
business environment provided a positive climate for our investment banking
activities, as well as for our customer-driven and proprietary trading
activities. Economic and market conditions were also favorable for wealth
creation, which contributed positively to growth in our asset management
businesses.

The macroeconomic environment in 1999 was particularly healthy in the
United States, where strong economic growth and low unemployment continued to be
combined with low levels of inflation. Major U.S. equity markets reached record
levels during the year as corporate earnings growth was strong and activity in
the new issues and mergers and acquisitions arenas increased markedly. The pace
of economic growth and the restoration of more normal conditions in financial
markets prompted the Federal Reserve to raise interest rates three times during
the second half of 1999, returning interest rates to levels in existence before
the 1998 financial market crisis.

European equity markets posted solid gains in 1999 as economic growth
improved and cross-border business combinations increased to record levels
following the introduction of the European Economic and Monetary Union (EMU) in
January. The new European Central Bank held short-term interest rates at low
levels for most of the year, despite a weakening in the euro against the U.S.
dollar. In Asia, the economic recovery in Japan resulted in an appreciation of
the yen versus the U.S. dollar and led Japanese equity markets higher. Financial
markets throughout Asia benefited from renewed economic growth in the region.

RESULTS OF OPERATIONS

The composition of our net revenues has varied over time as financial
markets and the scope of our operations have changed. The composition of net
revenues can also vary over the shorter term due to fluctuations in

25
27

U.S. and global economic and market conditions. As a result, period-to-period
comparisons may not be meaningful. In addition, Goldman Sachs' conversion to
corporate form has affected, and will continue to affect, our operating results
in several significant ways:

1. FORMER PARTNER COMPENSATION. As a corporation, payments for services
rendered by managing directors who, prior to our conversion to corporate form,
were profit participating limited partners are included in compensation and
benefits expense. In prior years, these payments were accounted for as
distributions of partners' capital rather than as compensation and benefits
expense. As a result, our 1998 and 1997 compensation and benefits expense
understate the cost of doing business in corporate form.

2. ONGOING STOCK-BASED COMPENSATION. As part of compensation, restricted stock
units and other forms of stock-based compensation can be awarded to employees.
Of the total restricted stock units that were granted at the end of 1999,
approximately 50% require future service as a condition to the delivery of the
underlying shares of common stock. In accordance with Accounting Principles
Board Opinion No. 25, the restricted stock units with future service
requirements will generally be recorded as compensation expense over the
four-year service period following the date of grant as follows: 52%, 28%, 14%
and 6% in years one, two, three and four, respectively.

3. AMORTIZATION OF EMPLOYEE INITIAL PUBLIC OFFERING AWARDS. We have recorded,
and will continue to record over the five-year vesting period following the date
of grant, noncash expense related to the amortization of certain restricted
stock units awarded to employees in connection with our initial public offering.
These restricted stock units had a value of $1.76 billion on the date of grant,
approximately 26% of which will be amortized as a noncash expense, after giving
effect to forfeitures, in the 12 months following the date of grant. The
remaining 74% of the value of these restricted stock units will be amortized
over the next four years as follows: 26%, 26%, 15% and 7% in years two, three,
four and five, respectively. See "Management -- The Employee Initial Public
Offering Awards" for a discussion of restricted stock units awarded to our
employees in connection with our initial public offering.

4. INCOME TAXES. As a corporation, our operating results have become, and will
continue to be, subject to U.S. federal, state and local corporate income taxes
and, therefore, to a higher tax rate than we incurred as a partnership. Our
effective tax rate for the period from May 7, 1999 to the end of the fiscal
year, excluding the effect of nonrecurring items, was 40%.

For a further discussion of the effect of these items on our actual and pro
forma operating results, see "-- Operating Expenses" and "-- Pro Forma Operating
Results" below and the notes to the consolidated financial statements included
elsewhere in this prospectus.

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28

OVERVIEW

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

FINANCIAL OVERVIEW

(in millions, except per share amounts)

YEAR ENDED NOVEMBER
-------------------------------
1999(5) 1998 1997
------- ---- ----

Net revenues...................................... $13,345 $8,520 $7,447
Pre-tax earnings(1)(2)(3)......................... 1,992 2,921 3,014
Net earnings(2)................................... 2,708 2,428 2,746
Diluted earnings per share........................ 5.57 -- --
Pro forma pre-tax earnings(4)..................... 4,250 -- --
Pro forma net earnings(4)......................... 2,550 -- --
Pro forma diluted earnings per share(4)........... 5.27 -- --

- ---------------

(1) Management believes that for periods prior to our conversion to corporate
form, the best measure by which to assess Goldman Sachs' profitability is
pre-tax earnings because, as a partnership, we generally were not subject to
U.S. federal or state income taxes.

(2) Our pre-tax earnings and net earnings in 1999 were reduced by nonrecurring
items recognized in connection with our conversion to corporate form. For a
further discussion of these nonrecurring items, see "-- Operating Expenses"
and "-- Provision for Taxes" below.

(3) Our pre-tax earnings in 1999 reflect payments for services rendered by
managing directors who, prior to our conversion to corporate form, were
profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as
compensation and benefits expense. As a result, these payments are not
reflected in our operating expenses in 1998 or 1997 and, therefore, the
pre-tax earnings in these years are not comparable with 1999.

(4) Pro forma disclosures reflect the results of Goldman Sachs as if our
conversion to corporate form and related transactions had taken place at the
beginning of 1999. See "-- Pro Forma Operating Results" below for a
discussion of the pro forma adjustments.

(5) Includes 23 weeks as a partnership and 29 weeks as a corporation.

------------------------

1999 VERSUS 1998. Net revenues were $13.35 billion, an increase of 57%
compared with 1998. Global Capital Markets experienced significant net revenue
growth in both Trading and Principal Investments, as substantially all
components of the business recovered from the global market turmoil of the
second half of 1998, and Investment Banking, where we benefited from
unprecedented levels of activity in mergers and acquisitions and equity new
issues worldwide. Net revenues in Asset Management and Securities Services
increased 16% compared with 1998, primarily due to growth in assets under
management, increased equities commissions and higher average customer balances
in securities lending and margin lending.

Our net earnings of $2.71 billion, or $5.57 per diluted share, in 1999 were
reduced by $672 million, or $1.38 per diluted share, due to nonrecurring items
recognized in connection with our conversion to corporate form. For a further
discussion of the nonrecurring charges and benefits affecting our operating
results in 1999, see "-- Operating Expenses" and "-- Provision for Taxes" below.

1998 VERSUS 1997. Our net revenues were $8.52 billion in 1998, an increase
of 14% compared with 1997. Net revenue growth was strong in Asset Management and
Securities Services, which increased 43%, primarily due to increased equities
commissions, higher customer balances in securities lending and margin lending
and growth in assets under management. Net revenues in Global Capital Markets
increased 4% as strong net revenue growth in Investment Banking, resulting from
higher levels of mergers and acquisitions activity, was substantially offset by
lower net revenues in Trading and Principal Invest-

27
29

ments, primarily due to a 30% reduction in FICC net revenues.

Pre-tax earnings in 1998 were $2.92 billion, a 3% decrease compared with
$3.01 billion in the prior year. This decrease was due to losses incurred in our
Trading and Principal Investments business during the global market turmoil of
the second half of 1998.

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

RESULTS BY SEGMENT

(in millions)

YEAR ENDED NOVEMBER
-------------------------------
1999 1998 1997
---- ---- ----

Global Capital Markets
Net revenues............................................ $10,132 $5,747 $5,513
Operating expenses...................................... 6,232 3,978 3,228
------- ------ ------
Pre-tax earnings........................................ $ 3,900 $1,769 $2,285
======= ====== ======
Asset Management and Securities Services
Net revenues............................................ $ 3,213 $2,773 $1,934
Operating expenses...................................... 2,396 1,621 1,205
------- ------ ------
Pre-tax earnings........................................ $ 817 $1,152 $ 729
======= ====== ======
Total
Net revenues............................................ $13,345 $8,520 $7,447
Operating expenses...................................... 11,353(1) 5,599 4,433
------- ------ ------
Pre-tax earnings........................................ $ 1,992 $2,921 $3,014
======= ====== ======

- ---------------

(1) Includes the following expenses that have not been allocated to our
segments: (i) nonrecurring employee initial public offering awards of $2.26
billion, (ii) the ongoing amortization of employee initial public offering
awards of $268 million and (iii) a charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of our initial public
offering.

------------------------

Net revenues in our segments include allocations of interest income and
expense to specific securities, commodities and other positions in relation to
the cash generated by, or funding requirements of, the underlying positions. Net
interest is allocated to the Trading and Principal Investments component of
Global Capital Markets and the Securities Services component of Asset Management
and Securities Services. See Note 13 to the consolidated financial statements
included elsewhere in this prospectus for further information regarding our
segments.

The pre-tax earnings of our segments in 1999 reflect payments for services
rendered by managing directors who, prior to our conversion to corporate form,
were profit participating limited partners. In prior years, these payments were
accounted for as distributions of partners' capital rather than as compensation
and benefits expense. As a result, these payments are not reflected in the
operating expenses of our segments in 1998 and 1997 and, therefore, the pre-tax
earnings of our segments in these years are not comparable with 1999.

GLOBAL CAPITAL MARKETS

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

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

- - FINANCIAL ADVISORY. Financial Advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures,

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30

corporate defense activities, restructurings and spin-offs; and

- - UNDERWRITING. Underwriting includes public offerings and private placements
of equity and debt securities.

TRADING AND PRINCIPAL INVESTMENTS. Our Trading and Principal Investments
business facilitates transactions with a diverse group of corporations,
financial institutions, governments and individuals and takes proprietary
positions through market making in and trading of fixed income and equity
products, currencies, commodities, and swaps and other derivatives. Trading and
Principal Investments is divided into three categories:

- - FICC. We make markets in and trade fixed income products, currencies and
commodities, structure and enter into a wide variety of derivative
transactions, and engage in proprietary trading and arbitrage activities;

- - EQUITIES. We make markets in and trade equities and equity-related products,
structure and enter into equity derivative transactions, and engage in
proprietary trading and equity arbitrage; and

- - PRINCIPAL INVESTMENTS. Principal Investments primarily represents net
revenues from our merchant banking investments.

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

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

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

GLOBAL CAPITAL MARKETS NET REVENUES

(in millions)

YEAR ENDED NOVEMBER
---------------------------
1999 1998 1997
---- ---- ----

------------------------

1999 VERSUS 1998. Net revenues in Global Capital Markets were $10.13
billion, an increase of 76% compared with 1998, reflecting substantial growth in
all major components of the business. Pre-tax earnings were $3.90 billion in
1999 compared with $1.77 billion in 1998. Operating expenses increased 57%,
principally due to the inclusion of compensation expense related to services
rendered by managing directors who, prior to our conversion to corporate form,
were profit participating limited partners, higher levels of incentive
compensation commensurate with growth in net revenues, and increased costs
associated with global expansion and higher levels of business activity.

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31

INVESTMENT BANKING. Investment Banking generated net revenues of $4.36
billion for the full year, a 29% increase over 1998. Net revenue growth was
strong in both Financial Advisory and Underwriting as our global presence and
strong client base enabled us to capitalize on record levels of global mergers
and acquisitions and new issue activity. Net revenue growth was driven by strong
performances across all regions, particularly in the communications, media and
entertainment, high technology, energy and power, and healthcare sectors.

Financial Advisory revenues increased 28% compared with 1998. Goldman Sachs
maintained its leading position in the advisory business and benefited from an
increase in mergers and acquisitions activity across many industry sectors, in
both Europe and the United States. Worldwide mergers and acquisitions activity
rose to record levels with transactions valued at over $3 trillion announced
during the period from January 1, 1999 to November 30, 1999.(1) Underwriting
revenues increased 31% compared with 1998. Equity underwriting revenues
benefited from favorable global economic conditions, which led major equity
market indices higher and new issue activity to record levels. Our debt
underwriting business generally benefited from a more stable economic
environment in 1999.

TRADING AND PRINCIPAL INVESTMENTS. Net revenues in Trading and Principal
Investments were $5.77 billion compared with $2.38 billion in 1998, as
substantially all components of the business recovered from the global market
turmoil of the second half of 1998.

Net revenues in FICC nearly doubled compared with 1998, primarily due to
growth in our credit-sensitive businesses and commodities that was partially
offset by lower net revenues in currencies. The credit-sensitive businesses
(which include high-yield debt, bank loans and investment-grade corporate debt)
benefited from improved economic conditions as credit spreads and market
liquidity returned to more normal levels following the dislocation experienced
during the second half of 1998. Net revenue growth in commodities benefited from
increased customer activity, while reduced activity and volatility in the global
foreign exchange markets contributed to a decline in net revenues from
currencies.

The significant net revenue growth in Equities was primarily due to
strength in arbitrage and convertibles and increased customer flow in
derivatives and global shares. Net revenue growth in arbitrage and convertibles
was driven by improved market conditions following the turmoil in global markets
during the second half of 1998 and by increased mergers and acquisitions and
other corporate activity. Equity derivatives net revenues were substantially
higher primarily as a result of increased customer activity worldwide. Increased
transaction volumes in global equity markets contributed to the net revenue
growth in our global shares businesses.

Net revenues from Principal Investments increased dramatically due to
mark-to-market gains on certain merchant banking investments, particularly in
the high technology and telecommunications sectors.

1998 VERSUS 1997. Net revenues in Global Capital Markets were $5.75
billion, an increase of 4% compared with 1997, as strong net revenue growth in
Investment Banking was substantially offset by a reduction in net revenues in
Trading and Principal Investments. Pre-tax earnings were $1.77 billion in 1998,
a 23% decrease compared with 1997, as many of our businesses were adversely
affected by market conditions from mid-August 1998 to mid-October 1998.
Operating expenses increased 23%, primarily due to increased compensation
related to growth in employment levels and additional expenses associated with
temporary staff and consultants.

INVESTMENT BANKING. Investment Banking achieved net revenues of $3.37
billion in 1998, an increase of 30% compared with 1997. Net revenue growth was
strong in Financial Advisory and, to a lesser extent, in Underwriting as we
capitalized on higher

- ---------------

(1) Source: Thomson Financial Securities Data, formerly known as Securities Data
Company.

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32

levels of activity in many industry groups, including communications, media and
entertainment, financial institutions, general industrials and retail. Net
revenue growth in Investment Banking was strong in all major regions in 1998
compared with the prior year.

Financial Advisory revenues increased 50% compared with 1997, due to
increased revenues from mergers and acquisitions advisory assignments, which
principally resulted from consolidation within various industries and generally
favorable U.S. and European stock markets. Despite a substantial decrease in the
number of industry-wide underwriting transactions in August and September of
1998, Underwriting revenues increased 14% for the year, primarily due to
increased revenues from equity and high-yield corporate debt underwriting
activities.

TRADING AND PRINCIPAL INVESTMENTS. Net revenues in Trading and Principal
Investments were $2.38 billion in 1998, a decrease of 19% compared with 1997.
This decrease in net revenues was concentrated in the second half of the year,
when the Russian economic crisis, the turmoil in Asian and Latin American
emerging markets, and the resulting move to higher credit quality fixed income
securities by many investors led to substantial declines in global financial
markets. For the full year, significant net revenue reductions in FICC and
Principal Investments were partially offset by increased net revenues in
Equities.

Net revenues in FICC decreased 30% compared with 1997 due to an
extraordinarily difficult environment in the second half of 1998. The net
revenue reduction in FICC was concentrated in fixed income arbitrage and
high-yield debt trading, which experienced losses in 1998 due to a reduction in
liquidity and widening credit spreads in the second half of the year. An
increase in net revenues from market making and trading in fixed income
derivatives, currencies and commodities partially offset this decline.

Net revenues in Equities increased 39% compared with 1997 as higher net
revenues in derivatives and European shares were partially offset by losses in
equity arbitrage. The derivatives business generated significantly higher net
revenues due, in part, to strong customer demand for over-the-counter products,
particularly in Europe. Net revenues from European shares increased as Goldman
Sachs benefited from generally favorable equity markets and increased customer
demand. The equity arbitrage losses were due principally to the underperformance
of various equity positions versus their benchmark hedges, to widening of
spreads in a variety of relative value trades, and to lower prices for
event-oriented securities resulting from a reduction in announced mergers and
acquisitions and other corporate activity in the second half of 1998.

Net revenues from Principal Investments declined 51% compared with 1997 as
investments in certain publicly held companies decreased in value during the
second half of 1998. This decrease was partially offset by an increase in gains
on the disposition of investments compared with the prior year.

ASSET MANAGEMENT AND SECURITIES SERVICES

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

- - ASSET MANAGEMENT. Asset Management generates management fees by providing
investment advisory services to a diverse client base of institutions and
individuals;

- - SECURITIES SERVICES. Securities Services includes prime brokerage, financing
services and securities lending, and our matched book businesses, all of which
generate revenue primarily in the form of fees or interest rate spreads; and

- - COMMISSIONS. Commissions includes agency transactions for clients on major
stock and futures exchanges and revenues from the increased share of the
income and gains derived from our merchant banking funds.

31
33

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

ASSET MANAGEMENT AND SECURITIES SERVICES NET REVENUES
(in millions)

YEAR ENDED NOVEMBER
--------------------------
1999 1998 1997
---- ---- ----

Asset Management....................................... $ 919 $ 675 $ 458
Securities Services.................................... 772 730 487
Commissions............................................ 1,522 1,368 989
------ ------ ------
Total.................................................. $3,213 $2,773 $1,934
====== ====== ======

------------------------

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

The following table sets forth our assets under supervision:

ASSETS UNDER SUPERVISION
(in millions)

AS OF NOVEMBER
--------------------------------
1999 1998 1997
---- ---- ----

Assets under management......................... $258,045 $194,821 $135,929
Other client assets............................. 227,424 142,018 102,033
-------- -------- --------
Total........................................... $485,469 $336,839 $237,962
======== ======== ========

------------------------

1999 VERSUS 1998. Net revenues in Asset Management and Securities Services
were $3.21 billion, an increase of 16% compared with 1998. All major components
of the business contributed to the net revenue growth in 1999. Pre-tax earnings
in Asset Management and Securities Services were $817 million in 1999 compared
with $1.15 billion in 1998. Operating expenses increased, principally due to the
inclusion of compensation expense related to services rendered by managing
directors who, prior to our conversion to corporate form, were profit
participating limited partners and increased costs associated with the
continuing expansion of the business.

Asset Management revenues increased 36%, primarily reflecting a 32%
increase in average assets under management as well as favorable changes in the
composition of assets managed. In 1999, approximately 55% of the increase in
assets under management was attributable to net asset inflows, with the
remaining 45% reflecting market appreciation. Securities Services net revenues
increased 6%, due to higher average customer balances in securities lending and
margin lending, partially offset by reduced spreads in our fixed income matched
book. Commissions rose by 11% as fees earned on higher transaction volumes in
global equity markets were partially offset by a reduction in our increased
share of gains from our merchant banking funds.

1998 VERSUS 1997. Net revenues in Asset Management and Securities Services
were $2.77 billion in 1998, an increase of 43% compared with 1997. All major
components of

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34

the segment exhibited strong net revenue
growth. Pre-tax earnings were $1.15 billion in 1998, an increase of 58% compared
with 1997. Operating expenses increased 35% as higher employment levels led to
increased compensation and benefits expenses.

Asset Management revenues increased 47% during this period, reflecting a
41% increase in average assets under management compared with 1997. In 1998,
approximately 80% of the increase in assets under management was attributable to
net asset inflows, with the remaining 20% reflecting market appreciation. Net
revenues from Securities Services increased 50%, primarily due to growth in our
securities borrowing and lending businesses. Commissions increased 38% as
generally strong and highly volatile equity markets resulted in increased
transaction volumes in listed equity securities. Revenues from the increased
share of income and gains from our merchant banking funds also contributed
significantly to the increase in Commissions.

OPERATING EXPENSES

In recent years, our operating expenses have increased as a result of
numerous factors, including higher levels of employment and compensation,
expansion of our asset management business, increased worldwide activities,
greater levels of business complexity, and additional systems and consulting
costs relating to various technology initiatives.

Our operating expenses in 1999, excluding the nonrecurring charges
associated with our initial public offering, increased significantly in part
because, as a corporation, payments for services rendered by managing directors
who, prior to our conversion to corporate form, were profit participating
limited partners are included in compensation and benefits expense. In prior
years, these payments were accounted for as distributions of partners' capital
rather than as compensation and benefits expense. As a result, our 1998 and 1997
compensation and benefits expense understate the cost of doing business in
corporate form.

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35

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

OPERATING EXPENSES AND EMPLOYEES
($ in millions)

YEAR ENDED NOVEMBER
-----------------------------
1999 1998 1997
---- ---- ----

Compensation and benefits, excluding employee
initial public offering awards.................... $ 6,459 $3,838 $3,097
Nonrecurring employee initial public offering
awards(1)......................................... 2,257 -- --
Amortization of employee initial public offering
awards............................................ 268 -- --
Brokerage, clearing and exchange fees............... 446 424 357
Market development.................................. 364 287 206
Communications and technology....................... 306 265 208
Depreciation and amortization....................... 337 242 178
Occupancy........................................... 314 207 168
Professional services and other..................... 402 336 219
Charitable contribution............................. 200 -- --
------- ------- -------
Total operating expenses............................ $11,353 $5,599 $4,433
======= ======= =======
Employees at year end(2)............................ 15,361 13,033 10,622

- ---------------

(1) Includes expense of $666 million related to the initial irrevocable
contribution of shares of common stock to a defined contribution plan.

(2) Excludes employees of Goldman Sachs' property management subsidiaries.
Substantially all of the costs of these employees are reimbursed to Goldman
Sachs by the real estate investment funds to which these subsidiaries
provide property management services. For more detailed information
regarding our employees, see "Business -- Employees".

------------------------

1999 VERSUS 1998. Operating expenses were $11.35 billion in 1999, a
substantial increase over 1998, primarily due to nonrecurring charges associated
with Goldman Sachs' conversion to corporate form and related transactions, the
inclusion of compensation expense related to services rendered by managing
directors who were profit participating limited partners, higher levels of
compensation commensurate with higher net revenues and amortization of employee
initial public offering awards. The nonrecurring charges included $2.26 billion
for employee initial public offering awards and $200 million for the charitable
contribution to The Goldman Sachs Foundation made at the time of our initial
public offering.

Compensation and benefits expense was $6.46 billion, an increase of 68%
compared with 1998. The ratio of compensation and benefits to net revenues was
48% in 1999. Employment levels increased 18% during the year, reflecting growth
in our core businesses. Expenses associated with our temporary staff and
consultants were $430 million in 1999, an increase of 30% compared with 1998,
reflecting increased global expansion and consulting costs associated with
technology initiatives, including preparations for the Year 2000.

Brokerage, clearing and exchange fees increased 5%, primarily due to higher
transaction volumes in equity derivatives, U.S. and European equities, and
commodities. Market development expenses increased 27%, principally due to
higher levels of business activity and increased spending on advertising.
Communications and technology expenses increased 15%, reflecting higher
telecommunications and market data costs associated with growth in employment
levels and additional spending on technology initiatives, including preparations
for the Year 2000. Depreciation and amortization increased 39%, due to
additional capital expenditures on leasehold improvements and

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technology-related and telecommunications equipment in support of higher levels
of business activity. Occupancy expenses increased 52%, reflecting additional
office space needed to accommodate growth in employment levels. Professional
services and other expenses increased 20% due to Goldman Sachs' increased
business activity.

1998 VERSUS 1997. Operating expenses were $5.60 billion in 1998, an
increase of 26% over 1997, primarily due to increased compensation and benefits
expense.

Compensation and benefits increased as a percentage of net revenues to 45%
from 42% in 1997, principally as a result of increases in employment levels and
in expenses associated with temporary staff and consultants. Employment levels
increased 23% during the year, with particularly strong growth in asset
management. Expenses associated with our temporary staff and consultants were
$330 million in 1998, an increase of 85% compared with 1997, reflecting greater
business activity, Goldman Sachs' global expansion, and consulting costs
associated with various technology initiatives, including preparations for the
Year 2000 and the establishment of the EMU.

Brokerage, clearing and exchange fees increased 19%, primarily due to
higher transaction volumes in European and U.S. equities and futures contracts.
Market development expenses increased 39% and professional services and other
expenses increased 53%, due to higher levels of business activity and Goldman
Sachs' global expansion. Communications and technology expenses increased 27%,
reflecting higher telecommunications and market data costs associated with
higher employment levels and additional spending on technology initiatives.
Depreciation and amortization increased 36%, principally due to capital
expenditures on telecommunications and technology-related equipment and
leasehold improvements. Occupancy expenses increased 23%, reflecting additional
office space needed to accommodate higher employment levels.

PROVISION FOR TAXES

The net tax benefit of $716 million in 1999 included nonrecurring net
benefits of $1.78 billion recognized during the second quarter. These
nonrecurring net benefits included $825 million related to our conversion to
corporate form, $880 million related to the granting of employee initial public
offering awards and $80 million related to the contribution of $200 million to
The Goldman Sachs Foundation made at the time of our initial public offering.
Goldman Sachs' effective tax rate for the period from May 7, 1999 to the end of
1999, excluding the effect of these nonrecurring items, was 40%. Our effective
tax rate can vary from year to year depending on, among other factors, the
geographic and business mix of our earnings. See Note 11 to the consolidated
financial statements included elsewhere in this prospectus for further
information regarding our provision for taxes.

Prior to our conversion to corporate form, we generally were not subject to
U.S. federal and state income taxes. As a partnership, we were primarily subject
to local unincorporated business taxes and taxes in non-U.S. jurisdictions on
certain of our operations.

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PRO FORMA OPERATING RESULTS

The following table sets forth our pro forma condensed consolidated
statement of earnings for the year ended November 1999:

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

($ in millions, except per share amounts)

YEAR ENDED NOVEMBER 1999
---------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------

Total revenues............................. $25,363 $ -- $25,363
Interest expense........................... 12,018 7(a) 12,025
------- -------- -------
Revenues, net of interest expense........ 13,345 (7) 13,338
Compensation and benefits, excluding
employee initial public offering
awards................................... 6,459 -- 6,459
Nonrecurring employee initial public
offering awards.......................... 2,257 (2,257)(b) --
Amortization of employee initial public
offering awards.......................... 268 192(c) 460
Other operating expenses................... 2,369 (200)(d) 2,169
------- -------- -------
Total operating expenses......... 11,353 (2,265) 9,088
Pre-tax earnings........................... 1,992 2,258 4,250
(Benefit)/provision for taxes.............. (716) 2,416(e) 1,700
------- -------- -------
Net earnings............................... $ 2,708 $ (158) $ 2,550
======= ======== =======
Ratio of earnings to fixed charges......... 1.16x 1.35x
Average common shares outstanding
Basic.................................... 475,883,756 (505,283)(f) 475,378,473
Diluted.................................. 485,803,960 (1,877,905)(g) 483,926,055
Earnings per share
Basic.................................... $5.69 $5.36
Diluted.................................. 5.57 5.27

------------------------

BASIS OF PRESENTATION. The pro forma condensed consolidated statement of
earnings was prepared as if our conversion to corporate form and related
transactions had taken place at the beginning of 1999.

For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent pre-tax earnings plus fixed charges and "fixed charges"
represent interest expense plus that portion of rent expense that, in our
opinion, approximates the interest factor included in rent expense.

The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The pro forma condensed
consolidated statement of earnings and accompanying notes should be read in
conjunction with the consolidated financial statements and their notes.

The pro forma condensed consolidated statement of earnings is not
necessarily indicative of the results of operations that might have occurred had
our conversion to corporate form and related transactions actually taken place
at the beginning of 1999, or that may be expected to occur in the future.

NOTES TO PRO FORMA ADJUSTMENTS

(a) Adjustment to reflect the additional interest expense on junior
subordinated debentures issued to retired limited partners in exchange for their
interests in The Goldman Sachs Group, L.P. and certain affiliates.

(b) Adjustment to eliminate the nonrecurring effect of the expense related
to restricted stock units, awarded to employees

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in connection with our conversion to corporate form, for which future service is
not required as a condition to the delivery of the underlying common stock, and
the initial irrevocable contribution of shares of common stock to our defined
contribution plan. For a description of the restricted stock units and the
contribution to our defined contribution plan, see "Management -- The Employee
Initial Public Offering Awards".

(c) Adjustment to reflect additional amortization for the full fiscal year
related to certain restricted stock units awarded to employees in connection
with our conversion to corporate form, which vest in equal installments in years
three, four and five following the date of grant (May 7, 1999). These restricted
stock units had a value of $1.76 billion at date of grant, approximately 26% of
which will be amortized as a noncash expense, after giving effect to
forfeitures, in the 12 months following the date of grant. The remaining 74% of
the value of these restricted stock units will be amortized over the next four
years as follows: 26%, 26%, 15% and 7% in years two, three, four and five,
respectively. For a description of the restricted stock units, see
"Management -- The Employee Initial Public Offering Awards".

(d) Adjustment to eliminate the expense related to the charitable
contribution to The Goldman Sachs Foundation made at the time of our initial
public offering.

(e) Adjustment to reflect a pro forma provision for taxes for Goldman Sachs
in corporate form at an effective tax rate of 40%.

(f) Adjustment to reflect the effect of share activity, primarily related
to the acquisition of The Hull Group in September 1999, which is averaged over
the period beginning on May 4, 1999 (the day trading in our common stock
commenced) for actual purposes, and over the entire year for pro forma purposes.

(g) Adjustment to diluted average common shares outstanding, which includes
both common stock and nonvoting common stock outstanding, to reflect the
additional dilutive effect of the common stock deliverable pursuant to the
restricted stock units and stock options, awarded to employees in connection
with our conversion to corporate form, for which future service is required as a
condition to the delivery of the underlying common stock. For purposes of
calculating pro forma diluted average common shares outstanding, we used the
initial public offering price of $53 per share from the beginning of 1999 until
May 4, 1999. Thereafter, we used actual daily closing prices.

GEOGRAPHIC DATA

For a summary of the net revenues, pre-tax earnings and identifiable assets
of Goldman Sachs by geographic region, see Note 13 to the consolidated financial
statements included elsewhere in this prospectus.

CASH FLOWS

Our cash flows are primarily related to the operating and financing
activities undertaken in connection with our trading and market-making
transactions.

YEAR ENDED NOVEMBER 1999. Cash and cash equivalents increased to $3.06
billion in 1999. Cash of $12.59 billion was used for operating activities,
primarily to fund higher net trading assets due to increased levels of business
activity. Cash of $654 million was used for investing activities, primarily for
the purchase of telecommunications and technology-related equipment, leasehold
improvements and the acquisition of The Hull Group in September 1999. Financing
activities provided $13.46 billion of cash, reflecting an increase in long-term
borrowings and net repurchase agreements, and proceeds from the issuance of
common stock.

YEAR ENDED NOVEMBER 1998. Cash and cash equivalents increased to $2.84
billion in 1998. Cash of $62 million was provided by operating activities. Cash
of $656 million was used for investing activities, primarily for leasehold
improvements and the purchase of telecommunications and technology-related
equipment and certain financial instruments. Financing activities provided $2.10
billion of cash, reflecting an increase in the net issuance of long-term and
short-term borrowings,

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partially offset by a decrease in net repurchase agreements, distributions to
partners, cash outflows related to partners' capital allocated for income taxes
and potential withdrawals, and the termination of our profit participation
plans.

YEAR ENDED NOVEMBER 1997. Cash and cash equivalents decreased to $1.33
billion in 1997. Operating activities provided cash of $70 million. Cash of $693
million was used for investing activities, primarily for the purchase of certain
financial instruments and technology-related equipment. Cash of $258 million was
used for financing activities, principally due to a decrease in net repurchase
agreements, distributions to partners, and cash outflows related to partners'
capital allocated for income taxes and potential withdrawals, partially offset
by the net issuance of long-term and short-term borrowings.

LIQUIDITY

MANAGEMENT OVERSIGHT OF LIQUIDITY

Management believes that one of the most important issues for a company in
the financial services sector is access to liquidity. Accordingly, Goldman Sachs
has established a comprehensive structure to oversee its liquidity and funding
policies.

The Finance Committee has responsibility for establishing and assuring
compliance with our asset and liability management policies and has oversight
responsibility for managing liquidity risk, the size and composition of our
balance sheet, and our credit ratings. See "-- Risk Management -- Risk
Management Structure" below for a further description of the committees that
participate in our risk management process. The Finance Committee meets monthly,
and more often when necessary, to evaluate our liquidity position and funding
requirements.

Our Treasury Department manages our capital structure, funding, liquidity,
and relationships with creditors and rating agencies on a global basis. The
Treasury Department works jointly with our global funding desk in managing our
borrowings. The global funding desk is primarily responsible for our
transactional short-term funding activity.

LIQUIDITY POLICIES

In order to maintain an appropriate level of liquidity, management has
implemented several liquidity policies as outlined below.

DIVERSIFICATION OF FUNDING SOURCES AND LIQUIDITY PLANNING. Goldman Sachs
seeks to maintain diversified funding sources with both banks and nonbank
lenders globally. Management believes that Goldman Sachs' relationships with its
lenders are critical to its liquidity.

Goldman Sachs also has access to diversified funding sources with numerous
creditors, including banks, insurance companies, mutual funds, bank trust
departments and other asset managers. We monitor our creditors to maintain broad
and diversified credit.

We access liquidity in a variety of markets in the United States as well as
in Europe and Asia. We make extensive use of the repurchase agreement markets
and have raised debt publicly as well as in the private placement and commercial
paper markets, and through Eurobonds, money broker loans, commodity-based
financings, letters of credit and promissory notes. We seek to structure our
liabilities to avoid significant amounts of debt coming due on any one day or
during any single week or year. In addition, we maintain and update annually a
liquidity crisis plan that provides guidance in the event of a liquidity crisis.
The annual update of this plan is reviewed and approved by our Finance
Committee.

ASSET LIQUIDITY. Goldman Sachs maintains a highly liquid balance sheet.
Many of our assets are readily funded in the repurchase agreement markets, which
generally have proven to be a consistent source of funding, even in periods of
market stress. A substantial portion of our inventory turns over rapidly and is
marked-to-market daily. We maintain long-term borrowings and stockholders'
equity substantially in excess of our less liquid assets.

DYNAMIC LIQUIDITY MANAGEMENT. Goldman Sachs seeks to manage the composition
of its asset base and the maturity profile of its funding to ensure that it can
liquidate its assets prior to its liabilities coming due, even in times of
liquidity stress. We have traditionally been able to fund our liquid-

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ity needs through security-based and
collateralized funding, such as repurchase transactions and securities lending,
as well as short-term and long-term borrowings and equity capital. To further
evaluate the adequacy of our liquidity management policies and guidelines, we
perform weekly "stress funding" simulations of disruptions to our access to
unsecured credit.

EXCESS LIQUIDITY. In addition to maintaining a highly liquid balance sheet
and a significant amount of longer term liabilities to assure liquidity even
during adverse conditions, we seek to maintain a liquidity cushion that consists
principally of unencumbered U.S. government and agency obligations to ensure the
availability of immediate liquidity. This pool of highly liquid assets averaged
$17.99 billion during 1999 and $14.17 billion during 1998.

LIQUIDITY RATIO MAINTENANCE. It is Goldman Sachs' policy to further manage
its liquidity by maintaining a "liquidity ratio" of at least 100%. This ratio
measures the relationship between the loan value of our unencumbered assets and
our short-term unsecured liabilities. The maintenance of this liquidity ratio is
intended to ensure that we could fund our positions on a fully secured basis in
the event that we were unable to replace our unsecured debt maturing within one
year. Under this policy, we seek to maintain unencumbered assets in an amount
that, if pledged or sold, would provide the funds necessary to replace unsecured
obligations that are scheduled to mature (or where holders have the option to
redeem) within the coming year.

INTERCOMPANY FUNDING. Most of the liquidity of Goldman Sachs is raised by
the parent company, The Goldman Sachs Group, Inc. The parent company then lends
the necessary funds to its subsidiaries and affiliates. We carefully manage our
intercompany exposure by generally requiring intercompany loans to have
maturities equal to or shorter than the maturities of the aggregate borrowings
of the parent company. This policy ensures that the subsidiaries' obligations to
the parent company will generally mature in advance of the parent company's
third-party long-term borrowings. In addition, many of the advances made to our
subsidiaries and affiliates are secured by marketable securities or other liquid
collateral. We generally fund our equity investments in subsidiaries with equity
capital.

THE BALANCE SHEET

Goldman Sachs maintains a highly liquid balance sheet that fluctuates
significantly between financial statement dates. In the fourth quarter of 1998,
we temporarily decreased our total assets to reduce risk and increase liquidity
in response to difficult conditions in the global financial markets.

The following table sets forth our total assets, adjusted assets, leverage
ratios and book value per share:

AS OF NOVEMBER
----------------
1999 1998
---- ----

Total assets............................................. $ 250 $ 217
Adjusted assets(1)....................................... 188 145
Leverage ratio(2)........................................ 24.7x 34.5x
Adjusted leverage ratio(3)............................... 18.5x 23.0x
Book value per share(4).................................. $20.94 --

- ---------------

(1) Adjusted assets represent total assets less securities purchased under
agreements to resell, certain securities borrowed transactions and the
increase in total assets related to certain provisions of Statement of
Financial Accounting Standards No. 125.

(2) Leverage ratio equals total assets divided by equity capital.

(3) Adjusted leverage ratio equals adjusted assets divided by equity capital.

(4) Book value per share was based on common shares outstanding, including
restricted stock units granted to employees with no future service
requirements, of 484,566,184 as of November 1999.

As of November 1999 and November 1998, we held $2.62 billion and $2.21
billion, respectively, in high-yield debt and emerging market securities and
$1.80 billion and $1.59 billion, respectively, in bank loans. These assets may
be relatively illiquid during

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times of market stress. We seek to diversify our holdings of these assets by
industry and by geographic location.

As of November 1999, the aggregate carrying value of our principal
investments held directly or through our merchant banking funds was $2.88
billion, which consisted of corporate principal investments with an aggregate
carrying value of $1.95 billion and real estate investments with an aggregate
carrying value of $928 million.

CREDIT RATINGS

Goldman Sachs relies upon the debt capital markets to fund a significant
portion of its day-to-day operations. The cost and availability of debt
financing is influenced by our credit ratings. Credit ratings are also important
to us when competing in certain markets and when seeking to engage in longer
term transactions, including over-the-counter derivatives. A reduction in our
credit ratings could increase our borrowing costs and limit our access to the
capital markets. This, in turn, could reduce our earnings and adversely affect
our liquidity.

LONG-TERM DEBT

As of November 1999, our consolidated long-term borrowings were $20.95
billion. Substantially all of these borrowings were unsecured and consisted
principally of senior borrowings with maturities extending to 2024. The weighted
average maturity of our long-term borrowings as of November 1999 was
approximately five years. Substantially all of our long-term borrowings are
swapped into U.S. dollar obligations with short-term floating rates of interest
in order to minimize our exposure to interest rates and foreign exchange
movements. See Note 5 to the consolidated financial statements included
elsewhere in this prospectus for further information regarding our long-term
borrowings.

REGULATED SUBSIDIARIES

Many of our principal subsidiaries are subject to extensive regulation in
the United States and elsewhere. Goldman, Sachs & Co., a registered U.S.
broker-dealer, is regulated by the SEC, the Commodity Futures Trading
Commission, the Chicago Board of Trade, the NYSE and the NASD. Goldman Sachs
International, a registered U.K. broker-dealer, is subject to regulation by the
Securities and Futures Authority Limited and the Financial Services Authority.
Goldman Sachs (Japan) Ltd., a Tokyo-based broker-dealer, is subject to
regulation by the Japanese Ministry of Finance, the Financial Supervisory
Agency, the Tokyo Stock Exchange, the Tokyo International Financial Futures
Exchange and the Japan Securities Dealers Association. Several other
subsidiaries of Goldman Sachs are regulated by securities, investment advisory,
banking, and other regulators and authorities around the world, such as the
Bundesbank of Germany. Compliance with the rules of these regulators may prevent
us from receiving distributions, advances or repayment of liabilities from these
subsidiaries. See "Business -- Regulation" and Note 12 to the consolidated
financial statements included elsewhere in this prospectus for further
information regarding our regulated subsidiaries.

RISK MANAGEMENT

Goldman Sachs has a comprehensive risk management process to monitor,
evaluate and manage the principal risks assumed in conducting its activities.
These risks include market, credit, liquidity, operational, legal and
reputational exposures.

RISK MANAGEMENT STRUCTURE

Goldman Sachs seeks to monitor and control its risk exposure through a
variety of separate but complementary financial, credit, operational and legal
reporting systems. We believe that we have effective procedures for evaluating
and managing the market, credit and other risks to which we are exposed.
Nonetheless, the effectiveness of our policies and procedures for managing risk
exposure can never be completely or accurately predicted or fully assured. For
example, unexpectedly large or rapid movements or disruptions in one or more
markets or other unforeseen developments can have a material adverse effect on
our results of operations and financial condition. The consequences of

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these developments can include losses due to adverse changes in inventory
values, decreases in the liquidity of trading positions, higher volatility in
our earnings, increases in our credit exposure to customers and counterparties,
and increases in general systemic risk. See "Risk Factors -- Market Fluctuations
Could Harm Our Businesses in Many Ways and, Consequently, Could Lower the Value
of an Investment in the Notes" for a discussion of the effect that market
fluctuations can have on our businesses.

Goldman Sachs has established risk control procedures at several levels
throughout the organization. Trading desk managers have the first line of
responsibility for managing risk within prescribed limits. These managers have
in-depth knowledge of the primary sources of risk in their individual markets
and the instruments available to hedge our exposures.

In addition, a number of committees are responsible for establishing
trading limits, for monitoring adherence to these limits and for general
oversight of our risk management process. These committees, which are described
below, meet regularly and consist of senior members of both our
revenue-producing units and departments that are independent of our
revenue-producing units.

MANAGEMENT COMMITTEE. All risk control functions ultimately report to the
Management Committee. Through both direct and delegated authority, the
Management Committee approves all of Goldman Sachs' operating activities,
trading risk parameters, and customer review guidelines.

RISK COMMITTEES. The Firmwide Risk Committee:

- - reviews the activities of existing businesses;

- - approves new businesses and products;

- - approves divisional market risk limits and reviews business unit market risk
limits;

- - approves inventory position limits for selected country exposures and business
units;

- - approves sovereign credit risk limits and credit risk limits by ratings group;
and

- - reviews scenario analyses based on abnormal or "catastrophic" market
movements.

The FICC Risk Committee sets market risk limits for individual business
units and sets issuer-specific net inventory position limits. The Equities Risk
Committee sets market risk limits for individual business units that consist of
gross and net inventory position limits and, for equity derivatives, limits
based on market move scenario analyses. The Asset Management Control Oversight
and the Asset Management Risk committees oversee various operational, credit,
pricing and business practice issues.

GLOBAL COMPLIANCE AND CONTROL COMMITTEE. The Global Compliance and Control
Committee provides oversight of our compliance and control functions, including
internal audit; reviews our legal, reputational, operational and control risks;
and periodically reviews the activities of existing businesses.

COMMITMENTS COMMITTEE. The Commitments Committee approves equity and non-
investment-grade debt underwriting commitments, loans extended by Goldman Sachs,
and unusual financing structures and transactions that involve significant
capital exposure. The Commitments Committee has delegated to the Credit
Department the authority to approve underwriting commitments for
investment-grade debt and certain other products.

CREDIT POLICY COMMITTEE. The Credit Policy Committee establishes and
reviews broad credit policies and parameters that are implemented by the Credit
Department.

FINANCE COMMITTEE. The Finance Committee is responsible for oversight of
our capital, liquidity and funding needs and for setting certain inventory
position limits.

Segregation of duties and management oversight are fundamental elements of
our risk management process. In addition to the committees described above,
departments that are independent of the revenue-producing units, such as the
Firmwide Risk, Credit, Controllers, Global Operations, Central Compliance,
Management Controls and Legal de-

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partments, in part perform risk management functions, which include monitoring,
analyzing and evaluating risk. Furthermore, the Controllers Department, in
conjunction with the Firmwide Risk Department, independently reviews, on a
regular basis, internal valuation models and the pricing of positions determined
by individual business units.

RISK LIMITS

Business unit risk limits are established by the various risk committees
and may be further allocated by the business unit managers to individual trading
desks.

Market risk limits are monitored on a daily basis by the Firmwide Risk
Department and are reviewed regularly by the appropriate risk committee. Limit
violations are reported to the appropriate risk committee and the appropriate
business unit managers.

Inventory position limits are monitored by the Controllers Department and
position limit violations are reported to the appropriate business unit managers
and the Finance Committee. When inventory position limits are used to monitor
market risk, they are also monitored by the Firmwide Risk Department, and
violations are reported to the appropriate risk committee.

MARKET RISK

The potential for changes in the market value of our trading positions is
referred to as "market risk". Our trading positions result from underwriting,
market-making and proprietary trading activities.

Categories of market risk include exposures to interest rates, currency
rates, equity prices and commodity prices.

A description of each market risk category is set forth below:

- - Interest rate risks primarily result from exposures to changes in the level,
slope and curvature of the yield curve, the volatility of interest rates,
mortgage prepayment speeds and credit spreads.

- - Currency rate risks result from exposures to changes in spot prices, forward
prices and volatilities of currency rates.

- - Equity price risks result from exposures to changes in prices and volatilities
of individual equities, equity baskets and equity indices.

- - Commodity price risks result from exposures to changes in spot prices, forward
prices and volatilities of commodities, such as electricity, natural gas,
crude oil, petroleum products, and precious and base metals.

We seek to manage these risk exposures through diversifying exposures,
controlling position sizes and establishing hedges in related securities or
derivatives. For example, we may hedge a portfolio of common stock by taking an
offsetting position in a related equity-index futures contract. The ability to
manage an exposure may, however, be limited by adverse changes in the liquidity
of the security or the related hedge instrument and in the correlation of price
movements between the security and related hedge instrument.

In addition to applying business judgment, senior management uses a number
of quantitative tools to manage our exposure to market risk. These tools
include:

- - risk limits based on a summary measure of market risk exposure referred to as
Value-at-Risk (VaR);

- - risk limits based on a scenario analysis that measures the potential effect on
our trading net revenues of a significant widening of credit spreads;

- - inventory position limits for selected business units and country exposures;
and

- - scenario analyses that measure the potential effect on our trading net
revenues of abnormal market movements.

We also estimate the broader potential impact of certain macroeconomic
scenarios, including a sustained downturn, on our investment banking and
merchant banking activities.

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

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For the VaR numbers reported below, a one-day time horizon and a 95%
confidence level were used. This means that there is a one in 20 chance that
daily trading net revenues will fall below the expected daily trading net
revenues by an amount at least as large as the reported VaR. Thus, shortfalls
from expected trading net revenues on a single trading day greater than the
reported VaR would be anticipated to occur, on average, about once a month.
Shortfalls on a single day can exceed reported VaR by significant amounts.
Shortfalls can also accumulate over a longer time horizon such as a number of
consecutive trading days. For a discussion of the limitations of our risk
measures, see "Risk Factors -- Our Risk Management Policies and Procedures May
Leave Us Exposed to Unidentified or Unanticipated Risk".

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

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

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

VaR also should be evaluated in light of the methodology's other
limitations. For example, when calculating the VaR numbers shown below, we
assume that asset returns are normally distributed. Nonlinear risk exposures on
options and the potentially mitigating impact of intraday changes in related
hedges would likely produce nonnormal asset returns. Different distributional
assumptions could produce a materially different VaR.

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

DAILY VaR
(in millions)

AS OF NOVEMBER YEAR ENDED NOVEMBER 1999
--------------- ------------------------
RISK CATEGORIES 1999 1998 AVERAGE HIGH LOW
- --------------- ---- ---- ------- ---- ---

Interest rates.......................... $ 13 $ 27 $ 23 $35 $10
Currency rates.......................... 4 9 9 25 4
Equity prices........................... 18 25 23 37 18
Commodity prices........................ 12 7 9 13 3
Diversification effect(1)............... (22) (25) (25) -- --
---- ---- ----
Firmwide................................ $ 25(2) $ 43 $ 39 56 23
==== ==== ====

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

(2) Not necessarily indicative of future VaR levels.

------------------------

The following chart sets forth the daily VaR for substantially all of our
trading positions during 1999:

FIRMWIDE VAR

[CHART APPEARS HERE]

Description of VaR Chart: Depicted on page 44 of the registration statement is a
chart setting forth the daily VaR for substantially all of our trading positions
during 1999. The horizontal axis is marked to indicate the start of each fiscal
quarter. The vertical axis is marked to indicate VaR in millions of dollars. The
values displayed in the chart start the fiscal year at $43 million, and end the
fiscal year at $25 million. The maximum VaR, of approximately $56 million, was
reached on February 16, 1999, and the minimum VaR, of approximately $23 million,
was reached on November 24, 1999.

------------------------

The general decline in our VaR during 1999 reflects lower levels of market
volatility and a decrease in trading exposures, particularly with respect to
interest rates. As described above, the historical data used to estimate VaR is
weighted to give greater importance to more recent observations and,
accordingly, our VaR levels in the beginning of 1999 were significantly affected
by the market turmoil of the second half of 1998.

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46

TRADING NET REVENUES DISTRIBUTION

Substantially all of our inventory positions are marked-to-market on a
daily basis and changes are recorded in net revenues.

The following chart sets forth the frequency distribution for substantially
all of our daily trading net revenues for the year ended November 1999:

[DAILY TRADING REVENUES]

DAILY TRADING NET REVENUES ($ IN MILLIONS) NUMBER OF DAYS
- ------------------------------------------ --------------

Greater than (20).................................... 2
(20)-(10)............................................ 6
(10)-0............................................... 19
0-10................................................. 40
10-20................................................ 58
20-30................................................ 60
30-40................................................ 40
40-50................................................ 17
Greater than 50...................................... 9

------------------------

As part of our overall risk control process, daily trading net revenues are
compared with the VaR calculated as of the end of the prior business day. During
1999, trading losses incurred on a single day exceeded our 95% one-day VaR on
only one occasion.

NONTRADING RISK

The market risk on our nontrading financial instruments, including our
merchant banking investments, is measured using a sensitivity analysis that
estimates the potential reduction in our net revenues associated with a 10%
decline in the S&P 500. This sensitivity analysis is based on certain
assumptions regarding the relationship between changes in the S&P 500 and
changes in the fair value of the individual nontrading financial instruments.
Different assumptions could produce materially different risk estimates. As of
November 1999, our nontrading market risk was approximately $200 million.

CREDIT RISK

Credit risk represents the loss that we would incur if a counterparty, or
an issuer of securities or other instruments we hold, fails to perform under its
contractual obligations to us. To reduce our credit exposures, we seek to enter
into netting agreements with counterparties that permit us to offset receivables
and payables with such counterparties. In addition, we attempt to further reduce
credit risk by entering into agreements that enable us to obtain collateral from
a counterparty or to terminate or reset the terms of transactions after
specified time periods or upon the occurrence of credit-related events, by
seeking third-party guarantees of the counterparty's obligations, and through
the use of credit derivatives.

For most businesses, counterparty credit limits are established by the
Credit Department, which is independent of the revenue-producing departments,
based on guidelines

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47

set by the Firmwide Risk and Credit Policy committees. For most products, we
measure and limit credit exposures by reference to both current and potential
exposure. We measure potential exposure based on projected worst-case market
movements over the life of a transaction within a 95% confidence interval. We
further seek to measure credit exposure through the use of scenario analyses and
other quantitative tools. Our global credit management systems monitor current
and potential credit exposure to individual counterparties and on an aggregate
basis to counterparties and their affiliates. The systems also provide
management, including the Firmwide Risk and Credit Policy committees, with
information regarding overall credit risk by product, industry sector, country
and region.

DERIVATIVE CONTRACTS

Derivative contracts are financial instruments, such as futures, forwards,
swaps or option contracts, that derive their value from underlying assets,
indices, reference rates or a combination of these factors. Derivative
instruments may be entered into by Goldman Sachs in privately negotiated
contracts, which are often referred to as over-the-counter derivatives, or they
may be listed and traded on an exchange.

Most of our derivative transactions are entered into for trading purposes.
We use derivatives in our trading activities to facilitate customer
transactions, to take proprietary positions and as a means of risk management.
We also enter into nontrading derivative contracts to manage the interest rate
and currency exposure on our long-term borrowings.

Derivatives are used in many of our businesses, and we believe that the
associated market risk can only be understood relative to the underlying assets
or risks being hedged, or as part of a broader trading strategy. Accordingly,
the market risk of derivative positions is managed with all of our other
nonderivative risk.

Derivative contracts are reported on a net-by-counterparty basis on our
consolidated statements of financial condition where management believes a legal
right of setoff exists under an enforceable netting agreement. For an
over-the-counter derivative, our credit exposure is directly with our
counterparty and continues until the maturity or termination of such contract.

The following table sets forth the distribution, by credit rating, of
substantially all of our credit exposure with respect to over-the-counter
derivatives as of November 1999, after taking into consideration the effect of
netting agreements. The categories shown reflect our internally determined
public rating agency equivalents.

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48

OVER-THE-COUNTER DERIVATIVE CREDIT EXPOSURES
($ in millions)

PERCENTAGE OF
COLLATERAL EXPOSURE EXPOSURE
CREDIT RATING EQUIVALENT EXPOSURE HELD(2) NET OF COLLATERAL NET OF COLLATERAL
- ------------------------ -------- ---------- ----------------- -----------------

AAA/Aaa............................... $ 2,603 $ 452 $ 2,151 11%
AA/Aa2................................ 5,132 557 4,575 24
A/A2.................................. 9,663 2,211 7,452 39
BBB/Baa2.............................. 3,246 516 2,730 14
BB/Ba2 or lower....................... 2,618 625 1,993 11
Unrated(1)............................ 2,486 2,228 258 1
------- ------ ------- ---
$25,748 $6,589 $19,159 100%
======= ====== ======= ===

- ---------------

(1) In lieu of making an individual assessment of the credit of unrated
counterparties, we make a determination that the collateral held in respect
of such obligations is sufficient to cover a substantial portion of our
exposure. In making this determination, we take into account various
factors, including legal uncertainties and market volatility.

(2) Collateral consists predominantly of cash and U.S. government and agency
securities and is usually received under agreements entitling Goldman Sachs
to require additional collateral upon specified increases in exposure or the
occurrence of adverse credit events.

------------------------

Derivative transactions may also involve the legal risk that they are not
authorized or appropriate for a counterparty, that documentation has not been
properly executed or that executed agreements may not be enforceable against the
counterparty. We attempt to minimize these risks by obtaining advice of counsel
on the enforceability of agreements as well as on the authority of a
counterparty to effect the derivative transaction.

OPERATIONAL RISKS

OPERATIONAL RISK. Goldman Sachs may face reputational damage, financial
loss or regulatory risk in the event of an operational failure or error. A
systems failure or failure to enter a trade properly into our records may result
in an inability to settle transactions in a timely manner or a breach of
regulatory requirements. Settlement errors or delays may cause losses due to
damages owed to counterparties or movements in prices. These operational and
systems risks may arise in connection with our own systems or as a result of the
failure of an agent acting on our behalf.

The Global Operations Department is responsible for establishing,
maintaining and approving policies and controls with respect to the accurate
inputting and processing of transactions, clearance and settlement of
transactions, the custody of securities and other instruments, and the detection
and prevention of employee errors or improper or fraudulent activities. Its
personnel work closely with Information Technology in creating systems to enable
appropriate supervision and management of its policies. The Global Operations
Department is also responsible, together with other areas of Goldman Sachs,
including the Legal and Compliance departments, for ensuring compliance with
applicable regulations with respect to the clearance and settlement of
transactions and the margining of positions. The Network Management Department
oversees our relationships with our clearance and settlement agents, regularly
reviews agents' performance and meets with these agents to review operational
issues.

YEAR 2000. Goldman Sachs has dedicated resources over the past several
years to address the potential hardware, software, and other computer and
technology issues and related concerns associated with the transition to the
Year 2000 and to confirm that our service providers took similar measures. As a
result of those efforts, we have not experienced any material disruptions in our
operations in connection with, or following, the transition to the Year 2000. We
currently estimate that our Year 2000 costs will total approximately $185
million, of which

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$170 million had been spent through
November 1999.

ACCOUNTING DEVELOPMENTS

In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of Financial Accounting
Standards Board Statement No. 133 -- an amendment of Financial Accounting
Standards Board Statement No. 133", which deferred to fiscal years beginning
after June 15, 2000 the effective date of the accounting and reporting
requirements of Statement of Financial Accounting Standards No. 133. Statement
of Financial Accounting Standards No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. This Statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative instrument depends on its intended use
and the resulting designation. We intend to adopt the provisions of Statement of
Financial Accounting Standards No. 133 deferred by Statement of Financial
Accounting Standards No. 137 in fiscal 2001 and are currently assessing their
effect.

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", effective for fiscal years beginning after December 15, 1998.
Statement of Position No. 98-1 requires that certain costs of computer software
developed or obtained for internal use be capitalized and amortized over the
useful life of the related software. We previously expensed the cost of all
software development in the period it was incurred. The adoption of Statement of
Position No. 98-1 is not expected to have a material effect on our results of
operations or financial condition. We intend to adopt the provisions of
Statement of Position No. 98-1 in fiscal 2000.

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50

BUSINESS

OVERVIEW

Goldman Sachs is a leading global investment banking and securities firm
that provides a wide range of services worldwide to a substantial and
diversified client base that includes corporations, financial institutions,
governments and high-net-worth individuals. As of November 1999, we operated
offices in over 20 countries and 37% of our 15,361 employees were based outside
the United States.

Goldman Sachs is the successor to a commercial paper business founded in
1869 by Marcus Goldman. Since then, we have expanded our business as a
participant and intermediary in securities and other financial activities to
become one of the leading firms in the industry.

In 1989, The Goldman Sachs Group, L.P. was formed to serve as the parent
company of the Goldman Sachs organization. On May 7, 1999, The Goldman Sachs
Group, Inc. succeeded to the business of The Goldman Sachs Group, L.P. and
completed an initial public offering of its common stock.

Financial information concerning our business segments and geographic
regions for each of 1999, 1998 and 1997 is set forth in Note 13 of the
consolidated financial statements included elsewhere in this prospectus.

BUSINESS SEGMENTS

Our activities are divided into two segments:

- - Global Capital Markets; and

- - Asset Management and Securities Services.

These segments consist of various product and service offerings that are
set forth in the following chart:

PRIMARY PRODUCTS AND ACTIVITIES BY BUSINESS SEGMENT

ASSET MANAGEMENT AND
GLOBAL CAPITAL MARKETS SECURITIES SERVICES
- ------------------------------------------------------------ ----------------------------
TRADING AND PRINCIPAL
INVESTMENT BANKING INVESTMENTS
- ---------------------------- ----------------------------

- -- Equity and debt -- Bank loans -- Commissions
underwriting -- Commodities -- Institutional and
- -- Financial restructuring -- Currencies high-net- worth asset
advisory services -- Equity and fixed income management
- -- Mergers and acquisitions derivatives -- Margin lending
advisory services -- Equity and fixed income -- Matched book
- -- Real estate advisory securities -- Merchant banking fees
services -- Principal investments -- Increased share of
-- Proprietary arbitrage merchant banking fund income
and gains
-- Mutual funds
-- Prime brokerage
-- Securities lending

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GLOBAL CAPITAL MARKETS

The Global Capital Markets segment, which represented 76% of 1999 net
revenues, consists of the following:

- - INVESTMENT BANKING. Investment Banking consists of our Financial Advisory and
Underwriting businesses; and

- - TRADING AND PRINCIPAL INVESTMENTS. Trading and Principal Investments consists
of our Fixed Income, Currency and Commodities ("FICC"), Equities and Principal
Investments businesses.

INVESTMENT BANKING

Investment Banking represented 33% of 1999 net revenues. We provide a broad
range of investment banking services to a diverse group of corporations,
financial institutions, governments and individuals and seek to develop and
maintain long-term relationships with these clients as their lead investment
bank.

Our current structure, which is organized along regional, product and
industry groups, seeks to combine client-focused investment bankers with
execution and industry expertise. Because our businesses are global, we have
adapted our organization to meet the demands of our clients in each geographic
region. Through our commitment to teamwork, we believe that we provide services
in an integrated fashion for the benefit of our clients.

Our investment banking activities are divided into two categories:

- - FINANCIAL ADVISORY. Financial Advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense
activities, restructurings and spin-offs; and

- - UNDERWRITING. Underwriting includes public offerings and private placements
of equity and debt securities.

FINANCIAL ADVISORY. Goldman Sachs is a leading investment bank in
worldwide mergers and acquisitions. Our mergers and acquisitions capabilities
are evidenced by our significant share of assignments in large, complex
transactions for which we provide multiple services, including "one-stop"
acquisition financing, currency hedging and cross-border structuring expertise.

UNDERWRITING. We underwrite a wide range of securities and other
instruments, including common and preferred stock, convertible securities,
investment-grade debt, high-yield debt, sovereign and emerging markets debt,
municipal debt, bank loans, asset-backed securities and real estate-related
securities, such as mortgage-backed securities and the securities of real estate
investment trusts.

Equity Underwriting. Equity underwriting has been a long-term core
strength of Goldman Sachs. As with mergers and acquisitions, we have been
particularly successful in winning mandates for large, complex equity
underwritings. We believe our leadership in large initial public offerings
reflects our expertise in complex transactions, research strengths, track record
and distribution capabilities. We have also acted as lead manager on many of the
largest initial public offerings in the international arena.

We believe that a key factor in our equity underwriting success is the
close working relationship among the investment bankers, research analysts and
sales force as coordinated by our Equity Capital Markets group. With
institutional sales professionals and high-net-worth relationship managers
located in every major market around the world, Goldman Sachs has relationships
with a large and diverse group of investors.

Debt Underwriting. We engage in the underwriting and origination of
various types of debt instruments that we broadly categorize as follows:

- - investment-grade debt for corporations, governments, municipalities and
agencies;

- - leveraged finance, which includes high-yield debt and bank loans for
non-investment-grade issuers;

- - emerging market debt, which includes corporate and sovereign issues; and

- - asset-backed securities.

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We have employed a focused approach in debt underwriting, emphasizing high
value-added areas in servicing our clients.

TRADING AND PRINCIPAL INVESTMENTS

Trading and Principal Investments represented 43% of 1999 net revenues. Our
Trading and Principal Investments business facilitates transactions with a
diverse group of corporations, financial institutions, governments and
individuals and takes proprietary positions through market making in and trading
of fixed income and equity products, currencies, commodities, and swaps and
other derivatives. In order to meet the needs of our clients, our Trading and
Principal Investments business is diversified across a wide range of products.
For example, we make markets in traditional investment-grade debt securities,
structure complex derivatives and securitize mortgages and insurance risk. We
believe our willingness and ability to take risk distinguishes us and
substantially enhances our client relationships.

Trading and Principal Investments is divided into three categories:

- - FIXED INCOME, CURRENCY AND COMMODITIES. Goldman Sachs makes markets in and
trades fixed income products, currencies and commodities, structures and
enters into a wide variety of derivative transactions, and engages in
proprietary trading and arbitrage activities;

- - EQUITIES. Goldman Sachs makes markets in and trades equities and
equity-related products, structures and enters into equity derivative
transactions, and engages in proprietary trading and equity arbitrage; and

- - PRINCIPAL INVESTMENTS. Principal Investments primarily represents net
revenues from our merchant banking investments.

FIXED INCOME, CURRENCY AND COMMODITIES. FICC is a large and diversified
operation through which we engage in a variety of customer-driven market-making
and proprie-

tary trading and arbitrage activities. FICC's principal products are:

- - Bank loans

- - Commodities

- - Currencies

- - Derivatives

- - Emerging market debt

- - Global government securities

- - High-yield securities

- - Investment-grade corporate securities

- - Money market instruments

- - Mortgage securities and loans

- - Municipal securities

We generate trading net revenues from our customer-driven business in three
ways. First, in large, highly liquid markets, we undertake a high volume of
transactions for modest spreads. Second, by capitalizing on our strong market
relationships and capital position, we also undertake transactions in less
liquid markets where spreads are generally larger. Finally, we generate net
revenues from structuring and executing transactions that address complex client
needs.

In our proprietary activities, we assume a variety of risks and devote
substantial resources to identify, analyze and benefit from these exposures. We
leverage our strong research capabilities and capitalize on our proprietary
analytical models to analyze information and make informed trading judgments. We
seek to benefit from perceived disparities in the value of assets in the trading
markets and from macroeconomic and company-specific trends.

FICC uses a three-part approach to deliver high quality service to its
clients. First, we offer broad market making, research and market knowledge to
our clients on a global basis. Second, we create innovative solutions to complex
client problems by drawing upon our structuring and trading expertise. Third, we
use our expertise to take positions in markets when we believe the return is at
least commensurate with the risk.

A core activity in FICC is market making in a broad array of securities and
products. For example, we are a primary dealer in many of the largest government
bond markets

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around the world, including the United States, Japan, the United Kingdom and
Canada. We are a member of the major futures exchanges, and also have interbank
dealer status in the currency markets in New York, London, Tokyo and Hong Kong.
Our willingness to make markets in a broad range of fixed income, currency and
commodity products and their derivatives is crucial both to our client
relationships and to support our underwriting business by providing secondary
market liquidity. Our research capabilities include quantitative and qualitative
analyses of global economic, currency and financial market trends, as well as
credit analyses of corporate and sovereign fixed income securities.

EQUITIES. Goldman Sachs engages in a variety of market-making, proprietary
trading and arbitrage activities in equity securities and equity-related
products (such as convertible securities and equity derivative instruments) on a
global basis. Goldman Sachs makes markets and positions blocks of stock to
facilitate customers' transactions and to provide liquidity in the marketplace.
Goldman Sachs is a member of most of the major stock exchanges, including New
York, London, Frankfurt, Tokyo and Hong Kong.

As agent, we execute brokerage transactions in equity securities for
institutional and individual customers that generate commission revenues.
Commissions earned on agency transactions are recorded in Asset Management and
Securities Services.

In equity trading, as in FICC, we generate net revenues from our
customer-driven business in three ways. First, in large, highly liquid principal
markets, such as the over-the-counter market for equity securities, we undertake
a high volume of transactions for modest spreads. Second, by capitalizing on our
strong market relationships and capital position, we also undertake large
transactions, such as block trades and positions in securities, in which we
benefit from spreads that are generally larger. Finally, we also benefit from
structuring complex transactions.

Goldman Sachs was a pioneer and is currently active in the execution of
large block trades (trades of 50,000 or more shares) in the United States and
abroad. We have been able to capitalize on our expertise in block trading, our
global distribution network and our willingness to commit capital to effect
increasingly large and complex customer transactions. We expect corporate
consolidation and restructuring and increased demand for certainty and speed of
execution by sellers and issuers of securities to increase both the frequency
and size of sales of large blocks of equity securities. Block transactions,
however, expose us to increased risks, including those arising from holding
large and concentrated positions, and decreasing spreads. See "Risk
Factors -- Market Fluctuations Could Harm Our Businesses in Many Ways and,
Consequently, Could Lower the Value of an Investment in the Notes -- Holding
Large and Concentrated Positions May Expose Us to Large Losses" for a discussion
of the risks associated with holding a large position in a single issuer, and
"Risk Factors -- The Financial Services Industry Is Intensely Competitive and
Rapidly Consolidating" for a discussion of the competitive risks that we face.

We are active in the listed options and futures markets, and we structure,
distribute and execute over-the-counter derivatives on market indices, industry
groups and individual company stocks to facilitate customer transactions and our
proprietary activities. We develop quantitative strategies and render advice
with respect to portfolio hedging and restructuring and asset allocation
transactions. We also create specially tailored instruments to enable
sophisticated investors to undertake hedging strategies and establish or
liquidate investment positions. We are one of the leading participants in the
trading and development of equity derivative instruments. We are an active
participant in the trading of futures and options on most of the major exchanges
in the United States, Europe and Asia.

We remain committed to being at the forefront of technological innovation
in the global capital markets. To pursue our strategy of expanding our
electronic market-making capabilities, on September 24, 1999, Goldman Sachs
completed its acquisition of The Hull Group, a leading global electronic market

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maker in exchange-traded equity derivatives and an active market maker in equity
securities worldwide.

In addition, equity arbitrage has long been an important part of our equity
franchise. Our strategy is based on making investments on a global basis through
a diversified portfolio across different markets and event categories. This
business focuses on event-oriented special situations where we are not acting as
an advisor and on relative value trades. These special situations include
mergers and acquisitions, corporate restructurings, recapitalizations and legal
and regulatory events.

TRADING RISK MANAGEMENT. We believe that our trading and market-making
capabilities are key ingredients to our success. While these businesses have
generally earned attractive returns, we have in the past incurred significant
trading losses in periods of market turbulence, such as in 1994 and the second
half of 1998.

Our trading risk management process seeks to balance our ability to profit
from trading positions with our exposure to potential losses. Risk management
includes input from all levels of Goldman Sachs, from the trading desks to the
Firmwide Risk Committee. For a further discussion of our risk management
policies and procedures, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Management".

PRINCIPAL INVESTMENTS. In connection with our merchant banking activities,
we invest by making principal investments directly and through funds that we
raise and manage. As of November 1999, we had committed $3.06 billion, of which
$2.33 billion had been funded, of the $17.27 billion total equity capital
committed for our merchant banking funds. The funds' investments generate
capital appreciation or depreciation and, upon disposition, realized gains or
losses. See "-- Asset Management and Securities Services -- Merchant Banking"
for a discussion of our merchant banking funds. As of November 1999, the
aggregate carrying value of our principal investments held directly or through
our merchant banking funds was approximately $2.88 billion, which consisted of
corporate principal investments with an aggregate carrying value of
approximately $1.95 billion and real estate investments with an aggregate
carrying value of approximately $928 million.

ASSET MANAGEMENT AND
SECURITIES SERVICES

The components of the Asset Management and Securities Services segment,
which represented 24% of 1999 net revenues, are set forth below:

- - ASSET MANAGEMENT. Asset Management generates management fees by providing
investment advisory services to a diverse client base of institutions and
individuals;

ASSET MANAGEMENT

Goldman Sachs is seeking to build a premier global asset management
business. We offer a broad array of investment strategies and advice across all
major asset classes: global equity; fixed income, including money markets;
currency; and alternative investment products (i.e., investment vehicles with
non-traditional investment objectives and/or strategies). Assets under
supervision consist of assets under management and other client assets. Assets
under management typically generate fees based on a percentage of their value
and include our mutual funds, separate accounts managed for institutional and
individual investors, our merchant banking funds and other alternative
investment funds. Other client assets consist of assets in brokerage accounts of
primarily

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high-net-worth individuals, on which we earn
commissions.

Our growth in assets under supervision is set forth in the graph below:

ASSETS UNDER SUPERVISION
(in billions)

[BAR CHART: ASSETS UNDER SUPERVISION]

YEAR ASSETS UNDER MANAGEMENT OTHER CLIENT ASSETS TOTAL
- ---- ----------------------- ------------------- -----

1995.......................................... $52 $58 $110
1996.......................................... 94 77 171
1997.......................................... 136 102 238
1998.......................................... 195 142 337
1999.......................................... 258 227 485

- ------------------------

As of November 1999, equities and alternative investments represented 59%
of our total assets under management. Since 1996, these two asset classes have
been the primary drivers of our growth in assets under management.

The following table sets forth the amount of assets under management by
asset class:
ASSETS UNDER MANAGEMENT BY ASSET CLASS
(in billions)

AS OF NOVEMBER
--------------------
1999 1998 1997
---- ---- ----

ASSET CLASS
Equity...................................................... $ 98 $ 69 $ 52
Fixed income and currency................................... 58 50 36
Money markets............................................... 48 46 31
Alternative investment(1)................................... 54 30 17
---- ---- ----
Total....................................................... $258 $195 $136
==== ==== ====

- ---------------
(1) Includes private equity, real estate, quantitative asset allocation and
other funds that we manage.
------------------------

Since the beginning of 1996, we have increased the resources devoted to our
Asset Management business, including the addition of over 1,000 employees. In
addition, Goldman Sachs has made three asset management acquisitions in order to
expand its geographic reach and broaden its global equity and alternative
investment portfolio management capabilities.

CLIENTS. Our primary clients are institutions, high-net-worth individuals
and retail investors. We access clients through both direct and third-party
channels. Our institutional clients include corporations, insurance companies,
pension funds, foundations and

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endowments. In the third-party distribution channel, we distribute our mutual
funds on a worldwide basis through banks, brokerage firms, insurance companies
and other financial intermediaries.

The table below sets forth the amount of assets under supervision by
distribution channel and client category as of November 1999:

ASSETS UNDER SUPERVISION BY DISTRIBUTION CHANNEL
(in billions)

ASSETS UNDER
SUPERVISION(1) PRIMARY INVESTMENT VEHICLES
-------------- ---------------------------

- Directly distributed
-- Institutional.......................... $151 Separate managed accounts
-- High-net-worth individuals............. 262 Commingled vehicles
Brokerage accounts
Limited partnerships
Separate managed accounts
- Third-party distributed
-- Institutional and retail............... 56 Mutual funds
----
Total....................................... $469
====

- ---------------

(1) Excludes $16 billion in our merchant banking funds.

------------------------

MERCHANT BANKING

Goldman Sachs has established a successful record in the corporate and real
estate merchant banking business, with $17.27 billion of committed capital as of
November 1999, of which $13.03 billion has been funded. We have committed $3.06
billion and funded $2.33 billion of these amounts. Our clients, including
pension plans, endowments, charitable institutions and high-net-worth
individuals, have provided the remainder.

Our strategy with respect to each merchant banking fund is to invest
opportunistically to build a portfolio of investments that is diversified by
industry, product type, geographic region and transaction structure and type.
Some of these investment funds pursue, on a global basis, long-term investments
in equity and debt securities in privately negotiated transactions, leveraged
buyouts and acquisitions. As of November 1999, our corporate merchant banking
funds had total committed capital of $9.50 billion. Other funds, with total
committed capital of $7.77 billion as of November 1999, invest in real estate
operating companies and debt and equity interests in real estate assets.

Merchant banking activities generate three revenue streams. First, we
receive a management fee that is generally a percentage of a fund's committed
capital, invested capital, total gross acquisition cost or asset value. These
annual management fees are included in our Asset Management revenues. Second,
after that fund has achieved a minimum return for fund investors, we receive an
increased share of the fund's income and gains that is a percentage, typically
20%, of the capital appreciation and gains from the fund's investments. Revenues
from the increased share of the funds' income and gains are included in
Commissions. Finally, Goldman Sachs, as a substantial investor in these funds,
is allocated its proportionate share of the funds' unrealized appreciation or
depreciation arising from changes in fair value as well as gains and losses upon
realization. These items are included in the Trading and Principal Investments
component of Global Capital Markets.

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SECURITIES SERVICES

Securities Services consists predominantly of Global Securities Services,
which provides prime brokerage, financing services and securities lending to a
diversified U.S. and international customer base, including hedge funds, pension
funds and high-net-worth individuals. Securities Services also includes our
matched book businesses.

We offer prime brokerage services to our clients, allowing them the
flexibility to trade with most brokers while maintaining a single source for
financing and portfolio reports. Our prime brokerage activities provide
multi-product clearing and custody in 50 markets, consolidated multi-currency
accounting and reporting and offshore fund administration and also provide
servicing for our most active clients. Additionally, we provide financing to our
clients through margin loans collateralized by securities held in the client's
account.

Securities lending activities principally involve the borrowing and lending
of equity securities to cover customer and Goldman Sachs' short sales and to
finance Goldman Sachs' long positions. In addition, we are an active participant
in the securities lending broker-to-broker business and the third-party agency
lending business.

COMMISSIONS

Goldman Sachs generates commissions by executing agency transactions on
major stock and futures exchanges worldwide. We effect agency transactions for
clients located throughout the world. In recent years, aggregate commissions
have increased as a result of growth in transaction volume on the major
exchanges. As discussed above, Commissions also includes the increased share of
income and gains from merchant banking funds as well as commissions earned from
brokerage transactions. For a discussion regarding our increased share of the
income and gains from our merchant banking funds, see "-- Merchant Banking"
above.

In anticipation of continued growth in electronic connectivity and on-line
trading, Goldman Sachs has made strategic investments in alternative trading
systems to gain experience and participate in the development of this market.
See "-- Internet Strategy" below for a further discussion of these investments,
and see "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating -- Our Revenues May Decline Due to
Competition from Alternative Trading Systems" for a discussion of the
competitive risks posed by alternative trading systems generally.

GLOBAL INVESTMENT RESEARCH

Our Global Investment Research Department provides fundamental research on
economies, debt and equity markets, commodities markets, industries and
companies on a worldwide basis. For over two decades, we have committed
resources on a global scale to develop a leading position in the industry for
our investment research products.

Global Investment Research employs a team approach that as of November 1999
provided research coverage of approximately 2,400 companies worldwide, 52
economies and 26 stock markets. This is accomplished by four groups:

- - the Commodities Research group, which provides research on the global
commodity markets;

- - the Company/Industry group, which provides fundamental analysis, forecasts and
investment recommendations for companies and industries worldwide. Equity
research analysts are organized regionally by sector and globally into more
than 20 industry teams, which allows for extensive collaboration and knowledge
sharing on important investment themes;

- - the Economic Research group, which formulates macroeconomic forecasts for
economic activity, foreign exchange and interest rates based on the globally
coordinated views of its regional economists; and

- - the Portfolio Strategy group, which forecasts equity market returns and
provides recommendations on both asset allocation and industry representation.

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INTERNET STRATEGY

We believe that Internet technology and electronic commerce will, over
time, change the ways that securities and other financial products are traded
and distributed, creating both opportunities and challenges for our businesses.
In response, we have established a program of internal development and external
investment.

Internally, we are extending our global electronic trading and information
distribution capabilities to our clients via the Internet. These capabilities
cover many of our fixed income, currency, commodity, equities and mutual fund
products in markets around the world. We are also using the Internet to improve
the ease and quality of communication with our institutional and high-net-worth
clients. For example, investors have on-line access to our investment research,
mutual fund data and valuation models. In addition, our high-net-worth clients
are increasingly accessing their portfolio information over the Internet. We
have also recently established GS-Online(SM), which, in conjunction with
Goldman, Sachs & Co., acts as an underwriter of securities offerings via the
Internet and other electronic means. GS-Online(SM) will deal initially only with
other underwriters and syndicate members and not with members of the public.

Recently, we established an internal working group to focus primarily on
utilizing the Internet to enhance and support our wealth management business.
Externally, we have invested in electronic commerce concerns such as Bridge
Information Systems, Inc., TradeWeb LLC, Archipelago, L.L.C., The BRASS Utility,
L.L.C., OptiMark Technologies, Inc. and Wit Capital Group, Inc. Through these
investments, we gain an increased understanding of business developments and
opportunities in this emerging sector. For a discussion of how Goldman Sachs
could be adversely affected by these developments, see "Risk Factors -- The
Financial Services Industry Is Intensely Competitive and Rapidly
Consolidating -- Our Revenues May Decline Due to Competition from Alternative
Trading Systems".

INFORMATION TECHNOLOGY

Technology is fundamental to our overall business strategy. Goldman Sachs
is committed to the ongoing development, maintenance and use of technology
throughout the organization. We have developed significant software and systems
over the past several years. Our technology initiatives can be broadly
categorized into three efforts:

- - enhancing client service through increased connectivity and the provision of
high value-added, tailored services;

- - risk management; and

- - overall efficiency and control.

We have tailored our services to our clients by providing them with
electronic access to our products and services. For example, we developed the GS
Financial Workbench(SM), an Internet Web site that clients and employees can use
to download research reports, access earnings and valuation models, submit
trades, monitor accounts, build and view presentations, calculate derivative
prices and view market data. First made available in 1995, the GS Financial
Workbench(SM) represents a joint effort among all of our business areas to
create one comprehensive site for clients and employees to access our products
and services.

We have also developed software that enables us to monitor and analyze our
market and credit risks. This risk management software not only analyzes market
risk on firmwide, divisional and trading desk levels, but also breaks down our
risk into its underlying exposures, permitting management to evaluate exposures
on the basis of specific interest rate, currency rate, equity price or commodity
price changes. To assist further in the management of our credit exposures, data
from many sources are aggregated daily into credit management systems that give
senior management and professionals in the Credit and Controllers departments
the ability to receive timely information with respect to credit exposures
worldwide, including netting information, and the ability to analyze complex
risk situations effectively. Our software accesses this data, allows for quick
analysis

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at the level of individual trades and interacts with other Goldman Sachs
systems.

Technology has also been a significant factor in improving the overall
efficiency of many areas of Goldman Sachs. By automating many trading procedures
and operational and accounting processes, we have substantially increased our
efficiency and accuracy.

EMPLOYEES

Management believes that one of the strengths and principal reasons for the
success of Goldman Sachs is the quality and dedication of its people and the
shared sense of being part of a team. We strive to maintain a work environment
that fosters professionalism, excellence, diversity and cooperation among our
employees worldwide.

Instilling the Goldman Sachs culture in all employees is a continuous
process, in which training plays an important part. All employees are offered
the opportunity to participate in education and periodic seminars that we
sponsor at various locations throughout the world. Another important part of
instilling the Goldman Sachs culture is our employee review process. Employees
are reviewed by supervisors, co-workers and employees they supervise in a
360-degree review process that is integral to our team approach.

As of November 1999, we had 15,361 employees, which excludes employees of
Goldman Sachs' two property management subsidiaries. Substantially all of the
costs of these property management employees are reimbursed to Goldman Sachs by
the real estate investment funds to which these subsidiaries provide property
management services.

COMPETITION

The financial services industry -- and all of our businesses -- are
intensely competitive, and we expect them to remain so. Our competitors are
other brokers and dealers, investment banking firms, insurance companies,
investment advisors, mutual funds, hedge funds, commercial banks and merchant
banks. We compete with some of our competitors globally and with others on a
regional, product or niche basis. Our competition is based on a number of
factors, including transaction execution, our products and services, innovation,
reputation and price.

We also face intense competition in attracting and retaining qualified
employees. Our ability to continue to compete effectively in our businesses will
depend upon our ability to attract new employees and retain and motivate our
existing employees.

Recently enacted federal financial modernization legislation significantly
expands the activities permissible for firms affiliated with a U.S. bank. The
legislation, among other things, enables U.S. banks and insurance firms to
affiliate, facilitates affiliations between U.S. banks and securities firms, and
expands the permissible principal investing activities of U.S. banking
organizations. See "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating -- We Face Increased Competition Due to a
Trend Toward Consolidation" for a discussion of the potential impact of this
legislation.

The trend toward consolidation and convergence has significantly increased
the capital base and geographic reach of our competitors. This trend has also
hastened the globalization of the securities and other financial services
markets. As a result, we have had to commit capital to support our interna-

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tional operations and to execute large global transactions.

We have experienced intense price competition in some of our businesses in
recent years. For example, equity and debt underwriting discounts have been
under pressure for a number of years and the ability to execute trades
electronically, through the Internet and through other alternative trading
systems may increase the pressure on trading commissions. It appears that this
trend toward alternative trading systems will continue and probably accelerate.
Similarly, underwriting spreads in certain privatizations have been subject to
considerable pressure. We believe that we may experience pricing pressures in
these and other areas in the future as some of our competitors seek to obtain
market share by reducing prices.

See "Risk Factors -- The Financial Services Industry Is Intensely
Competitive and Rapidly Consolidating" for a discussion of the competitive risks
we face in our businesses.

REGULATION

Goldman Sachs, as a participant in the securities and commodity futures and
options industries, is subject to extensive regulation in the United States and
elsewhere. As a matter of public policy, regulatory bodies in the United States
and the rest of the world are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in those markets. They are not, however, charged with
protecting the interests of Goldman Sachs' shareholders or creditors. In the
United States, the SEC is the federal agency responsible for the administration
of the federal securities laws. Goldman, Sachs & Co. is registered as a
broker-dealer and as an investment adviser with the SEC and as a broker-dealer
in all 50 states and the District of Columbia. Self-regulatory organizations,
such as the Chicago Board of Trade, the NYSE and the NASD, adopt rules and
examine broker-dealers such as Goldman, Sachs & Co. In addition, state
securities and other regulators also have regulatory or oversight authority over
Goldman, Sachs & Co. Similarly, our businesses are also subject to regulation by
various non-U.S. governmental and regulatory bodies and self-regulatory
authorities in virtually all countries where we have offices.

Broker-dealers are subject to regulations that cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record-keeping, the financing of customers' purchases, and the
conduct of directors, officers and employees. Additional legislation, changes in
rules promulgated by self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, either in the United
States or elsewhere, may directly affect the mode of operation and profitability
of Goldman Sachs.

The U.S. and non-U.S. government agencies and self-regulatory
organizations, as well as state securities commissions in the United States, are
empowered to conduct administrative proceedings that can result in censure,
fine, the issuance of cease-and-desist orders, or the suspension or expulsion of
a broker-dealer or its directors, officers or employees. Occasionally, our
subsidiaries have been subject to investigations and proceedings, and sanctions
have been imposed for infractions of various regulations relating to our
activities, none of which has had a material adverse effect on us or our
businesses.

The commodity futures and options industry in the United States is subject
to regulation under the Commodity Exchange Act, as amended. The Commodity
Futures Trading Commission is the federal agency charged with the administration
of the Commodity Exchange Act and the regulations thereunder. Goldman, Sachs &
Co. is regis-

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tered with the Commodity Futures Trading Commission as a futures commission
merchant, commodity pool operator and commodity trading advisor.

As a registered broker-dealer and member of various self-regulatory
organizations, Goldman, Sachs & Co. is subject to the SEC's uniform net capital
rule, Rule 15c3-1. This rule specifies the minimum level of net capital a
broker-dealer must maintain and also requires that part of its assets be kept in
relatively liquid form. Goldman, Sachs & Co. is also subject to the net capital
requirements of the Commodity Futures Trading Commission and various securities
and commodity exchanges. See Note 12 to the consolidated financial statements
included elsewhere in this prospectus, for a discussion of our net capital.

The SEC and various self-regulatory organizations impose rules that require
notification when net capital falls below certain predefined criteria, dictate
the ratio of subordinated debt to equity in the regulatory capital composition
of a broker-dealer and constrain the ability of a broker-dealer to expand its
business under certain circumstances. Additionally, the SEC's uniform net
capital rule imposes certain requirements that may have the effect of
prohibiting a broker-dealer from distributing or withdrawing capital and
requiring prior notice to the SEC for certain withdrawals of capital.

In January 1999, the SEC adopted revisions to its uniform net capital rule
and related regulations that permit the registration of over-the-counter
derivatives dealers as broker-dealers. An over-the-counter derivatives dealer
can, upon adoption of a risk management framework in accordance with the new
rules, utilize a capital requirement based upon proprietary models for
estimating market risk exposures. We have established Goldman Sachs Financial
Markets, L.P. and registered this company with the SEC as an over-the-counter
derivatives dealer to conduct in a more capital-efficient manner certain
over-the-counter derivative businesses previously conducted in other affiliates.

Goldman Sachs is an active participant in the international fixed income
and equity markets. Many of our affiliates that participate in those markets are
subject to comprehensive regulations that include some form of capital adequacy
rule and other customer protection rules. Goldman Sachs provides investment
services in and from the United Kingdom under a regulatory regime that is
undergoing comprehensive restructuring aimed at implementing the Financial
Services Authority as the United Kingdom's unified financial services regulator.
The relevant Goldman Sachs entities in London are at present regulated by the
Securities and Futures Authority Limited in respect of their investment banking,
individual asset management, brokerage and principal trading activities, and the
Investment Management Regulatory Organization in respect of their institutional
asset management and fund management activities. Some of these Goldman Sachs
entities are also regulated by the London Stock Exchange and other U.K.
securities and commodities exchanges of which they are members. It is expected,
however, that during 2000, the responsibilities of the Securities and Futures
Authority Limited and Investment Management Regulatory Organization will be
taken over by the Financial Services Authority. The investment services that are
subject to oversight by U.K. regulators are regulated in accordance with
European Union directives requiring, among other things, compliance with certain
capital adequacy standards, customer protection requirements and conduct of
business rules. These standards, requirements and rules are similarly
implemented, under the same directives, throughout the European Union and are
broadly comparable in scope and purpose to the regulatory capital and customer
protection requirements imposed under the SEC and Commodity Futures Trading
Commission rules. European Union directives also permit local regulation in each
jurisdiction, including those in which we operate, to be more restrictive than
the requirements of such directives and these local requirements can result in
certain competitive disadvantages to Goldman Sachs. In addition, the Japanese
Ministry of Finance, the Financial Supervisory Agency, the Tokyo Stock Exchange,
the Tokyo International Financial Futures Exchange and the Japan Securities
Dealers Association in Japan, the Securities and Futures Commis-

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sion in Hong Kong, the Bundesbank in Germany, as well as French and Swiss
banking authorities, among others, regulate various of our subsidiaries and also
have capital standards and other requirements comparable to the rules of the
SEC.

Compliance with net capital requirements of these and other regulators
could limit those operations of our subsidiaries that require the intensive use
of capital, such as underwriting and trading activities and the financing of
customer account balances, and also could restrict our ability to withdraw
capital from our regulated subsidiaries, which in turn could limit our ability
to repay debt or pay dividends on our common stock.

PROPERTIES

Our principal executive offices are located at 85 Broad Street, New York,
New York, and comprise approximately 969,000 square feet of leased space,
pursuant to a lease agreement expiring in June 2008 (with an option to renew for
up to 20 additional years). We also occupy over 500,000 square feet at each of 1
New York Plaza and 10 Hanover Square in New York, New York, pursuant to lease
agreements expiring in September 2004 (with an option to renew for ten years)
and June 2018, respectively. Additionally, we have a 15-year lease for
approximately 605,000 square feet at 180 Maiden Lane in New York, New York, that
expires in March 2014. In total, we lease over 3.6 million square feet in the
New York area. We have additional offices in the United States and elsewhere in
the Americas. Together, these offices comprise approximately 680,000 square feet
of leased space.

In the first quarter of 2000, we executed a contract to purchase
approximately six acres of unimproved land in Jersey City, New Jersey. We expect
to develop this land to complement our offices in lower Manhattan. The initial
phase of development is expected to include approximately 1.4 million usable
square feet of office space, with occupancy planned for early 2003.

We also have offices in Europe, Asia, Africa and Australia. In Europe, we
have offices that totaled approximately 788,000 square feet as of the end of
January 2000. Our largest presence in Europe is in London, where we leased
approximately 609,000 square feet through various leases as of the end of
January 2000, with the principal one for Peterborough Court expiring in 2016. An
additional 453,000 square feet of leased space in London is expected to be
occupied during 2000 and 2001.

In Asia, we have offices that total approximately 563,000 square feet. Our
largest offices in this region are in Tokyo and Hong Kong. In Tokyo, we
currently lease approximately 234,000 square feet under renewable leases with
current terms extending, in some cases, to June 2005. In Hong Kong, we currently
lease approximately 222,000 square feet under a lease that expires in 2012.
There are significant expansion efforts underway in Tokyo and Singapore.

Our space requirements have increased significantly over the last several
years. Currently, Goldman Sachs is at or near capacity at most of its locations.
As a result, we have been actively leasing additional space to support our
anticipated growth. Based on our progress to date, we believe that we will be
able to acquire additional space to meet our anticipated needs.

LEGAL PROCEEDINGS

We are involved in a number of judicial, regulatory and arbitration
proceedings (including those described below) concerning matters arising in
connection with the conduct of our businesses. We believe, based on currently
available information, that the results of such proceedings, in the aggregate,
will not have a material adverse effect on our financial condition, but might be
material to our operating results for any particular period, depending, in part,
upon the operating results for such period.

MOBILEMEDIA SECURITIES LITIGATION

Goldman, Sachs & Co. has been named as a defendant in a purported class
action lawsuit commenced on December 6, 1996 and pending in the U.S. District
Court for the District of New Jersey. This lawsuit was brought on behalf of
purchasers of common
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stock of MobileMedia Corporation in an underwritten offering in 1995 and
purchasers of senior subordinated notes of MobileMedia Communications Inc. in a
concurrent underwritten offering. Defendants are MobileMedia Corporation,
certain of its officers and directors, and the lead underwriters, including
Goldman, Sachs & Co. MobileMedia Corporation is currently reorganizing in
bankruptcy.

Goldman, Sachs & Co. underwrote 2,242,500 shares of common stock, for a
total price of approximately $53 million, and Goldman Sachs International
underwrote 718,750 shares, for a total price of approximately $17 million.
Goldman, Sachs & Co. underwrote approximately $38 million in principal amount of
the senior subordinated notes.

The consolidated class action complaint alleges violations of the
disclosure requirements of the federal securities laws and seeks compensatory
and/or rescissory damages. In light of MobileMedia Corporation's bankruptcy, the
action against it has been stayed. Defendants' motion to dismiss was denied in
October 1998.

The parties have entered into a stipulation of settlement, which was
approved by the court on February 7, 2000, but the time to appeal has yet to
expire.

ANTITRUST MATTERS

Goldman, Sachs & Co. is one of numerous financial services companies that
have been named as defendants in certain purported class actions brought in the
U.S. District Court for the Southern District of New York by purchasers of
securities in public offerings, who claim that the defendants engaged in
conspiracies in violation of federal antitrust laws in connection with these
offerings. The plaintiffs in each instance seek treble damages as well as
injunctive relief. One of the actions, which was commenced on August 21, 1998,
alleges that the defendants have conspired to discourage or restrict the resale
of securities for a period after the offerings, including by imposing "penalty
bids". Defendants moved to dismiss the complaint in November 1998. The
plaintiffs amended their complaint in February 1999, modifying their claims in
various ways, including limiting the proposed class to retail purchasers of
public offerings. On May 7, 1999, the defendants moved to dismiss the amended
complaint.

Several other actions were commenced, beginning on November 3, 1998, that
allege that the defendants, many of whom are also named in the other action
discussed above, have conspired to fix at 7% the discount that underwriting
syndicates receive from issuers of shares in certain offerings. On March 15,
1999, the plaintiffs filed a consolidated amended complaint. The defendants
moved to dismiss the consolidated amended complaint on April 29, 1999.

Goldman, Sachs & Co. received a Civil Investigative Demand on April 29,
1999 from the U.S. Department of Justice requesting information with respect to
its investigation of an alleged conspiracy among securities underwriters to fix
underwriting fees.

Hull Trading Co. L.L.C., an affiliate of The Goldman Sachs Group, Inc., is
one of numerous market makers in listed equity options which have been named as
defendants, together with five national securities exchanges, in a purported
class action brought in the U.S. District Court for the Southern District of New
York on behalf of persons who purchased or sold listed equity options. The
consolidated class action complaint, filed on October 4, 1999 (which
consolidated certain previously pending actions and added Hull Trading Co.
L.L.C. and other market makers as defendants), generally alleges that the
defendants engaged in a conspiracy to preclude the multiple listing of certain
equity options on the exchanges and seeks treble damages under the antitrust
laws as well as injunctive relief. On January 28, 2000, the defendants moved to
dismiss the consolidated class action complaint.

ROCKEFELLER CENTER PROPERTIES, INC. LITIGATION

Several former shareholders of Rockefeller Center Properties, Inc. brought
purported class actions in the U.S. District Court for the District of Delaware
and the Delaware Court of Chancery arising from the acquisition of Rockefeller
Center Properties, Inc. by an

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investor group in July 1996. The defendants in the actions include, among
others, Goldman, Sachs & Co., Whitehall Real Estate Partnership V, a fund
advised by Goldman, Sachs & Co., a Goldman, Sachs & Co. managing director and
other members of the investor group. The federal court actions, which have since
been consolidated, were filed beginning on November 15, 1996, and the state
court action was filed on May 29, 1998.

The complaints generally allege that the proxy statement disseminated to
former Rockefeller Center Properties, Inc. stockholders in connection with the
transaction was deficient, in violation of the disclosure requirements of the
federal securities laws. The plaintiffs are seeking, among other things,
unspecified damages, rescission of the acquisition, and/or disgorgement.

In a series of decisions, the federal district court granted summary
judgment dismissing all the claims in the federal action. The plaintiffs
appealed those rulings.

On July 19, 1999, the U.S. Court of Appeals for the Third Circuit rendered
its decision affirming in part and vacating in part the lower court's entry of
summary judgment dismissing the action. With respect to the claim as to which
summary judgment was vacated, the appellate court held that the district court
had committed a procedural error in converting the defendants' motion to dismiss
into a motion for summary judgment and remanded for the district court to
reconsider that claim under appropriate standards applicable to motions to
dismiss. Plaintiffs have since sought leave to amend the complaint as to the
remanded claim. The defendants have moved to dismiss the remanded claim and are
opposing the plaintiffs' motion to amend it further.

The state action has been stayed pending disposition of the federal action.

REICHHOLD CHEMICALS LITIGATION

Reichhold Chemicals, Inc. and Reichhold Norway ASA brought a claim on March
30, 1998 in the Commercial Court in London against Goldman Sachs International
in relation to the plaintiffs' 1997 purchase of the polymer division of one of
Goldman Sachs International's Norwegian clients, Jotun A/S. The plaintiffs claim
that they overpaid by $40 million based upon misrepresentations concerning the
financial performance of the polymer division.

In November 1998, the Commercial Court granted Goldman Sachs
International's application for a stay of the action pending the outcome of
arbitration proceedings between Reichhold Chemicals, Inc. and Reichhold Norway
ASA, on the one hand, and Jotun A/S in Norway, on the other. That stay order was
upheld by an appellate court on June 28, 1999.

MATTERS RELATING TO MUNICIPAL SECURITIES

Goldman, Sachs & Co., together with a number of other firms active in the
municipal securities area, has received requests beginning in June 1995 for
information from the SEC and certain other federal and state agencies and
authorities with respect to the pricing of escrow securities sold by Goldman,
Sachs & Co. to certain municipal bond issuers in connection with the advanced
refunding of municipal securities. Goldman, Sachs & Co. understands that certain
municipal bond issuers to which Goldman, Sachs & Co. sold escrow securities have
also received such inquiries.

There have been published reports that an action under the Federal False
Claims Act was filed in February 1995 alleging unlawful and undisclosed
overcharges in certain advance refunding transactions by a private plaintiff on
behalf of the United States and that Goldman, Sachs & Co., together with a
number of other firms, is a named defendant in that action. The complaint was
reportedly filed under seal while the government determines whether it will
pursue the claims directly.

Goldman, Sachs & Co. is also one of many municipal underwriting firms that
have been named as defendants in a purported class action brought on November
24, 1998 in the U.S. District Court for the Middle District of Florida by the
Clerk of Collier County, Florida on behalf of municipal issuers which

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purchased escrow securities since October 1986 in connection with advance
refundings. The amended complaint alleges that the securities were excessively
"marked up" in violation of the Investment Advisers Act and Florida law, and
that the defendants violated the federal antitrust laws in connection with the
prices at which escrow securities were sold to municipal issuers. The complaint
seeks to recover the difference between the actual and alleged "fair" prices of
the escrow securities and to treble the alleged damages with respect to the
antitrust claim. On October 29, 1999, the defendants moved to dismiss the
complaint.

AMF SECURITIES LITIGATION

The Goldman Sachs Group, L.P., Goldman, Sachs & Co. and a Goldman, Sachs &
Co. managing director have been named as defendants in several purported class
action lawsuits beginning on April 27, 1999 in the U.S. District Court for the
Southern District of New York. The lawsuits, which have been consolidated, were
brought on behalf of purchasers of stock of AMF Bowling, Inc. in an underwritten
initial public offering of 15,525,000 shares of common stock in November 1997 at
a price of $19.50 per share. Defendants are AMF Bowling, Inc., certain officers
and directors of AMF Bowling, Inc. (including the Goldman, Sachs & Co. managing
director), and the lead underwriters of the offering (including Goldman, Sachs &
Co.). The consolidated amended complaint alleges violations of the disclosure
requirements of the federal securities laws and seeks compensatory damages
and/or rescission. The complaint asserts that The Goldman Sachs Group, L.P. and
the Goldman, Sachs & Co. managing director are liable as controlling persons
under the federal securities laws because certain funds managed by Goldman Sachs
owned a majority of the outstanding common stock of AMF Bowling, Inc. and the
managing director served as its chairman at the time of the offering. On
December 22, 1999, the defendants moved to dismiss the complaint.

IRIDIUM SECURITIES LITIGATION

Goldman, Sachs & Co. has been named as a defendant in two purported class
action lawsuits commenced, beginning on May 26, 1999, in the U.S. District Court
for the District of Columbia. These lawsuits were brought on behalf of
purchasers of Class A common stock of Iridium World Communications, Ltd. in a
January 1999 underwritten secondary offering of 7,500,000 shares of Class A
common stock at a price of $33.40 per share, as well as in the secondary market.
The defendants in the actions include Iridium, certain of its officers and
directors, Motorola, Inc. (an investor in Iridium) and the lead underwriters in
the offering, including Goldman, Sachs & Co.

The complaints in both actions allege violations of the disclosure
requirements of the federal securities laws and seek compensatory and/or
rescissory damages. Goldman, Sachs & Co. underwrote 996,500 shares of common
stock and Goldman Sachs International underwrote 320,625 shares of common stock
for a total offering price of approximately $44 million.

On August 13, 1999, Iridium World Communications, Ltd. filed for protection
under the U.S. bankruptcy laws.

HUD LITIGATION

In September 1999, Goldman, Sachs & Co. was notified by the civil division
of the United States Attorney's Office for the District of Columbia that it is a
named defendant, along with other unidentified entities, in a civil action
brought by a private party in the U.S. District Court for the District of
Columbia under the qui tam provisions of the federal False Claims Act in
connection with certain auctions of competitive loans on behalf of the U.S.
Department of Housing and Urban Development. Goldman, Sachs & Co. has not been
provided with the complaint, which has been filed under seal, but has been
informed that the complaint alleges, among other things, that (i) Goldman, Sachs
& Co. and its bidding partners improperly directed approximately $4.7 billion of
government-owned notes for prices below that which would have been obtained in
full and fair competition,

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(ii) the U.S. Department of Housing and Urban Development's financial advisor in
connection with such auctions provided Goldman, Sachs & Co. and its bidding
partners with information not available to competing bidders relating to the
details of competing bids, the value of the assets being sold and the structure
of the sales, and (iii) in one instance, Goldman, Sachs & Co. and its bidding
partners were awarded assets despite not being the highest bidder. Pursuant to
the False Claims Act, the complaint remains under seal pending the government's
investigation and consideration as to whether to intervene in the action. The
complaint does not state a monetary amount of damages. Under the False Claims
Act, any damage award could be trebled.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is information concerning our directors and executive
officers:

NAME AGE POSITION
- ---- --- --------

Henry M. Paulson, Jr. 53 Director, Chairman and Chief Executive Officer
Robert J. Hurst 54 Director and Vice Chairman
John A. Thain 44 Director, President and Co-Chief Operating
Officer
John L. Thornton 46 Director, President and Co-Chief Operating
Officer
Sir John Browne 51 Director
John H. Bryan 63 Director
James A. Johnson 56 Director
Ruth J. Simmons 54 Director
John L. Weinberg 75 Director
Robert J. Katz 52 General Counsel and Executive Vice President
Gregory K. Palm 51 General Counsel and Executive Vice President
Leslie C. Tortora 43 Chief Information Officer and Executive Vice
President
David A. Viniar 44 Chief Financial Officer and Executive Vice
President
Barry L. Zubrow 46 Chief Administrative Officer and Executive Vice
President

------------------------

Executive officers are appointed by and serve at the pleasure of our board
of directors. A brief biography of each director and executive officer follows.

Mr. Paulson has been a director of The Goldman Sachs Group, Inc. since
August 1998, and has been its Chairman and Chief Executive Officer since May
1999. He was Co-Chairman and Chief Executive Officer or Co-Chief Executive
Officer of The Goldman Sachs Group, L.P. from June 1998 to May 1999 and served
as Chief Operating Officer from December 1994 to June 1998. From December 1990
to November 1994, he was Co-Head of Investment Banking. Mr. Paulson is a member
of the Board of Directors of the New York Stock Exchange. He is also Chairman of
the Board of Directors of the Peregrine Fund, Inc. and Co-Chairman of the
Asia/Pacific Council of The Nature Conservancy. Mr. Paulson also serves on the
Advisory Board of the J.L. Kellogg Graduate School of Management at Northwestern
University, is a member of the Board of Directors of the Associates of Harvard
Business School and is Chairman of the Advisory Board of the Tsinghua University
School of Economics and Management.

Mr. Hurst has been a director of The Goldman Sachs Group, Inc. since August
1998, and has been its Vice Chairman since May 1999. He was Vice Chairman of The
Goldman Sachs Group, L.P. from February 1997 to May 1999 and served as Head or
Co-Head of Investment Banking from December 1990 to November 1999. He is also a
director of VF Corporation and IDB Holding Corporation Ltd. Mr. Hurst is a
member of the Board of Overseers of the Wharton School. He is also a member of
the Council on Foreign Relations and a member of the Committee for Economic
Development. He is Chairman of the Board of the Jewish Museum and a Trustee and
Vice President of the Whitney Museum of American Art.

Mr. Thain has been a director of The Goldman Sachs Group, Inc. since August
1998, and has been its President and Co-Chief Operating Officer since May 1999.
He was President of The Goldman Sachs Group, L.P. from March 1999 to May 1999
and Co-Chief Operating Officer from January 1999 to May 1999. From December 1994
to March 1999, he served as Chief Financial Officer and Head of Operations,
Technology and Finance, the predecessor to the current Operations,

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Finance & Resources and Information Technology divisions. From July 1995 to
September 1997, he was also Co-Chief Executive Officer for European Operations.
In 1990, Mr. Thain transferred from the Fixed Income Division, where he
established and served as Co-Head of the Mortgage Securities Department, to
Operations, Technology and Finance to assume responsibility for Controllers and
Treasury. Mr. Thain is also a member of the Federal Reserve Bank of New York's
International Capital Markets Advisory Committee, a member of the INSEAD -- U.S.
National Advisory Board, and a member of the Dean's Advisory
Council -- MIT/Sloan School of Management.

Mr. Thornton has been a director of The Goldman Sachs Group, Inc. since
August 1998, and has been its President and Co-Chief Operating Officer since May
1999. He was President of The Goldman Sachs Group, L.P. from March 1999 to May
1999 and Co-Chief Operating Officer from January 1999 to May 1999. From August
1998 until January 1999, he had oversight responsibility for International
Operations. From September 1996 until August 1998, he was Chairman, Goldman
Sachs -- Asia, in addition to his senior strategic responsibilities in Europe.
From July 1995 to September 1997, he was Co-Chief Executive Officer for European
Operations. From 1994 to 1995, he was Co-Head of Investment Banking in Europe
and from 1992 to 1994 was Head of European Investment Banking Services. Mr.
Thornton is also a director of the Ford Motor Company, BSkyB PLC, Laura Ashley
Holdings PLC and the Pacific Century Group, Inc. In addition, he is a member of
the Council on Foreign Relations, the Hotchkiss School Board of Trustees, the
Asia Society Board of Trustees, the Yale University Investment Committee and the
Advisory Board of the Yale School of Management.

Sir John Browne has been a director of The Goldman Sachs Group, Inc. since
May 1999. He has been Group Chief Executive of BP Amoco p.l.c. since January
1999. He was Group Chief Executive of The British Petroleum Company from 1995 to
1999, having served as a Managing Director since 1991. Sir John is also a
director of the Intel Corporation, a member of the supervisory board of
DaimlerChrysler AG and a trustee of the British Museum.

Mr. Bryan has been a director of The Goldman Sachs Group, Inc. since
November 1999. He has been Chairman of the Board and Chief Executive Officer of
Sara Lee Corporation since 1976. He is a director of Bank One Corporation, BP
Amoco p.l.c. and General Motors Corporation. Mr. Bryan is a past Chairman and a
director of the Grocery Manufacturers of America, Inc., a member of The Business
Council and the Business Roundtable and a director and past national Chairman of
the Business Committee for the Arts. He is a past Chairman of Catalyst and a
trustee of the University of Chicago, Chairman of the Board of Trustees of The
Art Institute of Chicago and former Chairman of the Chicago Council on Foreign
Relations.

Mr. Johnson has been a director of The Goldman Sachs Group, Inc. since May
1999. Mr. Johnson is Chairman and Chief Executive Officer of Johnson Capital
Partners, a private investment company. From January through December 1999, he
was Chairman of the Board of Directors of Fannie Mae. He was Chairman and Chief
Executive Officer of Fannie Mae from February 1991 through December 1998. Mr.
Johnson is also a director of the Cummins Engine Company, Dayton Hudson
Corporation, United Health Group and Kaufman and Broad Home Corporation,
Chairman of the John F. Kennedy Center for the Performing Arts and Chairman of
the Board of Trustees of The Brookings Institution.

Dr. Simmons has been a director of The Goldman Sachs Group, Inc. since
January 2000. She has been President since 1995 of Smith College, a private
liberal arts college for women located in Northampton, Massachusetts. She was
Vice Provost of Princeton University from 1992 to 1995 and Provost of Spelman
College from 1990 to 1991. Dr. Simmons is a director of Metropolitan Life
Insurance Company, Pfizer Inc. and Texas Instruments Inc., a member of The
Conference Board, a fellow of the American Academy of Arts and Sciences and a
member of the Council on Foreign Relations. She is a member of the Advisory
Council to the Bill

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and Melinda Gates Millennium Scholars Foundation.

Mr. Weinberg has been a director of The Goldman Sachs Group, Inc. since May
1999. He was Senior Chairman of The Goldman Sachs Group, L.P. from December 1990
to May 1999. From 1984 to 1990, he was Senior Partner and Chairman of Goldman,
Sachs & Co. and (from its inception in May 1989) of The Goldman Sachs Group,
L.P. From 1976 to 1984, he served both as Senior Partner and Co-Chairman of
Goldman, Sachs & Co. Mr. Weinberg is also a director of Knight-Ridder, Inc.,
Providian Financial Corp. and Tricon Global Restaurants, Inc. He is a member of
The Conference Board, the Council on Foreign Relations and The Business Council,
and is a fellow of the American Academy of Arts and Sciences. Mr. Weinberg is a
Life Governor of The New York-Presbyterian Hospital.

Mr. Katz has been General Counsel, Secretary to the Board of Directors and
an Executive Vice President of The Goldman Sachs Group, Inc. since May 1999. He
was General Counsel of The Goldman Sachs Group, L.P. or its predecessor from
1988 to May 1999. From 1980 to 1988, Mr. Katz was a partner in Sullivan &
Cromwell. Mr. Katz is Chairman-elect of the Board of Trustees of Horace Mann
School, a member of the University Council and of the College of Arts and
Sciences, Advisory Council of Cornell University, a Trustee of Prep for Prep, a
Trustee emeritus of the Allen-Stevenson School and a member of the National
Campaign Board of the Shoah Foundation.

Mr. Palm has been General Counsel and an Executive Vice President of The
Goldman Sachs Group, Inc. since May 1999. He was General Counsel of The Goldman
Sachs Group, L.P. from 1992 to May 1999. He has senior oversight responsibility
for Legal, Compliance and Management Controls, and is Co-Chairman of the Global
Compliance and Control Committee. Mr. Palm also is a member of the American Law
Institute and the Legal Advisory Committee of the New York Stock Exchange. From
1982 to 1992, Mr. Palm was a partner in Sullivan & Cromwell.

Ms. Tortora has been Chief Information Officer and an Executive Vice
President of The Goldman Sachs Group, Inc. since May 1999 and has been Head of
Information Technology since March 1999. She was Chief Information Officer of
The Goldman Sachs Group, L.P. from March 1999 to May 1999. She headed Goldman
Sachs' global technology efforts from 1994 to March 1999. Prior to joining
Goldman Sachs in 1994, she was a director of Technical Services at General
Electric Company.

Mr. Viniar has been Chief Financial Officer and an Executive Vice President
of The Goldman Sachs Group, Inc. since May 1999 and has been Co-Head of
Operations, Finance and Resources since March 1999. He was Chief Financial
Officer of The Goldman Sachs Group, L.P. from March 1999 to May 1999. From July
1998 until March 1999, he was Deputy Chief Financial Officer and from 1994 until
July 1998, he was Head of Finance, with responsibility for Controllers and
Treasury. From 1992 to 1994, Mr. Viniar was Head of Treasury and immediately
prior to then was in the Structured Finance Department of Investment Banking.
Mr. Viniar is a member of the Board of Trustees of Children's Aid and Family
Services, and serves on the Board of Trustees of Union College.

Mr. Zubrow has been Chief Administrative Officer and an Executive Vice
President of The Goldman Sachs Group, Inc. since May 1999 and has been Co-Head
of Operations, Finance and Resources since March 1999. He was Chief
Administrative Officer of The Goldman Sachs Group, L.P. from March 1999 to May
1999. From 1994 until then, he was chief credit officer and Head of the Credit
Department. From 1992 to 1994, Mr. Zubrow was Head of the Midwest Group in the
Corporate Finance Department of Investment Banking. Mr. Zubrow is a
Vice-Chairman of the Board of Managers of Haverford College. He is also a member
of the Board of Directors of the Juvenile Law Center and a member of the
Visiting Committee of The Law School of the University of Chicago.

There are no family relationships among any directors or executive officers
of Goldman Sachs.

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INFORMATION REGARDING THE BOARD OF DIRECTORS

Our charter provides for a classified board of directors consisting of
three classes. The term of the initial Class I directors will terminate on the
date of the 2000 annual meeting of shareholders, the term of the initial Class
II directors will terminate on the date of the 2001 annual meeting of
shareholders and the term of the initial Class III directors will terminate on
the date of the 2002 annual meeting of shareholders. Messrs. Thain and Thornton
and Dr. Simmons are members of Class I, Sir John Browne and Messrs. Johnson and
John L. Weinberg are members of Class II and Messrs. Bryan, Hurst and Paulson
are members of Class III. Beginning in 2000, at each annual meeting of
shareholders, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term and until their respective
successors have been elected and qualified. A director may be removed only for
cause by the affirmative vote of the holders of not less than 80% of the
outstanding shares of capital stock entitled to vote in the election of
directors.

Our board of directors meets at least quarterly.

DIRECTOR COMPENSATION

Directors who are not employees of or advisors to Goldman Sachs or an
affiliate receive the annual retainer and committee and meeting fees as follows:

Annual Retainer................... $35,000
Committee Chair (in addition to
Committee Member Fee)........... $10,000
Committee Member.................. $15,000
Attendance at Board or Committee
Meeting......................... $ 1,000
Annual Restricted Stock Unit Grant
(beginning in 2000) (number of
units).......................... 2,000

For the 1999 calendar year, the annual retainer was payable in our common
stock and the committee fees were payable at the election of the non-employee
director in either cash or common stock; all of the non-employee directors
elected to receive common stock. Beginning with the 2000 calendar year, the
annual retainer and the committee fees will be paid in fully vested restricted
stock units issued under our 1999 stock incentive plan, based upon the closing
sales price of the common stock as of the dates on which the annual retainer or
committee fees would otherwise be paid, unless we elect to pay cash instead. The
meeting fees are payable in cash. Each non-employee director was also awarded an
initial grant of 3,000 fully vested restricted stock units under our 1999 stock
incentive plan upon becoming a director, and, as indicated in the table above,
has been awarded an additional grant of 2,000 such restricted stock units in
2000. Restricted stock units awarded to non-employee directors generally will
provide for delivery of the underlying shares of common stock on the last
business day in May in the year following the non-employee director's retirement
from the board.

Directors who are also employees of or advisors to Goldman Sachs or an
affiliate receive no compensation for serving as a director of Goldman Sachs.

Mr. John L. Weinberg provides senior advisory services to Goldman Sachs,
receives annual compensation of $2 million and participates in various employee
benefit plans. The agreement under which Mr. Weinberg performs these services
expires November 24, 2000, unless earlier terminated on 90-days' notice.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has an Audit Committee, composed of directors who
are not employed by Goldman Sachs or affiliated with management. Sir John
Browne, Messrs. John H. Bryan and James A. Johnson, and Dr. Simmons are the
current members of our Audit Committee. Our Audit Committee, chaired by Sir John
Browne, is responsible for recommending for approval by our board of directors a
firm of independent auditors whose duty it is to audit our consolidated
financial statements for the fiscal year in which they are appointed. The Audit
Committee, among other things, also monitors the activities of our internal
auditors and our independent accountants, reviews the results

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and scope of the audit services provided by our independent auditors and reviews
the results of the internal and external audit work to assess the adequacy and
appropriateness of our financial and accounting controls.

Our board of directors also has a Compensation Committee, composed of
directors who are not employed by Goldman Sachs or affiliated with management.
Sir John Browne, Messrs. John H. Bryan and James A. Johnson, and Dr. Simmons are
the current members of our Compensation Committee. Our Compensation Committee,
chaired by Mr. Johnson, is responsible for reviewing and approving compensation
levels for all of our senior executives. The Compensation Committee is also
responsible for overseeing the committees appointed by our board of directors to
administer our 1999 stock incentive plan, our partner compensation plan and our
defined contribution plan.

Our board of directors does not have a nominating committee.

Our board of directors may from time to time establish other committees to
facilitate the management of Goldman Sachs.

EXECUTIVE COMPENSATION

The following table sets forth for the period May 7, 1999, the date of
completion of our initial public offering, through the end of fiscal 1999, the
compensation for such period for Goldman Sachs' chief executive officer and for
each of the five most highly compensated executive officers of Goldman Sachs,
other than the chief executive officer, serving as executive officers at the end
of fiscal 1999. These six persons are referred to collectively as the "named
executive officers".

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS(C)
----------------------- ----------------
RESTRICTED STOCK ALL OTHER
EXECUTIVE YEAR SALARY(B) BONUS UNIT AWARDS COMPENSATION(D)
- --------- ---- --------- ----- ---------------- ---------------

Henry M. Paulson, Jr......... 1999 $300,000 $16,062,153 $8,828,701 $ 8,332
Director, Chairman and 1998(a)
Chief Executive Officer

John A. Thain................ 1999 $300,000 $13,755,986 $7,513,538 $20,077
Director, President and 1998(a)
Co-Chief Operating Officer

John L. Thornton............. 1999 $300,000 $13,755,986 $7,513,538 $20,119
Director, President and 1998(a)
Co-Chief Operating Officer

Robert J. Hurst.............. 1999 $300,000 $12,248,193 $6,644,391 $11,778
Director and Vice Chairman 1998(a)

Leslie C. Tortora............ 1999 $300,000 $ 7,347,523 $3,840,035 $20,077
Chief Information Officer

David A. Viniar.............. 1999 $300,000 $ 7,347,523 $3,840,035 $20,077
Chief Financial Officer

- ---------------

(a) We previously reported aggregate compensation for the fiscal year ended
November 27, 1998 for the following named executive officers: Mr.
Paulson -- $12,700,000; Mr. Hurst -- $11,300,000; Mr. Thain -- $11,200,000;
and Mr. Thornton -- $9,900,000. We also reported aggregate compensation of
$12,800,000 for fiscal 1998 for Jon S. Corzine, who served as Co-Chairman
and Co-Chief Executive Officer of The Goldman Sachs Group, L.P. during
fiscal 1998 to January 1999. This compensation did

(Footnotes continued on following page)

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not include that portion of each such person's total partnership return from
The Goldman Sachs Group, L.P. in fiscal 1998 attributable to a return on his
share of invested capital or to his share of the income from investments
made by The Goldman Sachs Group, L.P. in prior years that was allocated to
the individuals who were partners in those years. The return on invested
capital for each such person was determined using a rate of 12%, the actual
fixed rate of return that was paid in fiscal 1998 to The Goldman Sachs
Group, L.P.'s retired limited partners on their long-term capital.

(b) Salary for a full fiscal year for each named executive officer is $600,000.
The salary for fiscal 1999 has been adjusted to reflect the salary actually
paid to the named executive officers for the period that Goldman Sachs was a
public company in fiscal 1999.

(c) The value of the restricted stock units shown in the table was determined by
multiplying the number of restricted stock units awarded to each named
executive officer by the closing price-per-share of common stock on the New
York Stock Exchange on November 26, 1999, the date the restricted stock
units were granted ($77.3125). The number of restricted stock units awarded
to each named executive officer was determined by dividing a dollar amount
determined for each named executive officer pursuant to a formula based on
the named executive officer's total compensation by the average of the
closing price-per-share of the common stock on the New York Stock Exchange
over the ten trading-day period up to and including the last day of the
fiscal year ($79.21). The dollar amounts on which the awards of restricted
stock units to the named executive officers were based and the number of
restricted stock units awarded were: Mr. Paulson -- $9,045,374 (114,195
restricted stock units); Mr. Thain -- $7,697,921 (97,184 restricted stock
units); Mr. Thornton -- $7,697,921 (97,184 restricted stock units); Mr.
Hurst -- $6,807,453 (85,942 restricted stock units); Ms.
Tortora -- $3,934,220 (49,669 restricted stock units); Mr.
Viniar -- $3,934,220 (49,669 restricted stock units). Each restricted stock
unit generally constitutes an unfunded, unsecured promise to deliver a share
of common stock in January 2004 (although delivery may be accelerated in
certain circumstances). 50% of the restricted stock units granted to the
named executive officers were vested when they were granted and the
remaining 50% will vest ratably over the next four years (although vesting
may be accelerated in certain circumstances). In general, non-vested
restricted stock units are forfeited on termination of employment, except in
limited cases such as retirement. All restricted stock units, whether or not
vested, may be forfeited if the holder's employment is terminated for
"cause" and in certain other circumstances. Each restricted stock unit
includes a "dividend equivalent right", pursuant to which the holder of the
restricted stock unit is entitled to receive with respect to each restricted
stock unit an amount equal to any ordinary cash dividends paid to the holder
of a share of common stock approximately when such dividends are paid to
shareholders.

(d) Includes contributions of $2,500 on behalf of each named executive officer
to The Employees' Profit Sharing Retirement Income Plan, contributions to
the Money Purchase Pension Plan and a premium paid in respect of Term Life
Insurance. The Money Purchase Pension Plan contribution and the Term Life
Insurance premium are respectively listed as follows: Mr. Paulson -- $5,646,
$186; Mr. Thain -- $17,500, $77; Mr. Thornton -- $17,500, $119; Mr.
Hurst -- $9,092, $186; Ms. Tortora -- $17,500, $77; and Mr.
Viniar -- $17,500, $77.

----------------------

In addition to the amounts disclosed in the table above, each of Messrs.
Paulson, Hurst, Thain, Thornton and Viniar and Ms. Tortora has accrued benefits
under the employees' pension plan entitling him or her to receive annual
benefits upon retirement at age 65 of $10,533, $10,533, $7,074, $11,801, $6,906
and $3,744, respectively. These benefits had accrued prior to November 1992, and
none of the named executive officers has earned additional benefits under the
pension plan since November 1992.

Aggregate compensation paid to key employees who are not named executive
officers may exceed that paid to the named executive officers.

EMPLOYMENT, NONCOMPETITION AND
PLEDGE AGREEMENTS

In connection with our initial public offering, we entered into employment
agreements with each profit participating limited partner who continued as a
managing director and pledge agreements and agreements relating to
noncompetition and other covenants with

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all of the managing directors who were profit participating limited partners,
whether or not they retired, including, in both cases, each managing director
who is a member of our board of directors or is an executive officer.

The following are descriptions of the material terms of the employment,
noncompetition and pledge agreements with the managing directors who were profit
participating limited partners. You should, however, refer to the exhibits that
are a part of the registration statement for a copy of the form of each
agreement. See "Available Information".

EMPLOYMENT AGREEMENTS

Each employment agreement has an initial term extending through November
24, 2000 (thereafter no set term), requires each continuing managing director
who was a profit participating limited partner to devote his or her entire
working time to the business and affairs of Goldman Sachs and generally may be
terminated at any time for any reason by either that managing director or
Goldman Sachs on 90 days' prior written notice.

Goldman Sachs entered into similar employment agreements with all other
managing directors, except that they have no set term.

NONCOMPETITION AGREEMENTS

Each noncompetition agreement provides as follows:

CONFIDENTIALITY. Each managing director who was a profit participating
limited partner is required to protect and use "confidential information" in
accordance with the restrictions placed by Goldman Sachs on its use and
disclosure.

NONCOMPETITION. During the period ending 12 months after the date a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director may not:

- - form, or acquire a 5% or greater ownership, voting or profit participation
interest in, any competitive enterprise; or

- - associate with any competitive enterprise and in connection with such
association engage in, or directly or indirectly manage or supervise personnel
engaged in, any activity that had a relationship to that managing director's
activities at Goldman Sachs.

When we refer to a "competitive enterprise", we are referring to any business
enterprise that engages in any activity, or owns a significant interest in any
entity that engages in any activity, that competes with any activity in which we
are engaged.

NONSOLICITATION. During the period ending 18 months after the date a
managing director who was a profit participating limited partner ceases to be
employed by Goldman Sachs, that managing director may not, directly or
indirectly, in any manner:

- - solicit any client with whom that managing director worked, or whose identity
became known to him or her in connection with his or her employment with
Goldman Sachs, to transact business with a competitive enterprise or reduce or
refrain from doing any business with Goldman Sachs;

- - interfere with or damage any relationship between Goldman Sachs and any client
or prospective client; or

- - solicit any employee of Goldman Sachs to apply for, or accept employment with,
any competitive enterprise.

TRANSFER OF CLIENT RELATIONSHIPS. Each managing director who was a profit
participating limited partner is required, upon termination of his or her
employment, to take all actions and do all things reasonably requested by
Goldman Sachs during a 90-day cooperation period to maintain for Goldman Sachs
the business, goodwill and business relationships with Goldman Sachs' clients
with which he or she worked.

LIQUIDATED DAMAGES. In the case of any breach of the noncompetition or
nonsolicitation provisions prior to May 2004, the breaching managing director
will be liable for liquidated damages. The amount of liquidated damages for each
managing director who initially served on the board of directors, the Management
Committee or the Partnership Committee of Goldman Sachs is $15 million, and the
amount of liquidated damages for

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each other managing director who was a profit participating limited partner is
$10 million. These liquidated damages are in addition to the forfeiture of any
future equity-based awards that may occur as a result of the breach of any
noncompetition or nonsolicitation provisions contained in those awards.

PLEDGE AGREEMENT

The liquidated damages provisions of each noncompetition agreement are
secured by a pledge of stock or other assets with an initial value equal to 100%
of the applicable liquidated damages amount.

Each pledge agreement will terminate on the earliest to occur of:

- - the death of the relevant managing director;

- - the expiration of the 24-month period following the termination of the
employment of the relevant managing director; or

- - May 2004.

NONEXCLUSIVITY AND ARBITRATION

The liquidated damages and pledge arrangements discussed above are not
exclusive of any injunctive relief that Goldman Sachs may be entitled to for a
breach of a noncompetition agreement and, after the termination of the pledge
agreement, Goldman Sachs will be entitled to all available remedies for a breach
of a noncompetition agreement.

The employment, noncompetition and pledge agreements generally provide that
any disputes thereunder will be resolved by binding arbitration.

THE EMPLOYEE INITIAL PUBLIC OFFERING AWARDS

BACKGROUND

In connection with our initial public offering, we provided awards to our
employees and a limited number of consultants and advisors, other than managing
directors who were profit participating limited partners, in one or more of the
following forms:

- - substantially all employees received a grant of restricted stock units awarded
based on a formula with respect to an aggregate of 30,025,946 shares of common
stock;

- - certain senior employees, principally managing directors who were not profit
participating limited partners, were selected to participate in the defined
contribution plan described below, to which Goldman Sachs made an initial
irrevocable contribution of 12,555,866 shares of common stock;

- - certain employees received a grant of restricted stock units awarded on a
discretionary basis with respect to an aggregate of 33,292,869 shares of
common stock; and

- - certain employees received a grant of options to purchase shares of common
stock awarded on a discretionary basis with respect to an aggregate of
40,127,592 shares of common stock.

The restricted stock units awarded to employees on a discretionary and a
formula basis confer only the rights of a general unsecured creditor of Goldman
Sachs and no rights as a shareholder of Goldman Sachs until the common stock
underlying such award is delivered. While these restricted stock units are
outstanding, amounts equal to regular cash dividends that would have been paid
on the common stock underlying these units if the common stock had been actually
issued are paid in cash at about the same time that the dividends are paid
generally to the shareholders. These amounts are recorded as compensation
expense since the underlying shares of common stock have not been issued.

Any shares of common stock acquired by a managing director pursuant to the
awards will be subject to the shareholders' agreement described in "Certain
Relationships and Related Transactions -- Shareholders' Agreement".

See Note 10 to the consolidated financial statements included elsewhere in
this prospectus for further information regarding these awards.

CHANGE IN CONTROL

If a change in control occurs and within 18 months thereafter a grantee's
or participant's employment is terminated by Goldman Sachs other than for cause
(as defined in the applicable award agreement) or the grantee

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or participant terminates employment for good reason (as defined in the
applicable award agreement):

- - the common stock underlying any outstanding restricted stock units will be
delivered;

- - any outstanding unexercised options to purchase shares of common stock will
become exercisable; and

- - under the defined contribution plan, any unvested portion of the common stock
attributable to the initial contribution by Goldman Sachs to the defined
contribution plan will vest and be distributed.

"Change in control" means the consummation of a business combination
involving The Goldman Sachs Group, Inc., unless immediately following the
business combination, either:

- - at least 50% of the total voting power of the surviving entity or its parent
entity, if applicable, is represented by securities of The Goldman Sachs
Group, Inc. that were outstanding immediately prior to the transaction; or

- - at least 50% of the members of the board of directors of the surviving entity,
or its parent entity, if applicable, following the transaction were incumbent
directors (including directors whose election or nomination was approved by
the incumbent directors) of The Goldman Sachs Group, Inc. at the time of the
board of directors' approval of the execution of the initial agreement
providing for the transaction.

THE STOCK INCENTIVE PLAN

The following is a description of the material terms of the 1999 stock
incentive plan. See also Note 10 to the consolidated financial statements
included elsewhere in this prospectus for further information regarding the
stock incentive plan. You should, however, refer to the exhibits that are a part
of the registration statement for a copy of the stock incentive plan. See
"Available Information".

TYPES OF AWARDS. The stock incentive plan provides for grants of incentive
stock options (within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended), nonqualified stock options, stock appreciation rights,
dividend equivalent rights, restricted stock, restricted stock units and other
awards. The stock incentive plan also permits the making of loans to purchase
shares of common stock.

SHARES SUBJECT TO THE STOCK INCENTIVE PLAN; OTHER LIMITATIONS ON
AWARDS. Subject to adjustment as described below, the total number of shares of
common stock of The Goldman Sachs Group, Inc. that may be issued under the stock
incentive plan through its fiscal year ending in 2002 may not exceed 300,000,000
shares and, in each fiscal year thereafter, may not exceed five percent (5%) of
the issued and outstanding shares of common stock, determined as of the last day
of the immediately preceding fiscal year, increased by the number of shares
available for awards in previous fiscal years but not covered by awards granted
in such years. These shares may be authorized but unissued common stock or
authorized and issued common stock held in Goldman Sachs' treasury or otherwise
acquired for the purposes of the stock incentive plan. If any award is forfeited
or is otherwise terminated or canceled without the delivery of shares of common
stock, if shares of common stock are surrendered or withheld from any award to
satisfy a grantee's income tax or other withholding obligations, or if shares of
common stock owned by a grantee are tendered to pay the exercise price of
awards, then such shares will again become available under the stock incentive
plan. No more than 200,000,000 shares of common stock may be available for
delivery in connection with the exercise of incentive stock options. The maximum
number of shares of common stock with respect to which options or stock
appreciation rights may be granted to an individual grantee in 2000 is 3,850,000
shares of common stock and, in each fiscal year that follows, is 110% of the
maximum number of shares of common stock applicable for the preceding fiscal
year.

Our Stock Incentive Plan Committee has the authority to adjust the terms of
any outstanding awards and the number of shares of common stock issuable under
the stock

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incentive plan for any increase or decrease in the number of issued shares of
common stock resulting from a stock split, reverse stock split, stock dividend,
spin-off, combination or reclassification of the common stock, or any other
event that the Stock Incentive Plan Committee determines affects our
capitalization.

ELIGIBILITY. Awards may be made to any director, officer or employee of
Goldman Sachs, including any prospective employee, and to any consultant or
advisor to Goldman Sachs selected by the Stock Incentive Plan Committee.

ADMINISTRATION. The Stock Incentive Plan Committee, consisting of Messrs.
Paulson, Hurst, Thain and Thornton, administers the stock incentive plan. Our
Compensation Committee oversees the Stock Incentive Plan Committee and makes
awards to our executive officers.

The Stock Incentive Plan Committee has the authority to construe, interpret
and implement the stock incentive plan, and prescribe, amend and rescind rules
and regulations relating to the stock incentive plan. The determination of the
Stock Incentive Plan Committee on all matters relating to the stock incentive
plan or any award agreement is final and binding.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The Stock Incentive Plan
Committee may grant incentive stock options and nonqualified stock options to
purchase shares of common stock from Goldman Sachs (at the price set forth in
the award agreement), and stock appreciation rights in such amounts, and subject
to such terms and conditions, as the Stock Incentive Plan Committee may
determine. No grantee of an option or stock appreciation right will have any of
the rights of a shareholder of The Goldman Sachs Group, Inc. with respect to
shares subject to their award until the issuance of the shares.

RESTRICTED STOCK. The Stock Incentive Plan Committee may grant restricted
shares of common stock in amounts, and subject to terms and conditions, as the
Stock Incentive Plan Committee may determine. The grantee will have the rights
of a shareholder with respect to the restricted stock, subject to any
restrictions and conditions as the Stock Incentive Plan Committee may include in
the award agreement.

RESTRICTED STOCK UNITS. The Stock Incentive Plan Committee may grant
restricted stock units in amounts, and subject to terms and conditions, as the
Stock Incentive Plan Committee may determine. Recipients of restricted stock
units have only the rights of a general unsecured creditor of Goldman Sachs and
no rights as a shareholder of The Goldman Sachs Group, Inc. until the common
stock underlying the restricted stock units is delivered.

OTHER EQUITY-BASED AWARDS. The Stock Incentive Plan Committee may grant
other types of equity-based awards, including the grant of unrestricted shares,
in amounts, and subject to terms and conditions, as the Stock Incentive Plan
Committee may determine. These awards may involve the transfer of actual shares
of common stock, or the payment in cash or otherwise of amounts based on the
value of shares of common stock, and may include awards designed to comply with,
or take advantage of certain benefits of, the local laws of non-U.S.
jurisdictions.

CHANGE IN CONTROL. The Stock Incentive Plan Committee may provide in any
award agreement for provisions relating to a change in control of The Goldman
Sachs Group, Inc. or any of its subsidiaries or affiliates, including, without
limitation, the acceleration of the exercisability of, or the lapse of
restrictions with respect to, the award.

DIVIDEND EQUIVALENT RIGHTS. The Stock Incentive Plan Committee may, in its
discretion, include in the award agreement a dividend equivalent right entitling
the grantee to receive amounts equal to the dividends that would be paid, during
the time such award is outstanding, on the shares of common stock covered by
such award as if such shares were then outstanding.

NONASSIGNABILITY. Except to the extent otherwise provided in the award
agreement or approved by the Stock Incentive Plan Committee, no award or right
granted to any person under the stock incentive plan is

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assignable or transferable other than by will or by the laws of descent and
distribution, and all awards and rights are exercisable during the life of the
grantee only by the grantee or the grantee's legal representative.

AMENDMENT AND TERMINATION. Except as otherwise provided in an award
agreement, the board of directors may from time to time suspend, discontinue,
revise or amend the stock incentive plan and the Stock Incentive Plan Committee
may amend the terms of any award in any respect.

THE DEFINED CONTRIBUTION PLAN

The defined contribution plan is not intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended, and is not subject to
the Employee Retirement Income Security Act of 1974, as amended.

The following is a description of the material terms of the defined
contribution plan. See also Note 9 to the consolidated financial statements,
included elsewhere in this prospectus, for further information regarding the
defined contribution plan. You should, however, refer to the exhibits that are a
part of the registration statement for a copy of the defined contribution plan.
See "Available Information".

ELIGIBILITY AND PARTICIPATION. Our board of directors or the Defined
Contribution Plan Committee, a committee appointed by our board of directors,
select the employees to participate in the defined contribution plan.

CONTRIBUTIONS. Goldman Sachs made an initial irrevocable contribution to
the Defined Contribution Plan Trust, the trust underlying the defined
contribution plan, of 12,555,866 shares of common stock simultaneously with the
consummation of our initial public offering. Goldman Sachs may contribute
additional shares of common stock or cash to the Defined Contribution Plan Trust
from time to time in its sole discretion. We made an additional contribution of
111,181 shares of common stock in calendar year 1999, and we currently intend to
make ongoing contributions to the defined contribution plan.

ALLOCATION OF CONTRIBUTIONS. Each participant has an account in his or her
name. There is also a separate, unallocated account to which any forfeitures of
common stock are credited pending reallocation to participants. The Defined
Contribution Plan Committee designates the number of shares of common stock
allocable to the account of each participant. Any common stock remaining in the
unallocated account as of the last day of each plan year due to forfeitures and
any distributions received on common stock credited to the unallocated account
will be reallocated among the accounts of participants who are employed by
Goldman Sachs on the last day of each plan year pro rata to each such
participant's share of Goldman Sachs contributions, for that plan year, or on
such other formulaic basis as the Defined Contribution Plan Committee may
determine.

VOTING AND TENDERING OF COMMON STOCK. Shares of common stock allocated to
participants who are parties to the shareholders' agreement referred to below
will be voted in accordance with the shareholders' agreement and will be
tendered by the trustee of the Defined Contribution Plan Trust in accordance
with confidential instructions provided by the participants if the transfer
restrictions under the shareholders' agreement are waived (and will not be
tendered if the transfer restrictions are not waived). See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" for a
discussion of those provisions. Any shares of common stock allocated to accounts
of participants who are not subject to the shareholders' agreement will be voted
and tendered by the trustee of the Defined Contribution Plan Trust in accordance
with confidential instructions provided by the participant. Shares held in
participants' accounts with respect to which the trustee of the Defined
Contribution Plan Trust does not receive voting or tendering directions will not
be voted or tendered.

Shares of common stock held in the unallocated account will be voted or
tendered by the trustee in the same proportion as the shares of common stock
allocated to participants' accounts with respect to which voting or tendering
instructions are received.

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DIVIDENDS. Any cash dividends on shares of common stock allocated to a
participant's account are distributed to each participant after the end of the
calendar quarter in which such dividend is received.

VESTING AND DISTRIBUTION. With respect to the initial contribution of
common stock to the defined contribution plan, the right to receive shares of
common stock allocated to a participant's account generally will become vested,
and the common stock generally will be distributable, in equal installments in
June 2002, June 2003 and June 2004 if the participant satisfies certain
conditions and the participant's employment with Goldman Sachs has not been
terminated, with certain exceptions for termination due to death or following a
change in control.

With respect to contributions to the defined contribution plan (other than
the initial contribution), the Defined Contribution Plan Committee may determine
the dates on which the right to receive common stock (or cash) allocated to a
participant's account will vest and be distributable.

ADMINISTRATION OF THE DEFINED CONTRIBUTION PLAN. The defined contribution
plan is administered by the Defined Contribution Plan Committee, consisting of
Messrs. Paulson, Hurst, Thain and Thornton. Our Compensation Committee oversees
the Defined Contribution Plan Committee and makes awards to our executive
officers.

AMENDMENTS. Subject to limitations with respect to contributions
previously made to the defined contribution plan, our board of directors
reserves the right to modify, alter, amend or terminate the defined contribution
plan or the Defined Contribution Plan Trust. No modification or amendment of the
defined contribution plan may be made which would cause or permit any part of
the assets of the Defined Contribution Plan Trust to be used for, or diverted
to, purposes other than for the exclusive benefit of participants or their
beneficiaries, or which would cause any part of the assets of the Defined
Contribution Plan Trust to revert to or become the property of Goldman Sachs.

LIMIT ON LIABILITY. All distributions under the defined contribution plan
are paid or provided solely from the assets of the Defined Contribution Plan
Trust and Goldman Sachs has no responsibility or liability to any participant or
beneficiary relating to the common stock or other assets of the Defined
Contribution Plan Trust. The agreement establishing the Defined Contribution
Plan Trust provides that no creditor of Goldman Sachs will have any rights to
the assets of the Defined Contribution Plan Trust.

THE PARTNER COMPENSATION PLAN

OVERVIEW

To perpetuate the sense of partnership and teamwork that exists among our
senior professionals, and to reinforce the alignment of employee and shareholder
interests, our board of directors adopted a partner compensation plan for the
purpose of compensating senior professionals. The partner compensation plan is
administered by the Partner Compensation Plan Committee, consisting of Messrs.
Paulson, Hurst, Thain and Thornton. Our Compensation Committee oversees the
Partner Compensation Plan Committee.

Individuals are selected to participate in the partner compensation plan
for a one- or two-fiscal year cycle. Upon selection to the partner compensation
plan, participants are allocated a percentage interest in a pool for annual
bonus payments in addition to base salaries. The size of the pool is established
by the Partner Compensation Plan Committee annually, taking into account our
results of operations and other measures of financial performance. The Partner
Compensation Plan Committee may also retain an unallocated percentage of the
pool that it may allocate among participants at fiscal year end in its sole
discretion. By linking the participant's annual bonus payments to our results as
a whole, as opposed to the results of any participant's individual business
unit, we believe it provides additional incentives for teamwork. Further, we
believe that the tying of the bonus payments to overall financial results more
closely aligns the interests of the participants with our shareholders. Finally,
we believe that the retention of a percentage of

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the pool for allocation among participants at fiscal year end in amounts
determined at the sole discretion of the Partner Compensation Plan Committee
provides appropriate compensation flexibility.

The following is a description of the material terms of the partner
compensation plan. You should, however, refer to the exhibits that are a part of
the registration statement for a copy of the partner compensation plan. See
"Available Information".

ELIGIBILITY AND PARTICIPATION

Consistent with our historical practice of partnership elections, the
initial cycle is through the end of fiscal 2000. The participants in this
initial cycle consist of the continuing managing directors who were profit
participating limited partners. Prior to the one- or two-fiscal year cycle
commencing with fiscal 2001, and on or before each succeeding cycle, the Partner
Compensation Plan Committee will determine the participants in the partner
compensation plan. Individual participants may also be added from time to time
outside the annual or biennial selection process.

DETERMINATION OF SALARY AND BONUS

The aggregate amount of compensation to be included in the partner
compensation plan for each fiscal year is determined by the Partner Compensation
Plan Committee, taking into account measures of our financial performance it
deems appropriate, including, but not limited to, earnings per share, return on
average common equity, pre-tax income, pre-tax operating income, net revenues,
net income, profits before taxes, book value per share, stock price, earnings
available to common shareholders and ratio of compensation and benefits to net
revenues.

Prior to the commencement of the first fiscal year in any one- or
two-fiscal year cycle, the Partner Compensation Plan Committee determines both
the salaries of and the percentage of the partner compensation plan pool that
may be allocable to any particular participant. (This determination was made
prior to the consummation of our initial public offering in the case of the
initial cycle.) The percentage allocated to any particular participant is
expected to be applicable for each fiscal year within the applicable cycle. Any
remaining portion of the partner compensation plan pool not so allocated is
allocated to individual participants at the end of the fiscal year in amounts
determined by the Partner Compensation Plan Committee.

Amounts payable under the partner compensation plan are satisfied in cash
or as awards under the stock incentive plan, as determined by the Partner
Compensation Plan Committee and recommended to the Stock Incentive Plan
Committee.

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PRINCIPAL SHAREHOLDERS

The following table sets forth as of January 21, 2000 certain information
regarding the beneficial ownership of our common stock by:

- - each person who is known to Goldman Sachs to be the beneficial owner of more
than 5% of our common stock;

- - each director and named executive officer of Goldman Sachs; and

- - all directors and executive officers of Goldman Sachs as a group.

For purposes of this table, information as to the shares of common stock is
calculated based on 441,429,384 shares of common stock outstanding as of January
21, 2000. For purposes of this table, "beneficial ownership" is determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, pursuant
to which a person or group of persons is deemed to have "beneficial ownership"
of any shares of common stock that such person has the right to acquire within
60 days after the date of this prospectus. As a result, this table excludes
shares of common stock underlying the restricted stock units awarded to our
executive officers as described under "Management -- Executive Compensation".
For purposes of computing the percentage of outstanding shares of common stock
held by each person or group of persons named above, any shares which such
person or persons has the right to acquire within 60 days after the date of this
prospectus are deemed to be outstanding but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.

SHARES BENEFICIALLY
OWNED AS OF
JANUARY 21, 2000(1)
----------------------
NAME NUMBER PERCENT
- ---- ------ -------

5% Shareholders:
Parties to Shareholders' Agreement........................ 275,764,110(2) 62.5%
c/o The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004
Kamehameha Activities Association(3)...................... 21,975,421 5.0
Sumitomo Bank Capital Markets, Inc.(4).................... 21,425,052 4.9
Directors and named executive officers:
Henry M. Paulson, Jr.(5).................................. 3,943,939 *
Robert J. Hurst(5)........................................ 3,769,357 *
John A. Thain(5).......................................... 3,050,659 *
John L. Thornton(5)....................................... 2,969,389 *
Sir John Browne(6)........................................ 5,535 *
John H. Bryan(6).......................................... 8,053 *
James A. Johnson(6)....................................... 7,535 *
Ruth J. Simmons(6)........................................ 5,000 *
John L. Weinberg(7)....................................... 444,444 *
Leslie C. Tortora(5)...................................... 1,726,550 *
David A. Viniar(5)........................................ 1,649,902 *
All directors and executive officers as a group
(14 persons)(8)........................................... 23,977,212 5.4

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- ---------------
* Less than 1% of the outstanding shares of common stock.

(1) Except as discussed in footnotes (5), (7) and (8) below, all directors,
named executive officers and other executive officers have sole voting power
and sole dispositive power over all shares of common stock beneficially
owned by them. No individual director, named executive officer or other
executive officer beneficially owned in excess of 1% of the outstanding
common stock.

(2) Each party to the shareholders' agreement referred to below disclaims
beneficial ownership of the shares subject to the shareholders' agreement
held by any other party to the agreement and disclaims beneficial ownership
of the 21,425,052 shares of common stock and 7,440,362 shares of nonvoting
common stock owned by Sumitomo Bank Capital Markets, Inc. and the 21,975,421
shares of common stock owned by Kamehameha Activities Association, which
amounts have been excluded from the amount set forth above. See "Certain
Relationships and Related Transactions -- Shareholders' Agreement" and
"-- Voting Agreement" for a discussion of the shareholders' agreement and
the voting agreement. 273,584,282 of the shares of common stock that are
subject to the shareholders' agreement are entitled to vote in the
preliminary vote described under "Certain Relationships and Related
Transactions -- Shareholders' Agreement -- Voting".

Sumitomo Bank Capital Markets, Inc. in the ordinary course of business
enters into derivative contracts and other transactions with Goldman Sachs.
These contracts and other transactions are negotiated on an arm's-length
basis and contain customary terms and conditions.

(3) This information has been derived from Amendment No. 1 to the Schedule 13D
of Kamehameha Activities Association filed with the SEC on December 22,
1999. 567 South King Street, Suite 150, Honolulu, Hawaii 96813. Kamehameha
Activities Association in the ordinary course of business is an investor in
a number of Goldman Sachs' merchant banking funds and from time to time is a
party to other transactions with Goldman Sachs. These investments and
transactions are negotiated on an arm's-length basis and contain customary
terms and conditions.

(4) This information has been derived from Amendment No. 1 to the Schedule 13D
of Sumitomo Bank Capital Markets, Inc., filed with the SEC on December 20,
1999. The 21,425,052 shares held by Sumitomo Bank Capital Markets, Inc.
exclude 7,440,362 shares of nonvoting common stock held by Sumitomo Bank
Capital Markets, Inc., which, although immediately convertible into common
stock, cannot currently be converted by Sumitomo Bank Capital Markets, Inc.
due to restrictions imposed under the Bank Holding Company Act of 1956, as
amended. Please see Amendment No. 1 to the Schedule 13D filed by Sumitomo
Bank Capital Markets, Inc. and any amendments thereto for information
relating to such shares.

(5) c/o The Goldman Sachs Group, Inc., 85 Broad Street, New York, New York
10004. Excludes any shares of common stock subject to the shareholders'
agreement referred to below that are owned by other parties to the
shareholders' agreement. While each of Messrs. Paulson, Hurst, Thain,
Thornton and Viniar and Ms. Tortora is a party to the shareholders'
agreement and each of Messrs. Paulson, Hurst, Thain and Thornton is a member
of the Shareholders' Committee, each disclaims beneficial ownership of the
shares of common stock that are subject to the shareholders' agreement other
than those specified for each such person individually, and each disclaims
beneficial ownership of the shares of common stock subject to the voting
agreements between Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association, respectively, on the one hand, and Goldman Sachs, on
the other hand. See "Certain Relationships and Related
Transactions -- Shareholders' Agreement" and "-- Voting Agreement" for a
discussion of the shareholders' agreement and the voting agreements.

Includes shares of common stock beneficially owned by the private charitable
foundations of our named executive officers, as follows: Mr.
Hurst -- 83,302; Mr. Thain -- 65,610; Mr. Thornton -- 86,303; Ms.
Tortora -- 26,152; and Mr. Viniar -- 13,077. Each of these named executive
officers disclaims beneficial ownership of these shares.

(6) Includes 5,000 fully vested restricted stock units awarded to each of Sir
John Browne, Messrs. Bryan and Johnson and Dr. Simmons under our 1999 stock
incentive plan, as described under "Management -- Information Regarding the
Board of Directors -- Director Compensation". Since these restricted stock
units are fully vested, we have included the shares of common stock
underlying these restricted stock units in the foregoing table even though
these shares are not deliverable within 60 days.

(Footnotes continued on following page)

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(7) Includes 13,076 shares of common stock beneficially owned by Mr. Weinberg's
private charitable foundation. Mr. Weinberg disclaims beneficial ownership
of these shares.

(8) Each executive officer is a party to the shareholders' agreement and each
disclaims beneficial ownership of the shares of common stock subject to the
shareholders' agreement that are owned by other parties to the shareholders
agreement, and each disclaims beneficial ownership of the shares of common
stock subject to the voting agreements between Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association, respectively, on the
one hand, and Goldman Sachs, on the other hand. See "Certain Relationships
and Related Transactions -- Shareholders' Agreement" and "-- Voting
Agreement" for a discussion of the shareholders' agreement and the voting
agreements.

Includes 347,520 shares of common stock beneficially owned by the private
charitable foundations of certain of our executive officers. Each of these
executive officers disclaims beneficial ownership of these shares.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following are descriptions of the material provisions of the agreements
and other documents discussed below. You should, however, refer to the exhibits
that are a part of the registration statement for a copy of each agreement and
document. See "Available Information".

INCORPORATION TRANSACTIONS

Simultaneously with the consummation of our initial public offering, we
completed a number of transactions in order to have The Goldman Sachs Group,
Inc. succeed to the business of The Goldman Sachs Group, L.P. The principal
incorporation transactions are summarized below.

Pursuant to our plan of incorporation:

- - The managing directors who were profit participating limited partners
exchanged their interests in The Goldman Sachs Group, L.P. and certain
affiliates for 265,019,073 shares of common stock;

- - The retired limited partners of Goldman Sachs exchanged their interests in The
Goldman Sachs Group, L.P. and certain affiliates for $891 million in cash,
$295 million principal amount of junior subordinated debentures and 47,270,551
shares of common stock;

- - Sumitomo Bank Capital Markets, Inc. exchanged its interests in The Goldman
Sachs Group, L.P. and Goldman, Sachs & Co. for 30,425,052 shares of common
stock and 7,440,362 shares of nonvoting common stock, and sold 9,000,000
shares of common stock in our initial public offering; and

- - Kamehameha Activities Association exchanged its interests in The Goldman Sachs
Group, L.P. for 30,975,421 shares of common stock, and sold 9,000,000 shares
of common stock in our initial public offering.

SHAREHOLDERS' AGREEMENT

PERSONS AND SHARES COVERED

Each former profit participating limited partner, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, and each other
person who was a managing director on May 7, 1999 or has become a managing
director since that date is a party to the shareholders' agreement. In addition,
each new managing director will become a party to the shareholders' agreement.

The shares covered by the shareholders' agreement include generally all
shares of common stock acquired from Goldman Sachs by a party to the
shareholders' agreement, including:

- - any shares of common stock that were received by the managing directors who
were profit participating limited partners pursuant to the incorporation
transactions, except for certain shares that aggregate less than 140,000
shares;

- - any shares of common stock received from the defined contribution plan;

- - any shares of common stock received pursuant to the restricted stock units
awarded to employees based on a formula, the restricted stock units awarded on
a discretionary basis or the options to purchase shares of common stock
awarded on a discretionary basis;

- - any shares of common stock received pursuant to the restricted stock units
awarded in 1999 and described under "Management -- Executive Compensation";
and

- - unless otherwise determined by our board of directors and the Shareholders'
Committee referred to below, any shares of common stock received from Goldman
Sachs through any other employee compensation, benefit or similar plan.

Shares of common stock purchased in the open market or in an underwritten
public offering are not subject to the shareholders' agreement. The
Shareholders' Committee may also exclude from the application of all or part of
the shareholders' agreement all or any portion of the common stock acquired by a
managing director who is a new employee of Goldman Sachs.

TRANSFER RESTRICTIONS

Each party to the shareholders' agreement agrees, among other things, to
have sole beneficial ownership while he or she is a managing director of at
least 25% of the

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cumulative number of his or her shares that are beneficially owned or acquired,
and are or become subject to the shareholders' agreement.

The former profit participating limited partners, other than Sumitomo Bank
Capital Markets, Inc. and Kamehameha Activities Association, are subject to
additional restrictions on their ability to transfer shares received in
connection with the incorporation transactions described under "-- Incorporation
Transactions". Under these additional restrictions, each of these persons agreed
that he or she will not transfer any of these shares, other than up to 140,000
shares in the aggregate that are excluded from these restrictions, until May
2002. These restrictions will lapse in equal installments in May 2002, May 2003
and May 2004.

All transfer restrictions applicable to a party to the shareholders'
agreement terminate upon death.

WAIVERS

Except in the case of a third-party tender or exchange offer, the
additional transfer restrictions applicable to profit participating limited
partners, other than Sumitomo Bank Capital Markets, Inc. and Kamehameha
Activities Association, may be waived or terminated at any time by the
Shareholders' Committee. The Shareholders' Committee also has the power to waive
the other transfer restrictions to permit parties to the shareholders' agreement
to:

- - participate as sellers in underwritten public offerings of common stock and
tender and exchange offers and share repurchase programs by Goldman Sachs;

- - transfer shares to charities, including charitable foundations;

- - transfer shares held in employee benefit plans; and

- - transfer shares in specific transactions (for example, to immediate family
members and trusts) or circumstances.

In December 1999, the Shareholders' Committee waived the restrictions on
transfer pursuant to the second bullet point above in order to permit our former
profit participating limited partners to donate up to 8,000,000 shares of common
stock to charitable foundations and public charities.

In the case of a third-party tender or exchange offer, all transfer
restrictions may be waived or terminated:

- - if our board of directors is recommending acceptance or is not making any
recommendation with respect to acceptance of the tender or exchange offer, by
a majority of the voting interests referred to below; or

- - if our board of directors is recommending rejection of the tender or exchange
offer, by 66 2/3% of the outstanding voting interests referred to below.

In the case of a tender or exchange offer by Goldman Sachs, a majority of
the outstanding voting interests may also elect to waive or terminate the
transfer restrictions.

VOTING

Prior to any vote of the shareholders of Goldman Sachs, the shareholders'
agreement requires a separate, preliminary vote of the voting interests on each
matter upon which a vote of the shareholders is proposed to be taken. Each share
subject to the shareholders' agreement will be voted in accordance with the
majority of the votes cast by the voting interests in the preliminary vote. In
elections of directors, each share subject to the shareholders' agreement will
be voted in favor of the election of those persons receiving the highest numbers
of votes cast by the voting interests in the preliminary vote. Prior to January
1, 2001, "voting interests" means all shares that are subject to the
shareholders' agreement. Thereafter, "voting interests" means all shares subject
to the shareholders' agreement held by all managing directors.

OTHER RESTRICTIONS

The shareholders' agreement also prevents the persons subject to the
shareholders' agreement from engaging in the following activities relating to
any securities of Goldman Sachs with any person who is not a person subject to
the shareholders' agreement or a director or employee of Goldman Sachs:

- - participating in a proxy solicitation;

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- - depositing any shares subject to the shareholders' agreement in a voting trust
or subjecting any of these shares to any voting agreement or arrangement;

- - forming, joining or in any way participating in a "group"; or

- - proposing certain transactions with Goldman Sachs or seeking the removal of
any of our directors or any change in the composition of our board of
directors.

TERM, AMENDMENT AND CONTINUATION

The shareholders' agreement is to continue in effect until the earlier of
January 1, 2050 and the time it is terminated by the vote of 66 2/3% of the
outstanding voting interests referred to above. The additional transfer
restrictions applicable to profit participating limited partners, other than
Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, will
not terminate upon the expiration or termination of the shareholders' agreement
unless previously waived or terminated or unless subsequently waived or
terminated by our board of directors. The shareholders' agreement may generally
be amended at any time by a majority of the outstanding voting interests
referred to above.

Unless otherwise terminated, in the event of any transaction in which a
third party succeeds to the business of Goldman Sachs and in which persons
subject to the shareholders' agreement hold securities of the third party, the
shareholders' agreement will remain in full force and effect as to the
securities of the third party, and the third party shall succeed to the rights
and obligations of Goldman Sachs under the shareholders' agreement.

INFORMATION REGARDING THE SHAREHOLDERS' COMMITTEE

The terms and provisions of the shareholders' agreement are administered by
the Shareholders' Committee. The Shareholders' Committee consists of Messrs.
Paulson, Hurst, Thain and Thornton. It is possible that over time all or a
majority of the members of the Shareholders' Committee will not be members of
our board of directors.

Members of the Shareholders' Committee are entitled to indemnification from
Goldman Sachs in their capacities as members of the Shareholders' Committee.

VOTING AGREEMENT

Both Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association agreed to vote their shares of common stock in the same manner as a
majority of the shares of common stock held by the managing directors of Goldman
Sachs are voted. The obligations of Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association under the voting agreements are enforceable by
The Goldman Sachs Group, Inc. The managing directors have no right to enforce
the voting agreements.

INSTRUMENT OF INDEMNIFICATION

In connection with our initial public offering, Goldman Sachs entered into
an instrument of indemnification. The instrument of indemnification covers
certain former partners of Goldman Sachs, including the managing directors who
were profit participating limited partners, each executive officer of Goldman
Sachs, the retired limited partners, Sumitomo Bank Capital Markets, Inc. and
Kamehameha Activities Association. Under the instrument of indemnification, in
the event any indemnitee is, or is threatened to be, made a party to any action,
suit or proceeding by reason of the fact that such indemnitee was a general or
limited partner, shareholder, member, director, officer, employee or agent of
The Goldman Sachs Group, L.P. or certain of its affiliates or subsidiaries or is
serving or served, at the request of The Goldman Sachs Group, L.P. or certain of
its affiliates or subsidiaries, in any of these capacities in another
enterprise, Goldman Sachs is, subject to certain exceptions, obligated to
indemnify and hold such indemnitee harmless from any losses, damages or expenses
incurred by such indemnitee in the action, suit or proceeding. The instrument of
indemnification does not duplicate the obligations of Goldman Sachs under the
tax indemnification agreement described below. The indemnification obligation of
Goldman Sachs under the instrument of indemnification also extends to the
indemnification obligations that certain indem-

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nitees, including each executive officer of The Goldman Sachs Group, Inc., may
have to other indemnitees.

The instrument of indemnification also provides that Goldman Sachs will,
subject to certain exceptions, release each indemnitee from all actions, suits
or other claims that The Goldman Sachs Group, L.P. may have had or which Goldman
Sachs, as a successor to The Goldman Sachs Group, L.P., may have arising out of
an indemnitee's partnership or other interest in The Goldman Sachs Group, L.P.
or certain of its affiliates or subsidiaries or arising out of the conduct of
such indemnitee while engaged in the conduct of the business of The Goldman
Sachs Group, L.P. or its affiliates or subsidiaries.

DIRECTOR AND OFFICER INDEMNIFICATION

We entered into an agreement that provides indemnification to our directors
and officers and to the directors and certain officers of the general partner of
The Goldman Sachs Group, L.P., members of our Management Committee or our
Partnership Committee or the former Executive Committee of The Goldman Sachs
Group, L.P. and all other persons requested or authorized by our board of
directors or the board of directors of the general partner of The Goldman Sachs
Group, L.P. to take actions on our behalf, The Goldman Sachs Group, L.P. or the
general partner of The Goldman Sachs Group, L.P. in connection with the plan of
incorporation, the registration statement for our initial public offering and
certain other registration statements for all losses, damages, costs and
expenses incurred by the indemnified person arising out of the relevant
registration statements or the transactions contemplated by the plan of
incorporation. We have also entered into a similar indemnification agreement
with our directors, some of our officers and all other persons requested or
authorized by our board of directors or any committee thereof to take actions on
our behalf in connection with the registration statement of which this
prospectus is a part and certain other registration statements. These agreements
are in addition to our indemnification obligations under our by-laws.

TAX INDEMNIFICATION AGREEMENT AND
RELATED MATTERS

An entity that has historically operated in corporate form generally is
liable for any adjustments to the corporation's taxes for periods prior to its
initial public offering. In contrast, the former partners of The Goldman Sachs
Group, L.P., rather than Goldman Sachs, generally will be liable for adjustments
to taxes (including U.S. federal and state income taxes) attributable to the
operations of The Goldman Sachs Group, L.P. and its affiliates prior to our
initial public offering. In connection with our initial public offering, we
entered into a tax indemnification agreement to indemnify certain former limited
partners of The Goldman Sachs Group, L.P., including the managing directors who
were profit participating limited partners, each then-current director and
executive officer of The Goldman Sachs Group, Inc., the retired limited
partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association, against certain increases in each tax indemnitee's taxes that
relate to activities of The Goldman Sachs Group, L.P. or certain of its
affiliates in respect of periods prior to our initial public offering. We are
required to make additional payments to offset any taxes payable by a tax
indemnitee in respect of payments made pursuant to the tax indemnification
agreement only to the extent the payments made to that tax indemnitee exceed a
fixed amount. Any such payment of additional taxes by Goldman Sachs is offset by
any tax benefit received by the tax indemnitee.

The tax indemnification agreement includes provisions that permit Goldman
Sachs to control any tax proceeding or contest which might result in Goldman
Sachs being required to make a payment under the tax indemnification agreement.

The incorporation transactions described under "-- Incorporation
Transactions" were structured in a manner that is not expected to result in a
significantly disproportionate tax or other burden to any former partner of The
Goldman Sachs Group, L.P. If the incorporation transactions have a
disproportionate effect on any partner, Goldman Sachs may, but is not required
to, make special payments

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and arrangements with any person who incurs a disproportionate tax or other
burden.

OTHER TRANSACTIONS

Goldman Sachs, in the ordinary course of business, maintains margin
accounts for certain of its directors and executive officers. Any credit
extended to any director or executive officer pursuant to his or her margin
account was made on substantially the same terms, including interest and
collateral, as those generally prevailing at the time for comparable third-party
extensions of credit, and did not involve more than the usual risk of
collectibility or present unfavorable terms.

We have established funds in order to permit our managing directors to
participate in our merchant banking investments. Many of our managing directors,
their spouses or entities owned or controlled by the managing directors have
invested their personal funds in these investment vehicles. Distributions of
greater than $60,000 from these funds to our executive officers or those persons
or entities affiliated with them (which reflect investments made over several
years) in fiscal 1999 were as follows: Mr. Paulson -- $5,094,509; Mr.
Hurst -- $795,558; Mr. Katz -- $215,622; Mr. Palm -- $678,976; Mr.
Viniar -- $188,308; and Mr. Zubrow -- $171,061.

In addition, certain of our executive officers from time to time invest
their personal funds directly in other funds managed by Goldman Sachs on the
same terms and with the same conditions as the other investors in these funds,
who are not our directors or executive officers.

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DESCRIPTION OF THE NOTES BEING OFFERED

Please note that in this section entitled "Description of the Notes Being
Offered", references to The Goldman Sachs Group, Inc., we, our and us refer only
to The Goldman Sachs Group, Inc. and not to its consolidated subsidiaries. Also,
in this section, references to Holders mean those who have notes registered in
their own names, on the books that we or the trustee maintain for this purpose,
and not those who own beneficial interests in notes issued in book-entry form
through The Depository Trust Company or in notes registered in street name.
Owners of beneficial interests in the notes should read the subsection entitled
"-- Legal Ownership of Notes".

FINANCIAL TERMS OF THE NOTES

The specific financial terms of the notes are as follows:

- - TITLE OF THE NOTES: 6.65% Notes due 2009

- - ISSUER OF THE NOTES: The Goldman Sachs Group, Inc.

- - TOTAL PRINCIPAL AMOUNT ISSUED: $1,800,000,000

- - ORIGINAL ISSUE DATE WAS: May 19, 1999

- - DUE DATE FOR PRINCIPAL: May 15, 2009

- - INTEREST RATE: 6.65% annually

- - DATE INTEREST STARTED ACCRUING: May 19, 1999

- - DUE DATES FOR INTEREST: every May 15 and November 15

- - FIRST DUE DATE FOR INTEREST WAS: November 15, 1999

- - REGULAR RECORD DATES FOR INTEREST: every May 1 and November 1

- - ADDITIONAL AMOUNTS: We intend to pay principal and interest without deducting
U.S. withholding taxes. If we are required to deduct from payments to non-U.S.
investors, however, we will pay additional amounts on those payments, but only
to the extent described below under "-- Payment of Additional Amounts".

- - REDEMPTION: We will not have the option to redeem the notes before they
mature, unless we become obligated to pay additional amounts because of
changes in U.S. withholding tax requirements.

- - FORM OF NOTES: We issued the notes only in global form, and you will not be
permitted to withdraw the notes from The Depository Trust Company except in
the limited situations we describe below under "-- We Issued the Notes in
Global Form".

ADDITIONAL INFORMATION
ABOUT YOUR NOTE

THE NOTES WERE ISSUED UNDER THE INDENTURE

As required by U.S. federal law for all bonds and notes of companies that
are publicly offered, the notes are governed by a document called the indenture.
The indenture is a contract between us and The Bank of New York, which acts as
trustee. The trustee has two main roles:

- - First, the trustee can enforce your rights against us if we default. There are
limitations on the extent to which the trustee acts on your behalf, which we
describe below under "-- Default, Remedies and Waiver of Default".

- - Second, the trustee performs administrative duties for us, such as sending you
interest payments and notices.

WE MAY ISSUE OTHER SERIES OF DEBT SECURITIES

The indenture permits us to issue different series of debt securities from
time to time. The notes are a single, distinct series of debt securities. The
specific terms of each other series may differ from those of the notes. The
indenture does not limit the aggregate amount of debt securities that we may
issue, nor

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does it limit the number of other series or the aggregate amount of any
particular series.

The indenture and the notes do not limit our ability to incur other debt or
to issue other securities. Also, we are not subject to financial or similar
restrictions by the terms of the notes except as we describe below under
"-- Restrictive Covenant and Defeasance".

When we refer to a series of debt securities, we mean a series, such as the
notes, issued under the indenture. When we refer to the notes or these notes, we
mean the notes that are covered by this prospectus.

HOW THE NOTES RANK AGAINST OTHER DEBT

The notes are not secured by any property or assets of The Goldman Sachs
Group, Inc. or its subsidiaries. Thus, by owning these notes, you are one of our
unsecured creditors. These notes will not be subordinated to any of our other
debt obligations. This means that, in a bankruptcy or liquidation proceeding
against us, these notes would rank equally in right of payment with all other
unsecured and unsubordinated debt of The Goldman Sachs Group, Inc. The specific
terms of other debt, including those of other series we may issue under the
indenture, however, will differ from those of the notes. For example, other debt
will have different due dates for principal and interest and may permit holders
to accelerate the maturity in different circumstances.

An investment in the notes involves risks because we are a holding company
and because our principal U.S. subsidiary, Goldman, Sachs & Co., is a
partnership in which we are a general partner. We summarize these risks above
under "Risk Factors -- Investors in the Notes Face Additional Risk Because The
Goldman Sachs Group, Inc. Is a Holding Company", "-- The Value of the Notes May
Be Impaired Because We Depend on Funds from Our Regulated Subsidiaries" and
"-- We May Be Liable to Creditors of Our Partnership Subsidiaries".

STATED MATURITY AND MATURITY

The day on which the principal amount of the notes is scheduled to become
due is called the stated maturity of the principal. The principal may become due
sooner, by reason of redemption or acceleration after a default. The day on
which the principal actually becomes due, whether at the stated maturity or
earlier, is called the maturity of the principal.

We also use the terms stated maturity and maturity to refer to the dates
when interest payments become due. For example, we may refer to a regular
interest payment date when an installment of interest is scheduled to become due
as the "stated maturity" of that installment. When we refer to the "stated
maturity" or the "maturity" of the notes without specifying a particular
payment, we mean the stated maturity or maturity, as the case may be, of the
principal.

THIS SECTION IS ONLY A SUMMARY

The indenture and its associated documents, including the notes, contain
the full legal text of the matters described in this section. The indenture and
the notes are governed by New York law. A copy of the indenture has been filed
with the SEC as part of our registration statement. See "Available Information"
below for information on how to obtain a copy.

This section summarizes all the material terms of the notes and the
indenture. It does not, however, describe every aspect of the notes and the
indenture. For example, in this section, we use terms that have been given
special meaning in the indenture, but we describe the meaning for only the more
important of those terms.

LEGAL OWNERSHIP OF NOTES

We refer to those who have the notes registered in their own names, on the
books that we or the trustee maintain for this purpose, as the "Holders" of
those notes. Those persons are the legal holders of those notes. We refer to
those who, indirectly through others, own beneficial interests in notes that are
not registered in their own names as indirect holders of those notes. As we
discuss below, indirect holders are not legal holders, and investors in notes
issued in book-entry form or in street name are indirect holders.

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BOOK-ENTRY HOLDERS

We issued these notes in book-entry form. This means the notes are
represented by one or more global notes registered in the name of a financial
institution that holds them as depositary on behalf of other financial
institutions that participate in the depositary's book-entry system. These
participating institutions, in turn, hold beneficial interests in the notes on
behalf of themselves or their customers.

Under the indenture, only the person in whose name a note is registered is
recognized as the Holder of that note. Consequently, for notes issued in global
form, we will recognize only the depositary as the Holder of those notes and we
will make all payments on those notes to the depositary. The depositary passes
along the payments it receives to its participants, which in turn pass the
payments along to their customers who are the beneficial owners. The depositary
and its participants do so under agreements they have made with one another or
with their customers; they are not obligated to do so under the terms of the
notes.

As a result, investors will not own notes directly. Instead, they will own
beneficial interests in a global note, through a bank, broker or other financial
institution that participates in the depositary's book-entry system or holds an
interest through a participant. As long as the notes are issued in global form,
investors will be indirect holders, and not Holders, of the notes.

STREET NAME HOLDERS

If in the future we terminate the global notes, investors may choose to
hold their notes in their own names or in street name. Notes held by an investor
in street name would be registered in the name of a bank, broker or other
financial institution that the investor chooses, and the investor would hold
only a beneficial interest in those notes through an account he or she maintains
at that institution.

For notes held in street name, we will recognize only the intermediary
banks, brokers and other financial institutions in whose names the notes are
registered as the Holders of those notes and we will make all payments on those
notes to them. These institutions pass along the payments they receive to their
customers who are the beneficial owners, but only because they agree to do so in
their customer agreements or because they are legally required to do so.
Investors who hold notes in street name will be indirect holders, not Holders,
of those notes.

LEGAL HOLDERS

Our obligations, as well as the obligations of the trustee and those of any
third parties employed by us or the trustee, run only to the Holders of the
notes. We do not have obligations to investors who hold beneficial interests in
global notes, in street name or by any other indirect means. This is the case
whether an investor chooses to be an indirect holder of a note or has no choice
because we issued the notes only in global form.

For example, once we make a payment or give a notice to the Holder, we have
no further responsibility for the payment or notice even if that Holder is
required, under agreements with depositary participants or customers or by law,
to pass it along to the indirect holders but does not do so. Similarly, if we
want to obtain the approval of the Holders for any purpose -- e.g., to amend the
indenture or to relieve us of the consequences of a default or of our obligation
to comply with a particular provision of the indenture -- we would seek the
approval only from the Holders, and not the indirect holders, of the notes.
Whether and how the Holders contact the indirect holders is up to the Holders.

When we refer to you, we mean those who invest in the notes being offered
by this prospectus, whether they are the Holders or only indirect holders of
those notes. When we refer to your notes, we mean the notes being offered by
this prospectus in which you hold a direct or indirect interest.

SPECIAL CONSIDERATIONS FOR INDIRECT HOLDERS

If you hold notes through a bank, broker or other financial institution,
either in book-

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entry form or in street name, you should check with your own institution to find
out:

- - how it handles securities payments and notices;

- - whether it imposes fees or charges;

- - how it would handle a request for the Holders' consent, if ever required;

- - whether and how you can instruct it to send you notes registered in your own
name so you can be a Holder, if that is permitted in the future;

- - how it would exercise rights under the notes if there were a default or other
event triggering the need for Holders to act to protect their interests; and

- - if the notes are in book-entry form, how the depositary's rules and procedures
will affect these matters.

WE ISSUED THE NOTES IN GLOBAL FORM

We have chosen to issue the notes in book-entry form. This means all the
notes were represented, at least initially, by one or more global notes.

WHAT IS A GLOBAL NOTE?

A global note is a note that we deposit with and register in the name of a
financial institution, or its nominee, that we select. The financial institution
that we select for this purpose is called the depositary. We have selected The
Depository Trust Company of New York, New York, known as DTC, to be the
depositary for the notes, at least initially.

A global note may not be transferred to or registered in the name of anyone
other than the depositary or its nominee, unless special termination situations
arise. We describe those situations below under "-- Special Situations When a
Global Note Will Be Terminated". As a result of these arrangements, the
depositary, or its nominee, will be the sole registered owner and Holder of all
the notes, and investors will be permitted to own only beneficial interests in a
global note. Beneficial interests must be held by means of an account with a
broker, bank or other financial institution that in turn has an account with the
depositary or with another institution that does. Thus, an investor whose note
is represented by a global note will not be a Holder of the note, but only an
indirect holder of a beneficial interest in the global note.

The notes will be represented by one or more global notes at all times
unless and until the global notes are terminated. We describe the situations in
which this can occur below under "-- Special Situations When a Global Note Will
Be Terminated". If termination occurs, we may issue the notes through another
book-entry clearing system or decide that the notes may no longer be held
through any book-entry clearing system.

SPECIAL CONSIDERATIONS FOR GLOBAL NOTES

As an indirect holder, an investor's rights relating to a global note will
be governed by the account rules of the investor's financial institution and of
the depositary, as well as general laws relating to securities transfers. We do
not recognize this type of investor as a Holder of notes and instead deal only
with the depositary that holds the global note.

Because the notes were issued only in the form of global notes, an investor
should be aware of the following:

- - An investor cannot cause the notes to be registered in his or her own name,
and cannot obtain non-global certificates for his or her interest in the
notes, except in the special situations we describe below.

- - An investor will be an indirect holder and must look to his or her own bank or
broker for payments on the notes and protection of his or her legal rights
relating to the notes, as we describe above under "-- Legal Ownership of
Notes".

- - An investor may not be able to sell interests in the notes to some insurance
companies and other institutions that are required by law to own their
securities in non-book-entry form.

- - An investor may not be able to pledge his or her interest in a global note in
circumstances where certificates representing the notes must be delivered to
the lender or

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other beneficiary of the pledge in order for the pledge to be effective.

- - The depositary's policies, which may change from time to time, will govern
payments, transfers, exchanges and other matters relating to an investor's
interest in a global note. We and the trustee have no responsibility for any
aspect of the depositary's actions or for its records of ownership interests
in a global note. We and the trustee also do not supervise the depositary in
any way.

- - The depositary will require that those who purchase and sell interests in a
global note within its book-entry system use immediately available funds.

- - Financial institutions that participate in the depositary's book-entry system,
and through which investors hold their interests in the global notes, may also
have their own policies affecting payments, notices and other matters relating
to the notes. There may be more than one financial intermediary in the chain
of ownership for an investor. We do not monitor and are not responsible for
the actions of any of those intermediaries.

SPECIAL SITUATIONS WHEN A GLOBAL NOTE WILL BE TERMINATED

In a few special situations described below, a global note will be
terminated and interests in it will be exchanged for certificates in non-global
form representing the notes it represented. After that exchange, the choice of
whether to hold the notes directly or in street name will be up to the investor.
Investors must consult their own banks or brokers to find out how to have their
interests in a global note transferred on termination to their own names, so
that they will be Holders. We have described the rights of Holders and street
name investors above under "-- Legal Ownership of Notes".

The special situations for termination of the global notes are as follows:

- - if the depositary notifies us that it is unwilling, unable or no longer
qualified to continue as depositary, and we do not appoint another institution
to act as depositary within 60 days;

- - if we notify the trustee that we wish to terminate the global notes; or

- - if an event of default has occurred and has not been cured or waived; we
discuss defaults later under "-- Default, Remedies and Waiver of Default".

If a global note is terminated, only the depositary, and not we or the trustee,
is responsible for deciding the names of the institutions in whose names the
notes represented by the global note will be registered and, therefore, who will
be the Holders of those notes.

YOU CAN HOLD INTERESTS IN GLOBAL NOTES

THROUGH CLEARSTREAM AND EUROCLEAR,

AS INDIRECT PARTICIPANTS IN DTC

As long as DTC is the depositary for the global notes, you may hold an
interest in a global note through any organization that participates, directly
or indirectly, in the DTC system. Those organizations include Clearstream
Banking, societe anonyme, Luxembourg, commonly known as Clearstream (previously
commonly referred to as Cedel), and Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear system known as Euroclear. If you
are a participant in either of those systems, you may hold your interest
directly in that system. If you are not a participant, you may hold your
interest indirectly through organizations that are participants in that system.
If you hold your interest indirectly, you should note that DTC, Clearstream and
Euroclear will have no record of you or your relationship with the direct
participant in their systems.

Clearstream and Euroclear are securities clearance systems in Europe, and
they participate indirectly in DTC. Clearstream and Euroclear will hold
interests in the global notes on behalf of the participants in their systems,
through securities accounts they maintain in their own names for their customers
on their own books or on the books of their depositaries. Those depositaries, in
turn, are participants in DTC and hold those interests in securities accounts
they maintain in their own names on the books of DTC.

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Citibank, N.A. acts as depositary for Clearstream and The Chase Manhattan Bank
acts as depositary for Euroclear. Clearstream and Euroclear clear and settle
securities transactions between their participants through electronic,
book-entry delivery of securities against payment.

DTC RULES WILL ALSO APPLY TO NOTES HELD THROUGH CLEARSTREAM AND EUROCLEAR

If you hold an interest in a global note through Clearstream or Euroclear,
that system will credit the payments we make on your note to the account of your
Clearstream or Euroclear participant in accordance with that system's rules and
procedures. The participant's account will be credited only to the extent that
the system's depositary receives these payments through the DTC system.
Payments, notices and other communications or deliveries relating to the notes,
if made through Clearstream or Euroclear, must comply not only with the rules
and procedures of those systems, but also with the rules and procedures of DTC,
except as described below.

If you hold an interest in a global note through Clearstream or Euroclear,
you will not be entitled to exchange your interest for a certificate
representing a non-global note, unless and until the global note is terminated
at DTC, as described in the prior subsection.

Trading in the notes between Clearstream participants or between Euroclear
participants will by governed only by the rules and procedures of that system.
We understand that, at present, those systems' rules and procedures applicable
to trades in conventional eurobonds will apply to trades in the notes, with
settlement in immediately available funds.

SPECIAL CONSIDERATIONS FOR CROSS-MARKET TRANSFERS

Cross-market transfers of the notes -- i.e., transfers between investors
who hold or will hold their interests through Clearstream or Euroclear, on the
one hand, and investors who hold or will hold their interests through DTC but
not through Clearstream or Euroclear, on the other hand -- will be governed by
DTC's rules and procedures in addition to those of Clearstream or Euroclear. If
you hold your note through Clearstream or Euroclear and you wish to complete a
cross-market transfer, you will need to deliver transfer instructions and
payment, if applicable, to Clearstream or Euroclear, through your participant,
and that system in turn will need to deliver them to DTC, through that system's
depositary.

Because of time-zone differences between the United States and Europe, any
notes you purchase through Clearstream or Euroclear in a cross-market transfer
will not be credited to your account at your Clearstream or Euroclear
participant until the business day after the DTC settlement date. For the same
reason, if you sell the notes through Clearstream or Euroclear in a cross-market
transfer, your cash proceeds will be received by the depositary for that system
on the DTC settlement date but will not be credited to your participant's
account until the business day following the DTC settlement date. In this
context, "business day" means a business day for Clearstream or Euroclear.

The description of the clearing and settlement systems in this section
reflects our understanding of the rules and procedures of DTC, Clearstream and
Euroclear as currently in effect. Those systems could change their rules and
procedures at any time. We have no control over those systems and we take no
responsibility for their activities.

PAYMENT OF ADDITIONAL AMOUNTS

We intend to make all payments on the notes without deducting U.S.
withholding taxes. If we are required by law to do so on payments to non-U.S.
investors, however, we will pay additional amounts on those payments to the
extent described in this section.

We will pay additional amounts on a note only if the beneficial owner of
the note is a United States alien. The term United States alien means any person
who, for U.S. federal income tax purposes, is:

- - a nonresident alien individual;

- - a foreign corporation;

- - a foreign partnership; or

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- - an estate or trust that is not subject to U.S. federal income tax on a net
income basis on income or gain from a note.

If the beneficial owner of a note is a United States alien, we will pay all
additional amounts that may be necessary so that every net payment of interest
or principal on that note will not be less than the amount provided for in that
note. By net payment we mean the amount we or our paying agent pay after
deducting or withholding an amount for or on account of any present or future
tax, assessment or other governmental charge imposed with respect to that
payment by a U.S. taxing authority.

Our obligation to pay additional amounts is subject to several important
exceptions, however. We will NOT pay additional amounts for or on account of any
of the following:

- - any tax, assessment or other governmental charge imposed solely because at any
time there is or was a connection between the beneficial owner -- or between a
fiduciary, settlor, beneficiary or member of the beneficial owner, if the
beneficial owner is an estate, trust or partnership -- and the United States
(other than the mere receipt of a payment or the ownership or holding of a
note), including because the beneficial owner -- or the fiduciary, settlor,
beneficiary or member -- at any time, for U.S. federal income tax purposes:

-- is or was a citizen or resident or is or was treated as a resident of the
United States;

-- is or was present in the United States;

-- is or was engaged in a trade or business in the United States;

-- has or had a permanent establishment in the United States;

-- is or was a domestic or foreign personal holding company, a passive
foreign investment company or a controlled foreign corporation;

-- is or was a corporation that accumulates earnings to avoid U.S. federal
income tax; or

-- is or was a "ten percent shareholder" of The Goldman Sachs Group, Inc.;

- - any tax, assessment or other governmental charge imposed solely because of a
change in applicable law or regulation, or in any official interpretation or
application of applicable law or regulation, that becomes effective more than
15 days after the day on which the payment becomes due or is duly provided
for, whichever occurs later;

- - any estate, inheritance, gift, sales, excise, transfer, wealth or personal
property tax, or any similar tax, assessment or other governmental charge;

- - any tax, assessment or other governmental charge imposed solely because the
beneficial owner or any other person fails to comply with any certification,
identification or other reporting requirement concerning the nationality,
residence, identity or connection with the United States of the holder or any
beneficial owner of the note, if compliance is required by statute, by
regulation of the U.S. Treasury department or by an applicable income tax
treaty to which the United States is a party, as a precondition to exemption
from the tax, assessment or other governmental charge;

- - any tax, assessment or other governmental charge that can be paid other than
by deduction or withholding from a payment on the note;

- - any tax, assessment or other governmental charge imposed solely because the
payment is to be made by a particular paying agent (which term may include us)
and would not be imposed if made by another paying agent; or

- - any combination of the taxes, assessments or other governmental charges
described above.

In addition, we will not pay additional amounts with respect to any payment of
principal or interest to any United States alien who is a fiduciary or a
partnership, or who is not the sole beneficial owner of the payment, to the
extent that we would not have to pay additional amounts to any beneficiary or
settlor of the fiduciary or any member of the partner-

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ship, or to any beneficial owner of the payment, if that person or entity were
treated as the beneficial owner of the note for this purpose.

When we refer to a U.S. taxing authority, we mean the United States of
America or any state, other jurisdiction or taxing authority in the United
States. When we refer to the United States in the discussion of additional
amounts above and in the discussion of redemption for tax reasons below, we mean
the United States of America, including the states and the District of Columbia,
together with the territories, possessions and all other areas subject to the
jurisdiction of the United States of America.

When we refer to any payment of interest or principal on a note, this
includes any additional amount that may be payable in respect of that payment.

WHEN WE CAN REDEEM THE NOTES

We will not be permitted to redeem the notes before their stated maturity,
except as described below. The notes will not be entitled to the benefit of any
sinking fund -- that is, we will not deposit money on a regular basis into any
separate custodial account to repay your note. In addition, you will not be
entitled to require us to buy your note from you before its stated maturity.

We will be entitled, at our option, to redeem the outstanding notes in
whole if at any time we become obligated to pay additional amounts on any notes
on the next interest payment date, but only if our obligation results from a
change in the laws or regulations of the United States of America, of any
jurisdiction in the United States or of any U.S. taxing authority, or from a
change in any official interpretation or application of those laws or
regulations, that becomes effective or is announced after the date of this
prospectus. If we redeem the notes, we will do so at a redemption price equal to
100% of the principal amount of the notes redeemed, plus accrued interest to the
redemption date.

If we become entitled to redeem the notes, we may do so at any time on a
redemption date of our choice. However, we must give the Holders of the notes
notice of the redemption not less than 30 days or more than 60 days before the
redemption date and not more than 90 days before the next date on which we would
be obligated to pay additional amounts. In addition, our obligation to pay
additional amounts must remain in effect when we give the notice of redemption.
We will give the notice in the manner described below in "-- Notices".

We or our affiliates may purchase notes from investors who are willing to
sell from time to time, either in the open market at prevailing prices or in
private transactions at negotiated prices. For example, we currently expect
Goldman, Sachs & Co. to make a market in the notes by purchasing and reselling
notes from time to time. Notes that we or our subsidiaries purchase may, at our
discretion, be held, resold or cancelled.

MERGERS AND SIMILAR TRANSACTIONS

We are generally permitted to merge or consolidate with another firm. We
are also permitted to sell substantially all our assets to another firm. We may
not take any of these actions, however, unless all the following conditions are
met:

- - If the successor firm in the transaction is not The Goldman Sachs Group, Inc.,
the successor firm must be organized as a corporation, partnership, trust,
limited liability company or other similar entity and must expressly assume
The Goldman Sachs Group, Inc.'s obligations under the notes and the indenture.
The successor firm may be organized under the laws of any jurisdiction,
whether in the United States or elsewhere.

- - Immediately after the transaction, no default under the notes has occurred and
is continuing. For this purpose, "default under the notes" means an event of
default or an event that would be an event of default if the requirements for
giving us default notice and for our default having to continue for a specific
period of time were disregarded. We describe these matters below under
"-- Default, Remedies and Waiver of Default".

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If the conditions described above are satisfied, we will not need to obtain the
approval of the Holders in order to merge or consolidate or to sell all or
substantially all our assets. Also, these conditions will apply only if we wish
to merge or consolidate with another firm or sell all or substantially all our
assets. We will not need to satisfy these conditions if we enter into other
types of transactions, including any transaction in which we acquire the stock
or assets of another firm, any transaction that involves a change of control of
The Goldman Sachs Group, Inc. but in which we do not merge or consolidate and
any transaction in which we sell less than substantially all our assets.

Also, if we merge, consolidate or sell all or substantially all our assets
and the successor firm is a non-U.S. entity, neither we nor any successor would
have any obligation to compensate you for any resulting adverse tax consequences
relating to the notes, other than an obligation to pay additional amounts to
non-U.S. investors in respect of U.S. withholding tax requirements, to the
extent described above under "-- Payment of Additional Amounts".

RESTRICTIVE COVENANT AND DEFEASANCE

RESTRICTION ON LIENS

In the indenture, we promise not to create or guarantee any debt for
borrowed money that is secured by a lien on the voting or profit participating
equity ownership interests that we or any of our subsidiaries own in Goldman,
Sachs & Co. (or in any subsidiary that beneficially owns or holds, directly or
indirectly, those interests in Goldman, Sachs & Co.), unless we also secure the
notes on an equal or priority basis with the other secured debt. Our promise,
however, is subject to an important exception: we may secure debt for borrowed
money with liens on those interests without securing the notes if our board of
directors determines that the liens do not materially detract from or interfere
with the then-present value or control of those interests.

Except as noted above, the indenture does not restrict our ability to put
liens on our interests in our subsidiaries other than Goldman, Sachs & Co., nor
does it restrict our ability to sell or otherwise dispose of our interests in
any of our subsidiaries, including Goldman, Sachs & Co. In addition, the
restriction on liens applies only to liens that secure debt for borrowed money.
For example, liens imposed by operation of law, such as liens to secure
statutory obligations for taxes or workers' compensation benefits, or liens we
create to secure obligations to pay legal judgments or surety bonds, would not
be covered by this restriction.

DEFEASANCE AND COVENANT DEFEASANCE

FULL DEFEASANCE. If there is a change in U.S. federal tax law, as
described below, we can legally release ourselves from all payment and other
obligations on the notes. This is called full defeasance. To do so, each of the
following must occur:

- - We must deposit in trust for the benefit of all Holders a combination of money
and U.S. government or U.S. government agency notes or bonds that will
generate enough cash to make interest, principal and any other payments on the
notes on their various due dates.

- - There must be a change in current U.S. federal tax law or an Internal Revenue
Service ruling that lets us make the above deposit without causing you to be
taxed on your notes any differently than if we did not make the deposit and
just repaid the notes ourselves. Under current federal tax law, the deposit
and our legal release from the notes would be treated as though we took back
your notes and gave you your share of the cash and notes or bonds deposited in
trust. In that event, you could recognize gain or loss on your notes.

- - We must deliver to the trustee a legal opinion of our counsel confirming the
tax law change described above.

If we ever did accomplish full defeasance, you would have to rely solely on
the trust deposit for payments on your notes. You could not look to us for
payment in the event of any shortfall.

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COVENANT DEFEASANCE. Under current U.S. federal tax law, we can make the
same type of deposit described above and be released from certain restrictive
covenants relating to the notes. This is called covenant defeasance. In that
event, you would lose the protection of those restrictive covenants. In order to
achieve covenant defeasance, we must do both of the following:

- - We must deposit in trust for the benefit of the Holders a combination of money
and U.S. government or U.S. government agency notes or bonds that will
generate enough cash to make interest, principal and any other payments on the
notes on their various due dates.

- - We must deliver to the trustee a legal opinion of our counsel confirming that
under current U.S. federal income tax law we may make the above deposit
without causing you to be taxed on your notes any differently than if we did
not make the deposit and just repaid the notes ourselves.

If we accomplish covenant defeasance with regard to your note, the
following provisions of the indenture and the notes would no longer apply:

- - our promise not to create liens on our voting or profit participating equity
ownership interests in Goldman, Sachs & Co. described above under
"-- Restriction on Liens"; and

- - the event of default resulting from a breach of covenants, described below in
the third item under "-- Default, Remedies and Waiver of Default -- Events of
Default".

If we accomplish covenant defeasance, you can still look to us for
repayment of your notes in the event of any shortfall in the trust deposit. You
should note, however, that if one of the remaining events of default occurred,
such as our bankruptcy, and your notes became immediately due and payable, there
may be a shortfall. Depending on the event causing the default, you may not be
able to obtain payment of the shortfall.

DEFAULT, REMEDIES AND WAIVER OF DEFAULT

You will have special rights if an event of default with respect to the
notes occurs and is not cured, as described in this subsection.

EVENTS OF DEFAULT

When we refer to an event of default with respect to the notes, we mean any
of the following:

- - We do not pay the principal on any of these notes on its due date.

- - We do not pay interest on any of these notes within 30 days after its due
date.

- - We remain in breach of our covenant described under "-- Restrictive Covenant
and Defeasance -- Restriction on Liens" above, or any other covenant we make
in the indenture for the benefit of these notes, for 60 days after we receive
a notice of default stating that we are in breach. The notice must be sent by
the trustee or the Holders of not less than 10% in principal amount of these
notes.

- - We file for bankruptcy or other events of bankruptcy, insolvency or
reorganization relating to The Goldman Sachs Group, Inc. occur. Those events
must arise under U.S. federal or state law, unless we merge, consolidate or
sell our assets as described above and the successor firm is a non-U.S.
entity. If that happens, then those events must arise under U.S. federal or
state law or the law of the jurisdiction in which the successor firm is
legally organized.

REMEDIES IF AN EVENT OF DEFAULT OCCURS

If an event of default has occurred and has not been cured or waived, the
trustee or the Holders of not less than 25% in principal amount of the notes may
declare the entire principal amount of all these notes to be due immediately. If
an event of default occurs because of events in bankruptcy, insolvency or
reorganization relating to The Goldman Sachs Group, Inc., the entire principal
amount of all these notes will be automatically accelerated, without any action
by the trustee or any Holder.

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Each of the situations described above is called an acceleration of the
maturity of the notes. If the maturity of the notes is accelerated and a
judgment for payment has not yet been obtained, the Holders of a majority in
principal amount of the notes may cancel the acceleration for all the notes.

If an event of default occurs, the trustee will have special duties. In
that situation, the trustee will be obligated to use those of its rights and
powers under the indenture, and to use the same degree of care and skill in
doing so, that a prudent person would use in that situation in conducting his or
her own affairs.

Except as described in the prior paragraph, the trustee is not required to
take any action under the indenture at the request of any Holders unless the
Holders offer the trustee reasonable protection from expenses and liability.
This is called an indemnity. If the trustee receives an indemnity that is
reasonably satisfactory to it, the Holders of a majority in principal amount of
the notes may direct the time, method and place of conducting any lawsuit or
other formal legal action seeking any remedy available to the trustee. These
majority Holders may also direct the trustee in performing any other action
under the indenture with respect to these notes.

Before you bypass the trustee and bring your own lawsuit or other formal
legal action or take other steps to enforce your rights or protect your
interests relating to the notes, the following must occur:

- - The Holder of your note must give the trustee written notice that an event of
default has occurred and the event of default must not have been cured or
waived.

- - The Holders of not less than 25% in principal amount of these notes must make
a written request that the trustee take action because of the default and they
or other Holders must offer to the trustee indemnity reasonably satisfactory
to the trustee against the cost and other liabilities of taking that action.

- - The trustee must not have taken action for 60 days after the above steps have
been taken.

- - During those 60 days, the Holders of a majority in principal amount of these
notes must not have given the trustee directions that are inconsistent with
the written request of the Holders of not less than 25% in principal amount of
these notes.

You are entitled, however, at any time to bring a lawsuit for the payment of
money due on your note on or after its due date.

WAIVER OF DEFAULT

The Holders of not less than a majority in principal amount of the notes
may waive a default for all these notes. If this happens, the default will be
treated as if it has not occurred. No one can waive a payment default on any
note, however, without the approval of the particular Holder of that note.

WE WILL GIVE THE TRUSTEE INFORMATION ABOUT DEFAULTS ANNUALLY

Each year, we will give the trustee a written statement of two of our
officers, certifying that to their knowledge we are in compliance with the
indenture and the notes, or else specifying any default known to them.

Book-entry and other indirect holders should consult their banks or
brokers for information on how to give notice or direction to or make a
request of the trustee and how to declare or cancel an acceleration of
the maturity.

MODIFICATION AND WAIVER OF COVENANTS

There are three types of changes we can make to the indenture and the
notes.

CHANGES REQUIRING EACH HOLDER'S APPROVAL

First, there are changes that cannot be made without the approval of each
Holder of

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a note affected by the change. Here is a list of those types of changes:

- - change the stated maturity for any principal or interest payment on a note;

- - reduce the principal amount, the interest rate or the redemption price for a
note;

- - permit redemption of a note if not previously permitted;

- - change the currency of any payment on a note other than as permitted by the
note;

- - change the place of any payment on a note;

- - impair the Holder's right to sue for payment of any amount due on its note;

- - reduce the percentage in principal amount of the notes and any other affected
series of debt securities, taken together, the approval of whose Holders is
needed to change the indenture or the notes;

- - reduce the percentage in principal amount of the notes and any other affected
series of debt securities, taken separately or together, as the case may be,
the approval of whose Holders is needed to waive our compliance with the
indenture or to waive defaults; and

- - change the provisions of the indenture dealing with modification and waiver in
any other respect, except to increase any required percentage referred to
above or to add to the provisions that cannot be changed or waived without
approval.

CHANGES NOT REQUIRING APPROVAL

The second type of change does not require any approval by Holders of the
notes. This type is limited to clarifications and changes that would not
adversely affect the notes in any material respect. Nor do we need any approval
to make changes that affect only debt securities to be issued under the
indenture after the changes take effect.

We may also make changes or obtain waivers that do not adversely affect a
particular note, even if they affect other notes or other debt securities. In
those cases, we do not need to obtain the approval of the Holder of that note;
we need only obtain any required approvals from the Holders of the affected
notes or other debt securities.

CHANGES REQUIRING MAJORITY APPROVAL

Any other change to the indenture and the notes would require the following
approval:

- - If the change affects only the notes, it must be approved by the Holders of a
majority in principal amount of the notes.

- - If the change affects the notes as well as one or more other series of debt
securities issued under the indenture, it must be approved by the Holders of a
majority in principal amount of the notes and all other series affected by the
change, with the notes and the other series voting together as one class for
this purpose.

In each case, the required approval must be given by written consent. Most
changes fall into this category.

The same majority approval would be required for us to obtain a waiver of
any of our covenants in the indenture. Our covenants include the promises we
make about merging and putting liens on our interests in Goldman, Sachs & Co.,
which we describe above under "-- Mergers and Similar Transactions" and
"-- Restrictive Covenant and Defeasance". If the Holders approve a waiver of a
covenant, we will not have to comply with it. The Holders, however, cannot
approve a waiver of any provision in a particular note, or in the indenture as
it affects that note, that we cannot change without the approval of the Holder
of that note as described above in "-- Changes Requiring Each Holder's
Approval", unless that Holder approves the waiver.

Book-entry and other indirect holders should consult their banks or
brokers for information on how approval may be granted or denied if we
seek to change the indenture or the notes or request a waiver.

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SPECIAL RULES FOR ACTION BY HOLDERS

When Holders take any action under the indenture, such as giving a notice
of default, declaring an acceleration, approving any change or waiver or giving
the trustee an instruction, we will apply the following rules. We may apply
similar rules to other series of debt securities issued under the indenture.

ONLY OUTSTANDING NOTES ARE ELIGIBLE

Only Holders of outstanding notes will be eligible to participate in any
action by Holders of these notes. Also, we will count only outstanding notes in
determining whether the various percentage requirements for taking action have
been met. For these purposes, a note will not be "outstanding":

- - if it has been surrendered for cancellation;

- - if we have deposited or set aside, in trust for its Holder, money for its
payment or redemption;

- - if we have fully defeased it as described above under "-- Restrictive Covenant
and Defeasance -- Defeasance and Covenant Defeasance -- Full Defeasance"; or

- - if we or one of our affiliates, such as Goldman, Sachs & Co., is the
beneficial owner.

In some situations, Holders of debt securities of other series may be eligible
to participate in an action by Holders of these notes. In that event, we may
follow special rules in calculating the principal amount of their debt
securities that is to be treated as outstanding for the purposes described
above. This may happen, for example, if the principal amount is payable in a
foreign currency, increases over time or is not to be fixed until maturity.

DETERMINING RECORD DATES FOR ACTION BY HOLDERS

We will generally be entitled to set any day as a record date for the
purpose of determining the Holders that are entitled to take action under the
indenture. In certain limited circumstances, only the trustee will be entitled
to set a record date for action by Holders. If we or the trustee set a record
date for an approval or other action to be taken by Holders, that vote or action
may be taken only by persons or entities who are Holders on the record date and
must be taken during the period that we specify for this purpose, or that the
trustee specifies if it sets the record date. We or the trustee, as applicable,
may shorten or lengthen this period from time to time. This period, however, may
not extend beyond the 180th day after the record date for the action. In
addition, record dates for any global note may be set in accordance with
procedures established by the depositary from time to time.

FORM, EXCHANGE AND TRANSFER

If any notes cease to be issued in global form, they will be issued:

- - only in fully registered form;

- - without interest coupons; and

- - in denominations of $1,000 and multiples of $1,000.

Holders may exchange their notes for notes of smaller denominations or
combined into fewer notes of larger denominations, as long as the total
principal amount is not changed.

Holders may exchange or transfer their notes at the office of the trustee.
We have appointed the trustee to act as our agent for registering notes in the
names of Holders and transferring notes. If the global notes are terminated and
we issue notes in non-global form, Holders of the non-global notes can transfer
those notes at the offices of Banque Internationale a Luxembourg or its
successor as our transfer agent in Luxembourg, but only for as long as the notes
are listed on the Luxembourg Stock Exchange. We may appoint another entity to
perform these functions or perform them ourselves.

Holders will not be required to pay a service charge to transfer or
exchange their notes, but they may be required to pay for any tax or other
governmental charge associated with the exchange or transfer. The transfer or
exchange will be made only if our transfer agent is satisfied with the Holder's
proof of legal ownership.

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We may appoint additional transfer agents or cancel the appointment of any
particular transfer agent. We may also approve a change in the office through
which any transfer agent acts.

As long as the notes are issued in global form, only the depositary will be
entitled to transfer and exchange notes as described in this subsection, since
the depositary will be the sole Holder of the notes.

PAYMENT MECHANICS

WHO RECEIVES PAYMENT?

We will pay interest on the notes on the interest payment dates stated
above under "-- Financial Terms of the Notes", and at maturity. Each payment of
interest due on an interest payment date or at maturity will include interest
accrued from and including the last date to which interest has been paid or made
available for payment, or from the issue date, if none has been paid or made
available for payment, to but excluding the relevant payment date. We will
compute interest on the notes on the basis of a 360-day year of twelve 30-day
months.

If interest is due on a note on an interest payment date, we will pay the
interest to the Holder in whose name the note is registered at the close of
business on the regular record date relating to the interest payment date. If
interest is due at maturity but on a day that is not an interest payment date,
we will pay the interest to the person or entity entitled to receive the
principal of the note. If principal is due on a note at maturity, we will pay
the amount to the Holder of the note against surrender of the note at the proper
place of payment.

REGULAR RECORD DATES FOR INTEREST

The regular record date relating to an interest payment date for any note
will be the May 1 or November 1 next preceding the interest payment date,
whether or not that preceding day is a business day. For the purpose of
determining the Holder at the close of business on a regular record date when
business is not being conducted, the close of business will mean 5:00 P.M., New
York City time, on that day.

HOW WE WILL MAKE PAYMENTS

PAYMENTS ON GLOBAL NOTES. As long as the notes are issued in global form,
we will make payments on the notes in accordance with the applicable policies of
the depositary as in effect from time to time. Under those policies, we will pay
directly to the depositary, or its nominee, and not to any indirect holders who
own beneficial interests in a global note. An indirect holder's right to receive
those payments will be governed by the rules and practices of the depositary and
its participants, as described above under "-- We Issued the Notes in Global
Form".

PAYMENTS ON NON-GLOBAL NOTES. If the global notes are terminated and we
issue notes in non-global form, we will make payments on the notes as follows.
We will pay interest that is due on an interest payment date by check mailed on
the interest payment date to the Holder at his or her address shown on the
trustee's records as of the close of business on the regular record date. We
will make all other payments by check at the paying agent described below,
against surrender of the note. All payments by check will be made in next day
funds -- i.e., funds that become available on the day after the check is cashed.

Alternatively, if a non-global note has a face amount of at least
$1,000,000 and the Holder asks us to do so, we will pay any amount that becomes
due on the note by wire transfer of immediately available funds to an account at
a bank in New York City, on the due date. To request wire payment, the Holder
must give the paying agent appropriate wire transfer instructions at least five
business days before the requested wire payment is due. In the case of any
interest payment due on an interest payment date, the instructions must be given
by the person or entity who is the Holder on the relevant regular record date.
In the case of any other payment, payment will be made only after the note is
surrendered to the paying agent. Any wire instructions, once properly given,
will remain in effect unless and until new instruc-

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tions are given in the manner described above.

Book-entry and other indirect holders should consult their banks or
brokers for information on how they will receive payments on the notes.

PAYMENT WHEN OFFICES ARE CLOSED

If any payment is due on a note on a day that is not a business day, we
will make the payment on the next day that is a business day. Payments postponed
to the next business day in this situation will be treated under the indenture
as if they were made on the original due date. Postponement of this kind will
not result in a default under the notes or the indenture, and no interest will
accrue on the postponed amount from the original due date to the next day that
is a business day.

When we refer to a business day, we mean each Monday, Tuesday, Wednesday,
Thursday and Friday that is not a day on which banking institutions in New York
City or any other relevant location generally are authorized or obligated by
law, regulation or executive order to close. By other relevant location, we mean
Luxembourg, for as long as the notes are listed on the Luxembourg Stock Exchange
and that exchange so requires. If the notes cease to be held in global form, the
reference to other relevant location will also mean each office of a paying
agent, but only with respect to a payment to be made at that office, and each
office of a transfer agent, but only with respect to any actions to occur at
that office.

PAYING AGENT

If we issue the notes in non-global form, we may appoint one or more
financial institutions to act as our paying agents, and at whose designated
offices the notes may be surrendered for payment at their maturity. We call each
of those offices a paying agent. We may add, replace or terminate paying agents
from time to time. We may also choose to act as our own paying agent. Initially,
we have appointed the trustee, at its corporate trust office in New York City,
as a paying agent. We must notify you of changes in the paying agents.

For as long as these notes are listed on the Luxembourg Stock Exchange, we
will also maintain a paying agent in Luxembourg. We have initially appointed
Banque Internationale a Luxembourg, acting out of its corporate office in
Luxembourg, or its successor, as that paying agent. We will notify you of any
change in our Luxembourg paying agent by publication in Luxembourg.

UNCLAIMED PAYMENTS

Regardless of who acts as paying agent, all money paid by us to a paying
agent that remains unclaimed at the end of two years after the amount is due to
a Holder will be repaid to us. After that two-year period, the Holder may look
only to us for payment and not to the trustee, any other paying agent or anyone
else.

NOTICES

As long as the notes remain in global form, notices to be given to Holders
will be given to the depositary, in accordance with its applicable policies as
in effect from time to time. If we issue the notes in non-global form, notices
to be given to Holders will be sent by mail to the respective addresses of the
Holders as they appear in the trustee's records, and will be deemed given when
mailed.

As long as these notes are listed on the Luxembourg Stock Exchange and its
rules require, we will also give notices to Holders by publication in a daily
newspaper of general circulation in Luxembourg. We expect that newspaper to be,
but it need not be, the Luxemburger Wort. If publication in Luxembourg is not
practical, we will make the publication elsewhere in Western Europe. By "daily
newspaper" we mean a newspaper that is published on each day, other than a
Saturday, Sunday or holiday, in Luxembourg or, when applicable, elsewhere in
Western Europe. You will be presumed to have received these notices on the date
we first publish them. If we are unable to give notice as described in this
paragraph because the publication of any newspaper is suspended or

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it is otherwise impractical for us to publish the notice, then we or the
trustee, acting on our instructions, will give Holders notice in another form.
That alternate form of notice will be sufficient notice to you.

Neither the failure to give any notice to a particular Holder, nor any
defect in a notice given to a particular Holder, will affect the sufficiency of
any notice given to another Holder.

Book-entry and other indirect holders should consult their banks or
brokers for information on how they will receive notices.

OUR RELATIONSHIP WITH THE TRUSTEE

The Bank of New York is initially serving as the trustee, for the notes and
all other series of debt securities to be issued under the indenture. The Bank
of New York has provided commercial banking and other services for us and our
affiliates in the past and may do so in the future. Among other things, The Bank
of New York provides us with a line of credit, holds debt securities issued by
us and serves as trustee or agent with regard to other debt obligations of The
Goldman Sachs Group, Inc. or its subsidiaries.

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UNITED STATES TAXATION

This section describes the material United States federal income tax
consequences of owning the notes and is the opinion of Sullivan & Cromwell,
counsel to The Goldman Sachs Group, Inc. It applies to you only if you hold your
notes as capital assets for tax purposes. This section does not apply to you if
you are a member of a class of holders subject to special rules, such as:

- - a dealer in securities or currencies;

- - a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings;

- - a bank;

- - a life insurance company;

- - a tax-exempt organization;

- - a person that holds notes that are a hedge or that are hedged against interest
rate or currency risks;

- - a person that holds notes as part of a straddle or conversion transaction for
tax purposes; or

- - a person whose functional currency for tax purposes is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations under the Internal
Revenue Code, published rulings and court decisions, all as currently in effect.
These laws are subject to change, possibly on a retroactive basis.

Please consult your own tax advisor concerning the consequences of owning
these notes in your particular circumstances under the Internal Revenue Code
and the laws of any other taxing jurisdiction.

UNITED STATES HOLDERS

This subsection describes the tax consequences to a United States holder.
You are a United States holder if you are a beneficial owner of a note and you
are:

- - a citizen or resident of the United States;

- - a domestic corporation;

- - an estate whose income is subject to United States federal income tax
regardless of its source; or

- - a trust if a United States court can exercise primary supervision over the
trust's administration and one or more United States persons are authorized to
control all substantial decisions of the trust.

If you are not a United States holder, this subsection does not apply to you and
you should refer to "-- United States Alien Holders" below.

PAYMENTS OF INTEREST. You will be taxed on any interest on your note as
ordinary income at the time you receive the interest or it accrues, depending on
your method of accounting for tax purposes. In addition, if you acquire your
note at a price other than the initial offering price, the rules relating to
market discount or amortizable bond premium may also apply to your note. This
may occur, for example, if you purchase your note in a market-making
transaction.

PURCHASE, SALE AND RETIREMENT OF NOTES. When you sell your note or your
note is retired, you will generally recognize gain or loss equal to the
difference between the amount you realize on the sale or retirement and the
amount that you paid for your note. This gain or loss will be capital gain or
loss, except to the extent attributable to accrued but unpaid interest or
described below under "-- Market Discount". Capital gain of a non-corporate
United States holder is generally taxed at a maximum rate of 20% where the
property is held for more than one year.

MARKET DISCOUNT. You will be treated as if you purchased your note at a
market discount, and your note will be a market discount note, if the note's
principal amount exceeds the price you paid for your note by at least 1/4 of 1%
of your note's principal amount multiplied by the number of complete years to
the note's maturity.

If your note's principal amount does not exceed the price you paid for the
note by 1/4 of 1% multiplied by the number of complete years to the note's
maturity, the excess

103
105

constitutes de minimis market discount, and the rules discussed below are not
applicable to you.

You must treat any gain you recognize on the maturity or disposition of
your market discount note as ordinary income to the extent of the accrued market
discount on your note. Alternatively, you may elect to include market discount
in income currently over the life of your note. If you make this election, it
will apply to all debt instruments with market discount that you acquire on or
after the first day of the first taxable year to which the election applies. You
may not revoke this election without the consent of the Internal Revenue
Service. If you own a market discount note and do not make this election, you
will generally be required to defer deductions for interest on borrowings
allocable to your note in an amount not exceeding the accrued market discount on
your note until maturity or disposition of your note.

You will accrue market discount on your market discount note on a
straight-line basis unless you elect to accrue market discount using a
constant-yield method. If you make this election, it will apply only to the note
with respect to which it is made and you may not revoke it.

If you are an accrual-basis taxpayer, you should be aware that the Clinton
administration has recently proposed legislation that would require you to
include market discount in income currently over the life of your note, subject
to certain limitations. If enacted, this proposal would only be effective if you
acquire your market discount note on or after the date of enactment. We do not
yet know whether this proposal will be enacted or when it will become effective
if enacted.

NOTES PURCHASED AT A PREMIUM. If you purchase your note for an amount in
excess of its principal amount, you may elect to treat the excess as amortizable
bond premium. If you make this election, you will reduce the amount required to
be included in your income each year with respect to interest on your note by
the amount of amortizable bond premium allocable to that year, based on your
note's yield to maturity. If you make an election to amortize bond premium, it
will apply to all debt instruments, other than debt instruments the interest on
which is excludible from gross income, that you hold at the beginning of the
first taxable year to which the election applies or thereafter acquire, and you
may not revoke it without the consent of the Internal Revenue Service.

BACKUP WITHHOLDING AND INFORMATION REPORTING. In general, if you are a
non-corporate United States holder, we and other payors are required to report
to the Internal Revenue Service all payments of principal and interest on your
note. In addition, the proceeds of the sale of your note before maturity within
the United States will be reported to the Internal Revenue Service.
Additionally, backup withholding at a rate of 31% will apply to any payments if
you fail to provide an accurate certified taxpayer identification number, or you
are notified by the Internal Revenue Service that you have failed to report all
interest and dividends required to be shown on your federal income tax returns.

UNITED STATES ALIEN HOLDERS

This subsection describes the tax consequences to a United States alien
holder. You are a United States alien holder if you are the beneficial owner of
a note and are, for United States federal income tax purposes:

- - a nonresident alien individual;

- - a foreign corporation;

- - a foreign partnership; or

- - an estate or trust that is not subject to United States federal income tax on
a net income basis on income or gain from a note.

Under present United States federal income and estate tax law, and subject
to the discussion of backup withholding below, if you are a United States alien
holder of a note:

- - we and other payors will not be required to deduct United States withholding
tax from

104
106

payments of principal and interest to you if, in the case of interest:

1. you do not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of The Goldman Sachs Group, Inc.
entitled to vote,

2. you are not a controlled foreign corporation that is related to us through
stock ownership, and

a. you certify to us or a U.S. payor under penalties of perjury, that you
are not a United States holder and provide your name and address, or

b. a non-U.S. securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of
its trade or business and holds the note certifies to us or a U.S. payor
under penalties of perjury that a similar statement has been received
from you by it or by a similar financial institution between it and you
and furnishes the payor with a copy thereof; and

- - no deduction for any United States federal withholding tax will be made from
any gain that you realize on the sale or exchange of your note.

Further, a note held by an individual, who at death is not a citizen or resident
of the United States will not be includible in the individual's gross estate for
United States federal estate tax purposes if:

- - the decedent did not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of The Goldman Sachs Group, Inc.
entitled to vote at the time of death; and

- - the income on the note would not have been effectively connected with a United
States trade or business of the decedent at the same time.

If you receive a payment after December 31, 2000, recently finalized
Treasury regulations will apply. Under these final withholding regulations,
after December 31, 2000, you may use an alternative method to satisfy the
certification requirement described above. Additionally, if you are a partner in
a foreign partnership, after December 31, 2000, you, in addition to the foreign
partnership, must provide the certification described above, and the partnership
must provide certain information, including a United States taxpayer
identification number. The Internal Revenue Service will apply a look-through
rule in the case of tiered partnerships.

You are generally exempt from backup withholding and information reporting
on Internal Revenue Service Form 1099 with respect to any payments of principal
or interest made by us and other payors, provided that you provide the
certification described above, and provided further that the payor does not have
actual knowledge that you are a United States person. We and other payors,
however, may report payments of interest on your notes on Internal Revenue
Service Form 1042-S.

In general, payment of the proceeds from the sale of notes to or through a
United States office of a broker is subject to both United States backup
withholding and information reporting. If, however, you are a United States
alien holder, you will not be subject to information reporting and backup
withholding if you certify as to your non-United States status under penalties
of perjury or otherwise establish an exemption. Payments of the proceeds from
the sale by a United States alien holder of a note made to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding. However, information reporting, but not backup withholding, may
apply to a payment made outside the United States of the proceeds of a sale of a
note through an office outside the United States if the broker is:

- - a United States person;

- - a controlled foreign corporation for United States tax purposes;

- - a foreign person 50% or more of whose gross income is effectively connected
with a United States trade or business for a specified three-year period; or

105
107

- - with respect to payments made after December 31, 2000, a foreign partnership,
if at any time during its tax year:

1. one or more of its partners are "U.S. persons" as defined in U.S. Treasury
regulations who in the aggregate hold more than 50% of the income or
capital interest in the partnership, or

2. the foreign partnership is engaged in a United States trade or business

unless the broker has documentary evidence in its records that you are a
non-U.S. person and does not have actual knowledge that you are a U.S. person,
or you otherwise establish an exemption.

EMPLOYEE RETIREMENT INCOME SECURITY ACT

This section is only relevant to you if you are an insurance company or the
fiduciary of a pension plan or an employee benefit plan proposing to invest in
the notes.

The Goldman Sachs Group, Inc. and certain of its affiliates may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or a "disqualified person"
within the meaning of the Internal Revenue Code with respect to many employee
benefit plans. Prohibited transactions within the meaning of ERISA or the
Internal Revenue Code may arise, for example, if the notes being offered by this
prospectus are acquired by or with the assets of a pension or other employee
benefit plan for which The Goldman Sachs Group, Inc. or any of its affiliates is
a service provider, unless those notes are acquired pursuant to an exemption for
transactions effected on behalf of that plan by a "qualified professional asset
manager" or an "in-house asset manager" or pursuant to any other available
exemption. The assets of a pension or other employee benefit plan may include
assets held in the general account of an insurance company that are deemed to be
"plan assets" under ERISA.

If you are an insurance company or the fiduciary of a pension plan or an
employee benefit plan, and propose to invest in the notes, you should consult
your legal counsel.

VALIDITY OF THE NOTES

The validity of the notes was passed upon for The Goldman Sachs Group, Inc.
by Sullivan & Cromwell, New York, New York and for the underwriters by Cleary,
Gottlieb, Steen & Hamilton, New York, New York in connection with the initial
offering and sale. Certain legal matters were also passed upon for The Goldman
Sachs Group, Inc. by one of its General Counsel, Robert J. Katz or Gregory K.
Palm. Sullivan & Cromwell has in the past represented, and continues to
represent, one or more of the underwriters and their affiliates in a variety of
matters. Cleary, Gottlieb, Steen & Hamilton has in the past represented, and
continues to represent, Goldman Sachs in a variety of matters.

EXPERTS

The consolidated financial statements of Goldman Sachs as of November 27,
1998 and November 26, 1999 and for each of the three years in the period ended
November 26, 1999 included in this prospectus and the financial statement
schedule included in the registration statement have been included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.

The income statement and balance sheet data included in "Selected
Consolidated Financial Data" for each of the five years in the period ended
November 26, 1999 included in this prospectus have been included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

106
108

AVAILABLE INFORMATION

As a result of its initial public offering, The Goldman Sachs Group, Inc.
is required to file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any documents filed by us
at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our filings with the SEC are also available to the public
through the SEC's Internet site at http://www.sec.gov and through the NYSE, 20
Broad Street, New York, New York 10005, on which our common stock is listed. As
long as the notes are listed on the Luxembourg Stock Exchange, copies of our
filings with the SEC will also be available free of charge from our listing
agent in Luxembourg, Banque Internationale a Luxembourg, 69, route d'Esch,
L-1470 Luxembourg.

We have filed with the SEC a registration statement on Form S-1 relating to
the notes. This prospectus is a part of the registration statement and does not
contain all the information in the registration statement. Whenever a reference
is made in this prospectus to a contract or other document, please be aware that
the reference is not necessarily complete and that you should refer to the
exhibits that are part of the registration statement for a copy of the contract
or other document. You may review a copy of the registration statement at the
SEC's public reference room in Washington, D.C., as well as through the SEC's
Internet site noted above.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE

SECURITIES LITIGATION REFORM ACT OF 1995

We have included in this prospectus statements that may constitute
"forward-looking statements" within the meaning of the safe harbor provisions of
The Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not historical facts but instead represent only our belief
regarding future events, many of which, by their nature, are inherently
uncertain and outside of our control. It is possible that our actual results may
differ, possibly materially, from the anticipated results indicated in these
forward-looking statements.

Information regarding important factors that could cause actual results to
differ, perhaps materially, from those in our forward-looking statements is

contained under the caption "Risk Factors" in this prospectus.

107
109

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Consolidated Financial Statements as of November 26, 1999
and November 27, 1998 and for the three years in the
period ended November 26, 1999
Report of Independent Accountants........................... F-2
Consolidated Statements of Earnings......................... F-3
Consolidated Statements of Financial Condition.............. F-4
Consolidated Statements of Changes in Stockholders' Equity
and Partners' Capital..................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Consolidated Statements of Comprehensive Income............. F-7
Notes to Consolidated Financial Statements.................. F-8

F-1
110

REPORT OF INDEPENDENT ACCOUNTANTS

To the Directors and Shareholders,

The Goldman Sachs Group, Inc.:

In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of earnings, changes in
stockholders' equity and partners' capital, cash flows and comprehensive income
(included on pages F-3 to F-30 of this prospectus) present fairly, in all
material respects, the consolidated financial position of The Goldman Sachs
Group, Inc. and Subsidiaries (the "firm") as of November 26, 1999 and November
27, 1998, and the results of their consolidated operations and their
consolidated cash flows for each of the three fiscal years in the period ended
November 26, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
firm's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated statements of financial condition as of
November 28, 1997, November 29, 1996 and November 24, 1995, and the related
consolidated statements of earnings, changes in partners' capital and cash flows
for the years ended November 29, 1996 and November 24, 1995 (none of which are
presented herein); and we expressed unqualified opinions on those consolidated
financial statements. In our opinion, the information set forth in the selected
consolidated financial data for each of the five years in the period ended
November 26, 1999 (included on pages 23 and 24 of this prospectus) is fairly
stated, in all material respects, in relation to the consolidated financial
statements from which it has been derived.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York

January 21, 2000.

F-2
111

CONSOLIDATED STATEMENTS OF EARNINGS

YEAR ENDED NOVEMBER
---------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS, EXCEPT SHARE AND
PER SHARE AMOUNTS)

Revenues
Global capital markets
Investment banking.................................... $ 4,359 $ 3,368 $ 2,587
Trading and principal investments..................... 5,758 2,015 2,303
Asset management and securities services................ 2,524 2,085 1,456
Interest income......................................... 12,722 15,010 14,087
----------- ------- -------
Total revenues........................................ 25,363 22,478 20,433
Interest expense........................................ 12,018 13,958 12,986
----------- ------- -------
Revenues, net of interest expense..................... 13,345 8,520 7,447

Operating expenses
Compensation and benefits, excluding employee initial
public offering awards................................ 6,459 3,838 3,097
Nonrecurring employee initial public offering
awards(1)............................................. 2,257 -- --
Amortization of employee initial public offering
awards................................................ 268 -- --
Brokerage, clearing and exchange fees................... 446 424 357
Market development...................................... 364 287 206
Communications and technology........................... 306 265 208
Depreciation and amortization........................... 337 242 178
Occupancy............................................... 314 207 168
Professional services and other......................... 402 336 219
Charitable contribution................................. 200 -- --
----------- ------- -------
Total operating expenses.............................. 11,353 5,599 4,433
Pre-tax earnings........................................ 1,992 2,921 3,014
(Benefit)/provision for taxes........................... (716) 493 268
----------- ------- -------
Net earnings............................................ $ 2,708 $ 2,428 $ 2,746
=========== ======= =======
Earnings per share
Basic................................................. $ 5.69 -- --
Diluted............................................... 5.57 -- --
Average common shares outstanding
Basic................................................. 475,883,756 -- --
Diluted............................................... 485,803,960 -- --

- ---------------

(1) Includes expense of $666 million related to the initial irrevocable
contribution of shares of common stock to a defined contribution plan.

The accompanying notes are an integral part of these consolidated financial
statements.
F-3
112

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF NOVEMBER
--------------------
1999 1998
---- ----
(IN MILLIONS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)

Assets
Cash and cash equivalents................................... $ 3,055 $ 2,836
Cash and securities segregated in compliance with U.S.
federal and other regulations............................. 9,135 7,887
Receivables from brokers, dealers and clearing
organizations............................................. 4,490 4,321
Receivables from customers and counterparties............... 30,140 14,953
Securities borrowed......................................... 78,418 69,158
Securities purchased under agreements to resell............. 37,106 37,484
Right to receive securities................................. 1,604 7,564
Financial instruments owned, at fair value
Commercial paper, certificates of deposit and time
deposits................................................ 1,435 1,382
U.S. government, federal agency and sovereign
obligations............................................. 22,193 24,789
Corporate debt............................................ 9,821 10,744
Equities and convertible debentures....................... 16,381 11,066
State, municipal and provincial obligations............... 756 918
Derivative contracts...................................... 30,661 21,299
Physical commodities...................................... 562 481
Other assets................................................ 4,734 2,498
-------- --------
$250,491 $217,380
======== ========
Liabilities and Equity
Short-term borrowings, including commercial paper........... $ 37,756 $ 27,430
Payables to brokers, dealers and clearing organizations..... 2,129 730
Payables to customers and counterparties.................... 57,405 46,208
Securities loaned........................................... 9,169 11,088
Securities sold under agreements to repurchase.............. 40,183 36,257
Obligation to return securities............................. 1,595 9,783
Financial instruments sold, but not yet purchased, at fair
value U.S. government, federal agency and sovereign
obligations............................................... 19,170 22,360
Corporate debt............................................ 2,642 1,441
Equities and convertible debentures....................... 14,002 6,406
Derivative contracts...................................... 28,488 24,722
Physical commodities...................................... 586 966
Other liabilities and accrued expenses...................... 6,269 3,699
Long-term borrowings........................................ 20,952 19,906
-------- --------
240,346 210,996
Commitments and contingencies
Partners' capital allocated for income taxes and potential
withdrawals............................................... -- 74
Partners' capital........................................... -- 6,310
Preferred stock, par value $0.01 per share; 150,000,000
shares authorized, no shares issued and outstanding....... -- --
Common stock, par value $0.01 per share; 4,000,000,000
shares authorized, 441,421,899 shares issued and
outstanding............................................... 4 --
Restricted stock units; 76,048,404 units issued and
outstanding............................................... 4,339 --
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, 7,440,362 shares issued and
outstanding............................................... -- --
Additional paid-in capital.................................. 7,359 --
Retained earnings........................................... 444 --
Unearned compensation....................................... (2,038) --
Accumulated other comprehensive income...................... 37 --
-------- --------
10,145 6,310
-------- --------
$250,491 $217,380
======== ========

The accompanying notes are an integral part of these consolidated financial
statements.
F-4
113

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'

EQUITY AND PARTNERS' CAPITAL

YEAR ENDED NOVEMBER
-------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)

Partners' capital
Balance, beginning of year................................ $ 6,310 $ 6,107 $ 5,309
Transfer of beginning partners' capital allocated for
income taxes and potential withdrawals.................. 74 -- --
Net earnings.............................................. 2,264(1) 2,428 2,746
Capital contributions..................................... 48 9 89
Return on capital and certain distributions to partners... (306) (619) (557)
Termination of profit participation plans................. -- (368) --
Transfers to partners' capital allocated for income taxes
and potential withdrawals, net.......................... -- (1,247) (1,480)
Distributions of remaining partners' capital.............. (4,520)(2) -- --
Exchange of partnership interests for shares of common
stock................................................... (3,901) -- --
Transfer to accumulated other comprehensive income........ 31 -- --
------- ------- -------
Balance, end of year...................................... -- 6,310 6,107
Common stock, par value $0.01 per share
Balance, beginning of year................................ -- -- --
Common stock issued....................................... 4 -- --
------- ------- -------
Balance, end of year...................................... 4 -- --

Restricted stock units
Balance, beginning of year................................ -- -- --
Restricted stock units granted, net of forfeitures of $42
million................................................. 4,339 -- --
------- ------- -------
Balance, end of year...................................... 4,339 -- --

Nonvoting common stock, par value $0.01 per share
Balance, beginning of year................................ -- -- --
Nonvoting common stock issued............................. -- -- --
------- ------- -------
Balance, end of year...................................... -- -- --

Additional paid-in capital
Balance, beginning of year................................ -- -- --
Exchange of partnership interests for shares of common
stock................................................... 3,901 -- --
Issuance of common stock.................................. 2,891 -- --
Issuance of common stock contributed to a defined
contribution plan....................................... 674 -- --
Dividends paid............................................ (107)(3) -- --
------- ------- -------
Balance, end of year...................................... 7,359 -- --

Retained earnings
Balance, beginning of year................................ -- -- --
Net earnings.............................................. (444)(4) -- --
------- ------- -------
Balance, end of year...................................... 444 -- --

Unearned compensation
Balance, beginning of year................................ -- -- --
Restricted stock units granted, net of forfeitures of $23
million................................................. (2,311) -- --
Amortization of restricted stock units.................... 273 -- --
------- ------- -------
Balance, end of year...................................... (2,038) -- --

Accumulated other comprehensive income
Balance, beginning of year................................ -- -- --
Transfer from partners' capital........................... (31) -- --
Currency translation adjustment........................... 68 -- --
------- ------- -------
Balance, end of year...................................... 37 -- --
------- ------- -------
$10,145 $ 6,310 $ 6,107
======= ======= =======

- ---------------

(1) Represents net earnings of the partnership from November 28, 1998 through
May 6, 1999.

(2) Represents the retired limited partners' exchanges of partnership interests
for cash and junior subordinated debentures, the redemption of senior
limited partnership interests for cash and other distributions of partners'
capital in accordance with the partnership agreement.

(3) Represents two quarterly dividends of $0.12 per common share each.

(4) Represents net earnings of the corporation from May 7, 1999 through November
26, 1999.

The accompanying notes are an integral part of these consolidated financial
statements.
F-5
114

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED NOVEMBER
--------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Cash flows from operating activities
Net earnings.............................................. $ 2,708 $ 2,428 $ 2,746
Noncash items included in net earnings
Depreciation and amortization........................... 337 242 178
Deferred income taxes................................... (1,387) 23 32
Stock-based compensation................................ 2,989 -- --
Changes in operating assets and liabilities
Cash and securities segregated in compliance with U.S.
federal and other regulations........................... (1,248) (2,984) (670)
Net receivables from brokers, dealers and clearing
organizations........................................... 1,453 (789) (1,599)
Net payables to customers and counterparties.............. (3,990) 14,664 5,029
Securities borrowed, net.................................. (11,179) (21,158) (10,814)
Financial instruments owned, at fair value................ (13,718) 148 (7,439)
Financial instruments sold, but not yet purchased, at fair
value................................................... 9,059 7,559 11,702
Other, net................................................ 2,387 (71) 905
-------- -------- --------
Net cash (used for)/provided by operating activities.... (12,589) 62 70
Cash flows from investing activities
Property, leasehold improvements and equipment............ (656) (476) (259)
Financial instruments owned, at fair value................ 189 (180) (360)
Acquisitions, net of cash acquired........................ (187) -- (74)
-------- -------- --------
Net cash used for investing activities.................. (654) (656) (693)
Cash flows from financing activities
Short-term borrowings, net................................ 755 2,193 1,082
Securities sold under agreements to repurchase, net....... 4,304 (5,909) (4,717)
Issuance of long-term borrowings.......................... 11,000 10,527 7,734
Repayment of long-term borrowings......................... (753) (2,058) (1,855)
Capital contributions..................................... 48 9 89
Dividends paid............................................ (107) -- --
Returns on capital and certain distributions to
partners................................................ (306) (619) (557)
Termination of the profit participation plans............. -- (368) --
Proceeds from issuance of common stock.................... 2,633 -- --
Partners' capital distributions, net...................... (4,112) -- --
Partners' capital allocated for income taxes and potential
withdrawals............................................. -- (1,673) (2,034)
-------- -------- --------
Net cash provided by/(used for) financing activities.... 13,462 2,102 (258)
Net increase/(decrease) in cash and cash equivalents.... 219 1,508 (881)
Cash and cash equivalents, beginning of year.............. 2,836 1,328 2,209
-------- -------- --------
Cash and cash equivalents, end of year.................... $ 3,055 $ 2,836 $ 1,328
======== ======== ========

- ---------------

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest approximated the related expense for each of the
fiscal years presented. Payments of income taxes were $463 million for the year
ended November 1999 and were immaterial for the years ended November 1998 and
1997.

Noncash activities:

In connection with the firm's conversion to corporate form, junior subordinated
debentures of $371 million were issued to retired limited partners in exchange
for their partnership interests.

Common stock issued in connection with acquisitions was $245 million in 1999.

The accompanying notes are an integral part of these consolidated financial
statements.
F-6
115

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEAR ENDED NOVEMBER
-------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Net earnings................................................ $2,708 $2,428 $2,746
Other comprehensive income, net of tax
Currency translation adjustment........................... 37 (31) (28)
------ ------ ------
Comprehensive income........................................ $2,745 $2,397 $2,718
====== ====== ======

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

F-7
116

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1/DESCRIPTION OF BUSINESS

The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation,
together with its consolidated subsidiaries (collectively, the firm), is a
global investment banking and securities firm that provides a wide range of
financial services worldwide to a substantial and diversified client base. On
May 7, 1999, the firm converted from a partnership to a corporation and
completed its initial public offering.

The firm's activities are divided into two business segments:

ASSET MANAGEMENT AND SECURITIES SERVICES. This segment comprises Asset
Management, Securities Services and Commissions.

NOTE 2/SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Group Inc.
and its U.S. and international subsidiaries including Goldman, Sachs & Co.
(GS&Co.) and J. Aron & Company in New York, Goldman Sachs International (GSI) in
London and Goldman Sachs (Japan) Ltd. (GSJL) in Tokyo. Certain reclassifications
have been made to prior-year amounts to conform to the current-year
presentation. All material intercompany transactions and balances have been
eliminated.

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

Unless otherwise stated herein, all references to 1999, 1998 and 1997 refer
to the firm's fiscal year ended, or the date, as the context requires, November
26, 1999, November 27, 1998 and November 28, 1997, respectively.

CASH AND CASH EQUIVALENTS

The firm defines cash equivalents as highly liquid overnight deposits held
in the ordinary course of business.

REPURCHASE AGREEMENTS AND COLLATERALIZED FINANCING ARRANGEMENTS

Securities purchased under agreements to resell and securities sold under
agreements to repurchase, principally U.S. government, federal agency and
investment-grade non-U.S. sovereign obligations, represent short-term
collateralized financing transactions and are carried at their contractual
amounts plus accrued interest. These amounts are presented on a net-by-
counterparty basis where management believes a legal right of setoff exists
under an enforceable netting agreement. The firm takes possession of securities
purchased under agreements to resell, monitors the market value of these
securities on a daily basis and obtains additional collateral as appropriate.

Securities borrowed and loaned are recorded on the statements of financial
condition based on the amount of cash collateral advanced or received. These
transactions are generally collateralized by either cash, securities or letters
of credit. The firm takes possession of securities borrowed, monitors the market
value of securities loaned and obtains additional collateral as appropriate.
Income or expense is recognized as interest over the life of the transaction.

F-8
117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FINANCIAL INSTRUMENTS

Gains and losses on financial instruments and commission income and related
expenses are recorded on a trade date basis in the consolidated statements of
earnings. The consolidated statement of financial condition as of November 1999
generally reflects purchases and sales of financial instruments, including
agency transactions, on a trade date basis. The consolidated statement of
financial condition as of November 1998 generally reflects these transactions on
a settlement date basis. Recording these transactions on a trade date basis
would not have resulted in a material adjustment to the consolidated statement
of financial condition as of November 1998.

Substantially all financial instruments used in the firm's trading and
nontrading activities are carried at fair value or amounts that approximate fair
value, and unrealized gains and losses are recognized in earnings. Fair value is
based generally on listed market prices or broker or dealer price quotations. To
the extent that prices are not readily available, or if liquidating the firm's
position is reasonably expected to affect market prices, fair value is based on
either internal valuation models or management's estimate of amounts that could
be realized under current market conditions, assuming an orderly liquidation
over a reasonable period of time. Certain over-the-counter (OTC) derivative
instruments are valued using pricing models that consider, among other factors,
current and contractual market prices, time value, and yield curve and/or
volatility factors of the underlying positions. The fair value of the firm's
trading and nontrading assets and liabilities is discussed further in Notes 3, 4
and 5.

PRINCIPAL INVESTMENTS

Principal investments are carried at fair value, generally based upon
quoted market prices or comparable substantial third-party transactions. Where
fair value is not readily ascertainable, principal investments are recorded at
cost or management's estimate of the realizable value.

The firm is entitled to receive merchant banking overrides (i.e., an
increased share of a fund's income and gains) when the return on the fund's
investments exceeds certain threshold returns. Overrides are based on investment
performance over the life of each merchant banking fund, and future investment
underperformance may require amounts previously distributed to the firm to be
returned to the funds. Accordingly, overrides are recognized in earnings only
when management determines that the probability of return is remote. Overrides
are included in "Asset management and securities services" on the consolidated
statements of earnings.

DERIVATIVE CONTRACTS

Derivatives used for trading purposes are reported at fair value and are
included in "Derivative contracts" on the consolidated statements of financial
condition. Gains and losses on derivatives used for trading purposes are
generally included in "Trading and principal investments" on the consolidated
statements of earnings.

Derivatives used for nontrading purposes include interest rate futures
contracts and interest rate and currency swap agreements, which are primarily
utilized to convert a substantial portion of the firm's fixed rate debt into
U.S. dollar-based floating rate obligations. Gains and losses on these
derivatives are generally deferred and recognized as adjustments to interest
expense over the life of the derivative contract. Gains and losses resulting
from the early termination of derivatives used for nontrading purposes are
generally deferred and recognized over the remaining life of the underlying
debt. If the underlying debt is terminated prior to its stated maturity, gains
and losses on these transactions, including the associated hedges, are
recognized in earnings immediately.

Derivatives are reported on a net-by-counterparty basis on the consolidated
statements of financial condition where manage-

F-9
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ment believes a legal right of setoff exists
under an enforceable netting agreement.

PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT

Depreciation and amortization generally are computed using accelerated cost
recovery methods for all property and equipment and for leasehold improvements
where the term of the lease is greater than the economic useful life of the
asset. All other leasehold improvements are amortized on a straight-line basis
over the term of the lease.

GOODWILL

The cost of acquired companies in excess of the fair value of net assets at
acquisition date is recorded as goodwill and amortized over periods of 15 to 20
years on a straight-line basis.

INVESTMENT BANKING

Underwriting revenues and fees from mergers and acquisitions and other
corporate finance advisory assignments are recorded when the underlying
transaction is completed under the terms of the engagement. Syndicate expenses
related to securities offerings in which the firm acts as an underwriter or
agent are deferred until the related revenue is recognized.

EARNINGS PER SHARE

Earnings per share (EPS) is computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic EPS
is calculated by dividing net earnings by the weighted average number of common
shares outstanding. Common shares outstanding includes common stock and
nonvoting common stock as well as restricted stock units for which no future
service is required as a condition to the delivery of the underlying common
stock. Diluted EPS includes the determinants of basic EPS and, in addition,
reflects the dilutive effect of common stock deliverable pursuant to the
restricted stock units and stock options for which future service is required as
a condition to the delivery of the underlying common stock.

STOCK-BASED COMPENSATION

The firm has elected to account for stock-based employee compensation plans
in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees", as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation". In accordance with APB No. 25, compensation expense
is not recognized for stock options that have no intrinsic value on the date of
grant. Compensation expense is recognized immediately for restricted stock units
for which future service is not required as a condition to the delivery of the
underlying shares of common stock. For restricted stock units with future
service requirements, compensation expense is recognized over the relevant
vesting period using an accelerated amortization methodology.

INCOME TAXES

The firm accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of tax benefits or
expenses on the temporary differences between the financial reporting and tax
bases of its assets and liabilities. As a partnership, the firm was primarily
subject to unincorporated business taxes and taxes in foreign jurisdictions on
certain of its operations. As a corporation, the earnings of the firm are
subject to U.S. federal, foreign, state and local taxes. As a result of its
conversion to corporate form, the firm recognized the tax effect of the change
in its income tax rate on both its deferred tax assets and liabilities and the
earnings attributable to the period from May 7, 1999 to the end of the fiscal
year. The firm's tax assets and liabilities are presented as a component of
"Other assets" and "Other liabilities and accrued expenses", respectively, on
the consolidated statements of financial condition.

F-10
119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FOREIGN CURRENCY TRANSLATION

Assets and liabilities denominated in non-U.S. currencies are translated at
rates of exchange prevailing on the date of the statement of financial
condition, and revenues and expenses are translated at average rates of exchange
for the fiscal year. Gains or losses on translation of the financial statements
of a non-U.S. operation, where the functional currency is other than the U.S.
dollar, are reflected as a separate component of equity. Gains or losses on
foreign currency transactions are included in the consolidated statements of
earnings.

As a partnership, the firm reported the cumulative translation adjustment
as a component of "Partners' capital allocated for income taxes and potential
withdrawals" on the consolidated statement of financial condition. Effective
with the firm's conversion to corporate form, the cumulative translation
adjustment is reported as "Accumulated other comprehensive income" on the
consolidated statement of financial condition.

ACCOUNTING DEVELOPMENTS

In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement No.
133", which deferred to fiscal years beginning after June 15, 2000 the effective
date of the accounting and reporting requirements of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively, referred to as
derivatives), and for hedging activities. This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative instrument depends on its intended
use and the resulting designation. The firm intends to adopt the provisions of
SFAS No. 133 deferred by SFAS No. 137 in fiscal 2001 and is currently assessing
their effect.

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", effective for fiscal years beginning after December 15, 1998. SOP
No. 98-1 requires that certain costs of computer software developed or obtained
for internal use be capitalized and amortized over the useful life of the
related software. The firm previously expensed the cost of all software
development in the period it was incurred. The adoption of SOP No. 98-1 is not
expected to have a material effect on the firm's results of operations or
financial condition. The firm intends to adopt the provisions of SOP No. 98-1 in
fiscal 2000.

NOTE 3/FINANCIAL INSTRUMENTS

Financial instruments, including both cash instruments and derivatives, are
used to manage market risk, facilitate customer transactions, engage in
proprietary transactions and meet financing objectives. These instruments can be
either executed on an exchange or negotiated in the OTC market.

Transactions involving financial instruments sold, but not yet purchased,
entail an obligation to purchase a financial instrument at a future date. The
firm may incur a loss if the market value of the financial instrument
subsequently increases prior to the purchase of the instrument.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Substantially all of the firm's assets and liabilities are carried at fair
value or amounts that approximate fair value.

Trading assets and liabilities, including derivative contracts used for
trading purposes, are carried at fair value and reported as financial
instruments owned and financial instruments sold, but not yet purchased, on the
consolidated statements of financial con-

F-11
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

dition. Nontrading assets and liabilities are generally carried at fair value or
amounts that approximate fair value.

Nontrading assets include cash and cash equivalents; cash and securities
segregated in compliance with U.S. federal and other regulations; receivables
from brokers, dealers and clearing organizations; receivables from customers and
counterparties; securities borrowed; securities purchased under agreements to
resell; right to receive securities; and certain investments, primarily those
made in connection with the firm's merchant banking activities.

Nontrading liabilities include short-term borrowings; payables to brokers,
dealers and clearing organizations; payables to customers and counterparties;
securities loaned; securities sold under agreements to repurchase; obligation to
return securities; other liabilities and accrued expenses; and long-term
borrowings. The fair value of the firm's long-term borrowings and associated
hedges is discussed in Note 5.

TRADING AND PRINCIPAL INVESTMENTS

The firm's Trading and Principal Investments business, a component of the
Global Capital Markets segment, facilitates customer transactions and takes
proprietary positions through market making in and trading of securities,
currencies, commodities and swaps, and other derivatives. Derivative financial
instruments are often used to hedge cash instruments or other derivative
financial instruments as an integral part of the firm's strategies. As a result,
it is necessary to view the results of any activity on a fully integrated basis,
including cash positions, the effect of related derivatives and the financing of
the underlying positions.

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

The following table sets forth the net revenues of Trading and Principal
Investments:

YEAR ENDED NOVEMBER
--------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

FICC................................................... $2,862 $1,438 $2,055
Equities............................................... 1,961 795 573
Principal Investments.................................. 950 146 298
------ ------ ------
Total.................................................. $5,773 $2,379 $2,926
====== ====== ======

RISK MANAGEMENT

The firm seeks to monitor and control its risk exposure through a variety
of separate but complementary financial, credit, operational and legal reporting
systems. Management believes that it has effective procedures for evaluating and
managing the market, credit and other risks to which it is exposed. The
Management Committee, the firm's primary decision-making body, determines (both
directly and through delegated authority) the types of business in which the
firm engages, approves guidelines for accepting customers for all product lines,
outlines the terms under which customer business is conducted and establishes
the parameters for the risks that the firm is willing to undertake in its
business.

The Firmwide Risk Committee, which reports to senior management and meets
weekly, is responsible for managing and monitoring all of the firm's risk
exposures. In addition, the firm maintains segregation of duties, with credit
review and risk-monitoring functions performed by groups that are independent
from revenue-producing departments.

MARKET RISK. The potential for changes in the market value of the firm's
trading positions is referred to as "market risk". The firm's trading positions
result from underwrit-

F-12
121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ing, market-making and proprietary trading activities.

Categories of market risk include exposures to interest rates, currency
rates, equity prices and commodity prices. A description of each market risk
category is set forth below:

- Interest rate risks primarily result from exposures to changes in the
level, slope and curvature of the yield curve, the volatility of interest
rates, mortgage prepayment speeds and credit spreads.

- Currency rate risks result from exposures to changes in spot prices,
forward prices and volatilities of currency rates.

- Equity price risks result from exposures to changes in prices and
volatilities of individual equities, equity baskets and equity indices.

- Commodity price risks result from exposures to changes in spot prices,
forward prices and volatilities of commodities, such as electricity,
natural gas, crude oil, petroleum products, and precious and base metals.

These risk exposures are managed through diversification, by controlling
position sizes and by establishing hedges in related securities or derivatives.
For example, the firm may hedge a portfolio of common stock by taking an
offsetting position in a related equity-index futures contract. The ability to
manage these exposures may, however, be limited by adverse changes in the
liquidity of the security or the related hedge instrument and in the correlation
of price movements between the security and the related hedge instrument.

CREDIT RISK. Credit risk represents the loss that the firm would incur if
a counterparty or issuer of securities or other instruments held by the firm
fails to perform its contractual obligations to the firm. To reduce credit
exposures, the firm seeks to enter into netting agreements with counterparties
that permit the firm to offset receivables and payables with such
counterparties. In addition, the firm attempts to further reduce credit risk by
entering into agreements that enable us to obtain collateral from a
counterparty, to terminate or reset the terms of transactions after specified
time periods or upon the occurrence of credit-related events, by seeking
third-party guarantees of the counterparty's obligations, and through the use of
credit derivatives.

Credit concentrations may arise from trading, underwriting and securities
borrowing activities and may be impacted by changes in economic, industry or
political factors. The firm's concentration of credit risk is monitored actively
by the Credit Policy Committee. As of November 1999 and 1998, U.S. government
and federal agency obligations represented 7% of the firm's total assets. In
addition, most of the firm's securities purchased under agreements to resell are
collateralized by U.S. government, federal agency and other sovereign
obligations.

DERIVATIVE ACTIVITIES

Most of the firm's derivative transactions are entered into for trading
purposes. The firm uses derivatives in its trading activities to facilitate
customer transactions, to take proprietary positions and as a means of risk
management. The firm also enters into nontrading derivative contracts to manage
the interest rate and currency exposure on its long-term borrowings. Nontrading
derivatives related to the firm's long-term borrowings are discussed in Note 5.

Derivative contracts are financial instruments, such as futures, forwards,
swaps or option contracts, that derive their value from underlying assets,
indices, reference rates or a combination of these factors. Derivatives may
involve future commitments to purchase or sell financial instruments or
commodities, or to exchange currency or interest payment streams. The amounts
exchanged are based on the specific terms of the contract with reference to
specified rates, securities, commodities or indices.

Derivative contracts exclude certain cash instruments, such as
mortgage-backed securities, interest-only and principal-only obliga-

F-13
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tions, and indexed debt instruments, that derive their values or contractually
required cash flows from the price of some other security or index. Derivatives
also exclude option features that are embedded in cash instruments, such as the
conversion features and call provisions embedded in bonds. The firm has elected
to include commodity-related contracts in its derivative disclosure, although
not required to do so, as these contracts may be settled in cash or are readily
convertible into cash.

The gross notional (or contractual) amounts of derivative financial
instruments represent the volume of these transactions and not the amounts
potentially subject to market risk. In addition, measurement of market risk is
meaningful only when all related and offsetting transactions are taken into
consideration.

Gross notional (or contractual) amounts of derivative financial instruments
used for trading purposes with off-balance-sheet market risk are set forth
below:

AS OF NOVEMBER
------------------------
1999 1998
---- ----
(IN MILLIONS)

Interest Rate
Financial futures and forward settlement
contracts....................................... $ 422,465 $ 406,302
Swap agreements................................... 2,581,100 1,848,977
Written option contracts.......................... 509,841 423,561

Equity
Financial futures and forward settlement
contracts....................................... 10,082 7,405
Swap agreements................................... 3,423 2,752
Written option contracts.......................... 113,653 54,856

Currency and Commodity
Financial futures and forward settlement
contracts....................................... 460,941 420,138
Swap agreements................................... 110,159 51,502
Written option contracts.......................... 193,989 183,929

Market risk on purchased option contracts is limited to the market value of
the option; therefore, purchased option contracts have no off-balance-sheet
market risk.

The gross notional (or contractual) amounts of purchased option contracts
used for trading purposes are set forth below:

AS OF NOVEMBER
--------------------
1999 1998
---- ----
(IN MILLIONS)

Purchased Option Contracts
Interest rate........................................ $484,104 $509,770
Equity............................................... 114,680 59,571
Currency and commodity............................... 210,421 186,748

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

F-14
123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of derivative financial instruments used for trading
purposes, computed in accordance with the firm's netting policy, is set forth
below:

AS OF NOVEMBER
------------------------------------------------
1999 1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)

Year End
Forward settlement contracts............. $ 4,555 $ 4,625 $ 4,061 $ 4,201
Swap agreements.......................... 12,052 11,587 10,000 11,475
Option contracts......................... 14,018 12,274 7,140 9,038
------- ------- ------- -------
Total.................................... $30,625 $28,486 $21,201 $24,714
======= ======= ======= =======
Monthly Average
Forward settlement contracts............. $ 3,877 $ 3,619 $ 4,326 $ 3,979
Swap agreements.......................... 10,414 11,210 7,340 8,158
Option contracts......................... 9,249 9,707 6,696 8,958
------- ------- ------- -------
Total.................................... $23,540 $24,536 $18,362 $21,095
======= ======= ======= =======

NOTE 4/SHORT-TERM BORROWINGS

The firm obtains secured short-term financing principally through the use
of repurchase agreements and securities lending agreements, collateralized
mainly by U.S. government, federal agency, investment-grade foreign sovereign
obligations and equity securities. The firm obtains unsecured short-term
borrowings through issuance of commercial paper, promissory notes and bank
loans. The carrying value of these short-term obligations approximates fair
value due to their short-term nature.

Short-term borrowings are set forth below:

AS OF NOVEMBER
------------------
1999 1998
---- ----
(IN MILLIONS)

Commercial paper....................................... $ 9,403 $10,008
Promissory notes....................................... 11,061 10,763
Bank loans and other(1)................................ 17,292 6,659
------- -------
Total(2)............................................... $37,756 $27,430
======= =======

- ---------------

(1) As of November 1999 and November 1998, short-term borrowings included $10.82
billion and $2.96 billion, respectively, of long-term borrowings maturing
within one year.

(2) As of November 1999 and November 1998, weighted average interest rates for
short-term borrowings, including commercial paper, were 5.66% and 5.19%,
respectively.

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

F-15
124

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5/LONG-TERM BORROWINGS

The firm's long-term borrowings are set forth below:

AS OF NOVEMBER
------------------
1999 1998
---- ----
(IN MILLIONS)

Fixed Rate Obligations(1)
U.S. dollar.......................................... $ 8,236 $ 5,260
Non-U.S. dollar...................................... 1,980 2,066
Floating Rate Obligations(2)
U.S. dollar.......................................... 9,697 11,858
Non-U.S. dollar...................................... 1,039 722
------- -------
Total(3)............................................... $20,952 $19,906
======= =======

- ---------------

(1) During 1999 and 1998, interest rates on U.S. dollar fixed rate obligations
ranged from 5.56% to 12.00% and from 5.74% to 10.10%, respectively. During
1999 and 1998, non-U.S. dollar fixed rate obligations interest rates ranged
from 0.85% to 9.51% and from 1.90% to 9.51%, respectively.

(2) Floating interest rates generally are based on LIBOR, the U.S. treasury bill
rate or the federal funds rate. Certain equity-linked and indexed
instruments are included in floating rate obligations.

(3) Long-term borrowings bear fixed or floating interest rates and have
maturities that range from one to 30 years from the date of issue.

Long-term borrowings by maturity date are set forth below:

AS OF NOVEMBER
----------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
U.S. NON-U.S. U.S. NON-U.S.
DOLLAR DOLLAR TOTAL DOLLAR DOLLAR TOTAL
------ -------- ----- ------ -------- -----
(IN MILLIONS)

Maturity Dates
1999....................... $ -- $ -- $ -- $ 2,443 $ 199 $ 2,642
2000....................... 2,527 114 2,641 4,293 272 4,565
2001....................... 3,145 327 3,472 2,261 148 2,409
2002....................... 1,638 594 2,232 1,669 265 1,934
2003....................... 1,522 404 1,926 1,409 412 1,821
2004....................... 1,857 134 1,991 1,310 43 1,353
2005 - Thereafter.......... 7,244 1,446 8,690 3,733 1,449 5,182
------- ------ ------- ------- ------ -------
Total...................... $17,933 $3,019 $20,952 $17,118 $2,788 $19,906
======= ====== ======= ======= ====== =======

The firm enters into nontrading derivative contracts, such as interest rate
and currency swap agreements, to effectively convert a substantial portion of
its fixed rate long-term borrowings into U.S. dollar-based floating rate
obligations. Accordingly, the aggregate carrying value of these long-term
borrowings and related hedges approximates fair value.

F-16
125

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The effective weighted average interest rates for long-term borrowings,
after hedging activities, are set forth below:

AS OF NOVEMBER
-----------------------------------
1999 1998
---------------- ---------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
($ IN MILLIONS)

Fixed rate obligations........................ $ 650 10.17% $ 222 8.09%
Floating rate obligations..................... 20,302 6.03 19,684 5.63
------- -------
Total............................... $20,952 6.16 $19,906 5.66
======= =======

As of November 1999 and November 1998, the notional amounts of the related
swap agreements used for nontrading purposes were $12.94 billion and $10.21
billion, respectively.

The fair value and carrying value of these agreements are set forth below:

AS OF NOVEMBER
------------------------------------------------
1999 1998
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)

Fair value................................. $ 3 $159 $519 $7
Carrying value............................. 36 2 98 8

NOTE 6/COMMITMENTS AND CONTINGENCIES

LITIGATION

The firm is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
businesses. Management believes, based on currently available information, that
the results of such proceedings, in the aggregate, will not have a material
adverse effect on the firm's financial condition, but might be material to the
firm's operating results for any particular period, depending, in part, upon the
operating results for such period.

LEASES

The firm has obligations under long-term noncancelable lease agreements,
principally for office space, expiring on various dates through 2019. Certain
agreements are subject to periodic escalation charges for increases in real
estate taxes and other charges. Minimum rental commitments, net of minimum
sublease rentals, under noncancelable leases for 2000 and the succeeding four
years and thereafter

F-17
126

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and rent charged to operating expense for the last three years are set forth
below:

(IN MILLIONS)

Minimum Rental Commitments
2000.................................................... $ 203
2001.................................................... 183
2002.................................................... 182
2003.................................................... 181
2004.................................................... 154
2005 - Thereafter....................................... 836
------
Total................................................... $1,739
======
Net Rent Expense
1999.................................................... $ 154
1998.................................................... 104
1997.................................................... 87

OTHER COMMITMENTS

The firm acts as an investor in merchant banking transactions, which
includes making long-term investments in equity and debt securities in privately
negotiated transactions, corporate acquisitions and real estate transactions. In
connection with these activities, the firm had commitments to invest up to $1.09
billion and $1.39 billion in corporate and real estate merchant banking
investment funds and a bridge loan fund as of November 1999 and November 1998,
respectively.

In connection with loan origination and participation, the firm had loan
commitments of $9.38 billion and $1.51 billion as of November 1999 and November
1998, respectively. These commitments are agreements to lend to counterparties,
have fixed termination dates and are contingent on all conditions to borrowing
set forth in the contract having been met. Since these commitments may expire
unused, the total commitment amount does not necessarily reflect the actual
future cash flow requirements.

The firm also had outstanding guarantees of $575 million and $790 million
relating to its fund management activities as of November 1999 and November
1998, respectively.

The firm had pledged securities of $35.83 billion and $22.88 billion as
collateral for securities borrowed of approximately equivalent value as of
November 1999 and November 1998, respectively.

The firm had commitments to enter into repurchase and resale agreements of
$30.58 billion and $46.26 billion as of November 1999 and November 1998,
respectively.

The firm provides letters of credit issued by various banks to
counterparties in lieu of securities or cash to satisfy various collateral and
margin deposit requirements. Letters of credit outstanding were $10.30 billion
and $8.81 billion as of November 1999 and November 1998, respectively.

NOTE 7/EQUITY CAPITAL

On May 7, 1999, the firm converted from a partnership to a corporation and
completed its initial public offering. In that offering, the firm sold
51,000,000 shares of common stock. In addition, the firm completed a number of
transactions to have Group Inc. succeed to the business of The Goldman Sachs
Group, L.P. These transactions included the exchange of the partnership
interests of the participating limited partners (PLPs), retired limited
partners, Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities
Association for shares of common stock. As of November 1999, the firm had equity
of $10.15 billion.

F-18
127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Shares of nonvoting common stock are convertible into shares of common
stock on a one-for-one basis upon transfer by Sumitomo Bank Capital Markets,
Inc., the beneficial owner of such shares as of November 1999, to a third party,
and in certain other circumstances.

As of November 1998, the firm had $6.31 billion in partners' capital, which
included both the general partner's and limited partners' capital. Partners'
capital allocated for income taxes and potential withdrawals represented
management's estimate of net amounts distributable, primarily to the PLPs, under
the Partnership Agreement, for items including, among other things, income taxes
and capital withdrawals.

NOTE 8/EARNINGS PER SHARE

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

YEAR ENDED
NOVEMBER 1999
-------------
(IN MILLIONS, EXCEPT SHARE
AND PER SHARE AMOUNTS)

Numerator for basic and diluted EPS -- earnings
available to common stockholders.................... $2,708
===========
Denominator for basic EPS -- weighted average number
of common shares.................................... 475,883,756
Effect of dilutive securities
Restricted stock units.............................. 5,657,350
Stock options....................................... 4,262,854
-----------
Dilutive potential common shares...................... 9,920,204
-----------
Denominator for diluted EPS -- weighted average number
of common shares and dilutive potential common
shares.............................................. 485,803,960
===========
Basic EPS............................................. $ 5.69
Diluted EPS........................................... 5.57

NOTE 9/EMPLOYEE BENEFIT PLANS

The firm sponsors various pension plans and certain other postretirement
benefit plans, primarily healthcare and life insurance, which cover most
employees worldwide. The firm also provides certain benefits to former or
inactive employees prior to retirement. A summary of these plans is set forth
below:

DEFINED BENEFIT PENSION PLANS AND POSTRETIREMENT PLANS

The firm maintains a defined benefit pension plan for substantially all
U.S. employees. Employees of certain non-U.S. subsidiaries participate in
various local defined benefit plans. These plans generally provide benefits
based on years of credited service and a percentage of the employee's eligible
compensation. In addition, the firm has unfunded postretirement benefit plans
that provide medical and life insurance for eligible retirees, employees and
dependents in the United States.

F-19
128

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables provide a summary of the changes in the plans'
projected benefit obligations and the fair value of assets for 1999 and 1998,
and a statement of the funded status of the plans as of November 1999 and
November 1998:

NOVEMBER 1999 NOVEMBER 1998
------------------------------- -------------------------------
U.S. NON-U.S. POST- U.S. NON-U.S. POST-
PENSION PENSION RETIREMENT PENSION PENSION RETIREMENT
------- -------- ---------- ------- -------- ----------
(IN MILLIONS)

Benefit Obligation
Balance, beginning of year............. $108 $120 $ 60 $ 90 $ 77 $ 52
Service cost........................... 4 15 3 3 11 2
Interest cost.......................... 8 5 4 7 4 4
Actuarial (gain)/loss.................. (10) (4) (4) 10 30 4
Benefits paid.......................... (2) (4) (2) (2) (1) (2)
Effect of foreign exchange rates....... -- 6 -- -- (1) --
---- ---- ---- ---- ---- ----
Balance, end of year................... $108 $138 $ 61 $108 $120 $ 60
==== ==== ==== ==== ==== ====
Fair Value of Plan Assets
Balance, beginning of year............. $133 $ 75 $ -- $131 $ 56 $ --
Actual return on plan assets........... 17 11 -- 4 11 --
Firm contributions..................... -- 26 2 -- 10 3
Benefits paid.......................... (2) (4) (2) (2) (1) (3)
Effect of foreign exchange rates....... -- 2 -- -- (1) --
---- ---- ---- ---- ---- ----
Balance, end of year................... $148 $110 $ -- $133 $ 75 $ --
==== ==== ==== ==== ==== ====
Prepaid/(Accrued) Benefit Cost
Funded Status.......................... $ 40 $(28) $(61) $ 25 $(45) $(60)
Unrecognized actuarial loss............ 2 14 5 20 23 9
Unrecognized transition obligation..... (37) 23 -- (40) 22 --
Unrecognized prior service cost........ -- -- (2) -- -- (2)
---- ---- ---- ---- ---- ----
Prepaid/(accrued) benefit cost......... $ 5 $ 9 $(58) $ 5 $ -- $(53)
==== ==== ==== ==== ==== ====

For plans in which the accumulated benefit obligation exceeded plan assets,
the projected benefit obligation and aggregate accumulated benefit obligation
was $138 million and $121 million as of November 1999, respectively, and $85
million and $85 million as of November 1998, respectively. The fair value of
plan assets for these plans was $110 million and $57 million as of November 1999
and November 1998, respectively. For plans in which the accumulated benefit
obligation exceeded the fair value of plan assets, the effect of recognizing
this amount would not have been material to the consolidated statements of
financial condition or comprehensive income.

F-20
129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of pension expense/(income) and postretirement expense are
set forth below:

YEAR ENDED NOVEMBER 1999 YEAR ENDED NOVEMBER 1998
------------------------------- -------------------------------
U.S. NON-U.S. POST- U.S. NON-U.S. POST-
PENSION PENSION RETIREMENT PENSION PENSION RETIREMENT
------- -------- ---------- ------- -------- ----------
(IN MILLIONS)

Service cost........................... $ 4 $15 $3 $ 3 $11 $2
Interest cost.......................... 8 5 4 7 4 4
Expected return on plan assets......... (10) (5) -- (10) (4) --
Net amortization....................... (2) 3 -- (3) 2 --
---- --- -- ---- --- --
Total.................................. $ -- $18 $7 $ (3) $13 $6
==== === == ==== === ==

The weighted average assumptions used to develop net periodic pension cost
and the actuarial present value of the projected benefit obligation are set
forth below. The assumptions represent a weighted average of the assumptions
used for the U.S. and international plans and are based on the economic
environment of each applicable country.

YEAR ENDED NOVEMBER
--------------------
1999 1998 1997
---- ---- ----

Defined Benefit Pension Plans
U.S. Plans
Discount rate............................................. 7.5% 7.0% 7.5%
Rate of increase in future compensation levels............ 5.0 5.0 5.0
Expected long-term rate of return on plan assets.......... 7.5 7.5 7.5
International Plans
Discount rate............................................. 4.6 5.0 5.7
Rate of increase in future compensation levels............ 4.3 4.7 5.3
Expected long-term rate of return on plan assets.......... 6.0 6.0 7.0
Postretirement Plans
Discount rate............................................. 7.5 7.0 7.5
Rate of increase in future compensation levels............ 5.0 5.0 5.0

For measurement purposes, a 6.6% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for the fiscal year ending
November 2000. The rate was assumed to decrease gradually to 5.0% for the fiscal
year ending November 2008 and remain at that level thereafter.

The assumed cost of healthcare has an effect on the amounts reported for
the firm's healthcare plans. A 1% change in the assumed healthcare cost trend
rate would have the following effects:

1% INCREASE 1% DECREASE
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
(IN MILLIONS)

Cost................................................... $1 $1 $(1) $(1)
Obligation............................................. 9 9 (8) (7)

DEFINED CONTRIBUTION PLANS

The firm contributes to employer-sponsored U.S. and international defined
contribution plans. The firm's contribution to these plans was $94 million, $70
million and $68 million for 1999, 1998 and 1997, respectively.

The firm has also established a nonqualified defined contribution plan (the
Plan) for certain senior employees. Shares of common

F-21
130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock contributed to the Plan in 1999 and outstanding as of November 1999 were
12,660,685. The shares of common stock will vest and generally be distributable
to the participant on specified future dates if the participant satisfies
certain conditions and the participant's employment with the firm has not been
terminated, with certain exceptions for terminations of employment due to death
or a change in control. Dividends on the underlying shares of common stock are
paid currently to the participants. Forfeited shares remain in the Plan and are
reallocated to other participants. Contributions to the Plan are expensed on the
date of grant. Plan expense in 1999 was $674 million, including $666 million
granted in connection with the firm's initial public offering.

NOTE 10/EMPLOYEE INCENTIVE PLANS

STOCK INCENTIVE PLAN

The firm sponsors a stock incentive plan that provides for grants of
incentive stock options, nonqualified stock options, stock appreciation rights,
dividend equivalent rights, restricted stock, restricted stock units and other
stock-based awards. The stock incentive plan also permits the making of loans to
purchase shares of common stock.

The total number of shares of common stock that may be issued under the
stock incentive plan through fiscal 2002 may not exceed 300,000,000 shares and,
in each fiscal year thereafter, may not exceed 5% of the issued and outstanding
shares of common stock, determined as of the last day of the immediately
preceding fiscal year, increased by the number of shares available for awards in
previous fiscal years but not covered by awards granted in such years. As of
November 1999, 183,440,631 shares were available for grant under the stock
incentive plan.

RESTRICTED STOCK UNITS

The firm issued restricted stock units to employees in 1999 under the stock
incentive plan, primarily in connection with its initial public offering and as
part of year-end compensation. Of the total restricted stock units outstanding
as of November 1999, (i) 40,344,481 units required future service as a condition
to the delivery of the underlying shares of common stock, and (ii) 35,703,923
units did not require future service. In all cases, delivery of the underlying
shares of common stock is conditioned on the grantee's satisfying certain other
requirements outlined in the award agreements.

The activity related to these restricted stock units during 1999 is set
forth below:

RESTRICTED STOCK UNITS OUTSTANDING
-----------------------------------
NO FUTURE SERVICE FUTURE SERVICE
REQUIRED REQUIRED
----------------- --------------
(IN MILLIONS, EXCEPT UNIT AMOUNTS)

Outstanding, beginning of year....................... -- --
Granted............................................ 36,127,314 40,780,999
Forfeited.......................................... (355,177) (436,518)
Delivered.......................................... (68,214) --
----------- -----------
Outstanding, end of year............................. 35,703,923 40,344,481
=========== ===========
Noncash compensation expense, net of forfeitures..... $2,042 $273

F-22
131

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The future noncash compensation expense related to the restricted stock
units for which future service is required is set forth below:

COMPENSATION
EXPENSE
------------
(IN MILLIONS)

2000.................................................. $ 733
2001.................................................. 610
2002.................................................. 429
2003.................................................. 214
2004.................................................. 52
------
Total................................................. $2,038
======

STOCK OPTIONS

Stock options granted to employees during 1999 will generally become
exercisable in equal installments on or about the third, fourth and fifth
anniversaries of the date of grant if the grantee has satisfied certain
conditions and the grantee's employment with the firm has not been terminated,
with certain exceptions for terminations of employment due to death, retirement,
extended absence or a change in control. Once service requirements have been
met, these options will generally remain exercisable, subject to satisfaction of
certain conditions, until the tenth anniversary of the date of grant. Pursuant
to APB No. 25, compensation expense was not recognized for those options that
had no intrinsic value on the date of grant. The dilutive effect of these
options is included in diluted common shares outstanding under SFAS No. 128.

The activity of these stock options during 1999 is set forth below:

OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE REMAINING LIFE (YEARS)
----------- ---------------- ----------------------

Outstanding, beginning of
year.......................... -- $ -- --
Granted....................... 40,863,172 52.91 --
Exercised..................... -- -- --
Forfeited..................... (503,506) 53.00 --
----------
Outstanding, end of year........ 40,359,666 52.91 9.42
==========

The weighted average fair value of options granted through November 1999
was $16.13 per option. Fair value is estimated as of the grant date based on a
binomial option pricing model using the following weighted average assumptions:

Risk-free interest rate.................................... 6.1%
Expected life.............................................. 7 years
Expected volatility........................................ 30.0%
Dividend yield............................................. 1.0%

PRO FORMA EFFECT OF SFAS NO. 123

If the firm were to recognize compensation expense under the fair
value-based method of SFAS No. 123 with respect to options granted, net earnings
would have

F-23
132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

decreased resulting in pro forma net earnings and EPS as follows:

YEAR ENDED
NOVEMBER 1999
-------------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)

Net earnings, as reported....................... $2,708
Pro forma net earnings.......................... 2,650
EPS, as reported
Basic........................................... $ 5.69
Diluted......................................... 5.57
Pro forma EPS
Basic........................................... $ 5.57
Diluted......................................... 5.45

In the table above, pro forma compensation expense associated with option
grants is recognized over the relevant vesting period. The effect of applying
SFAS No. 123 in the pro forma disclosure above is not representative of the
potential pro forma effect on net earnings in future periods.

NOTE 11/INCOME TAXES

Prior to its conversion to corporate form, the firm operated as a
partnership and generally was not subject to U.S. federal and state income
taxes. The earnings of the firm, however, were subject to local unincorporated
business taxes. In addition, certain non-U.S. subsidiaries were subject to
income taxes in their local jurisdictions. The partners of the firm's
predecessor partnership were taxed on their proportionate share of the
partnership's taxable income or loss. Effective with the conversion from a
partnership to a corporation on May 7, 1999, the firm became subject to U.S.
federal, state and local corporate income taxes.

The components of the net tax (benefit)/expense reflected on the
consolidated statements of earnings are set forth below:

YEAR ENDED NOVEMBER
-----------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Current Taxes
U.S. federal............................................. $ 16 $ 16 $ 5
State and local.......................................... 67 28 87
Non-U.S. ................................................ 588 426 144
------- ---- ----
Total current tax expense...................... 671 470 236

Deferred Taxes
U.S. federal............................................. (688) -- --
State and local.......................................... (342) (3) (4)
Non-U.S. ................................................ (357) 26 36
------- ---- ----
Total deferred tax (benefit)/expense........... (1,387) 23 32
------- ---- ----
Net tax (benefit)/expense................................ $ (716) $493 $268
======= ==== ====

Deferred income taxes reflect the net tax effects of temporary differences
between the financial reporting and tax bases of assets and liabilities. These
temporary differences result in taxable or deductible amounts in future years
and are measured using the tax rates and laws that will be in effect when such
differences are expected to reverse. In

F-24
133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

connection with the conversion from a partnership to a corporation, the firm
recognized a deferred tax benefit related to the revaluation of net deferred tax
assets recorded as a partnership. Additionally, deferred tax assets were
recorded as a result of acquisitions during 1999.

Significant components of the firm's deferred tax assets and liabilities
are set forth below:

AS OF NOVEMBER
--------------
1999 1998
---- ----
(IN MILLIONS)

Deferred Tax Assets
Compensation and benefits................................... $1,397 $44
Foreign tax credits......................................... 140 --
Depreciation and amortization............................... 57 14
Other, net.................................................. 226 14
------ ---
1,820 72
Less: valuation allowance(1)................................ (83) --
------ ---
Total deferred tax assets......................... 1,737 72
------ ---
Deferred Tax Liabilities
Unrealized gains............................................ 257 33
------ ---
Total deferred tax liabilities.................... 257 33
------ ---
Net deferred tax assets..................................... $1,480 $39
====== ===

- ---------------

(1) Relates primarily to the ability to recognize tax benefits associated with
non-U.S. operations.

A reconciliation of the U.S. federal statutory income tax rate to the
firm's effective income tax rate is set forth below:

YEAR ENDED NOVEMBER
---------------------------
1999 1998(1) 1997(1)
---- ------- -------

U.S. federal statutory income tax rate.................. 35.0% --% --%
Increase related to:
State and local taxes, net of U.S. income tax effects... 5.0 0.9 2.8
Foreign................................................. -- 15.5 6.0
Other................................................... -- 0.5 0.1
----- ---- ---
Rate before one-time events............................. 40.0 16.9 8.9
Revaluation of deferred tax assets upon change in tax
status................................................ (41.4)(2) -- --
Rate benefit for partnership period..................... (37.7)(3) -- --
Other................................................... 3.2 -- --
----- ---- ---
Total tax (benefit)/expense............................. (35.9)% 16.9% 8.9%
===== ==== ===

- ---------------

(1) The U.S. federal statutory income tax rate is not applicable to 1998 or 1997
because the firm operated as a partnership and generally was not subject to
corporate federal income taxes. U.S. federal taxes paid by subsidiary
corporations are included in "Other" for 1998 and 1997.

(2) The deferred tax benefit recognized upon the firm's change in tax status
from partnership to corporate form primarily reflects the revaluation of the
deferred tax assets and liabilities at the firm's corporate income tax rate.

(3) The rate benefit for the partnership period relates to the firm's earnings
prior to its conversion to corporate form, which generally were not subject
to corporate income taxes.

F-25
134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12/REGULATED SUBSIDIARIES

GS&Co. is a registered U.S. broker-dealer subsidiary, which is subject to
the Securities and Exchange Commission's "Uniform Net Capital Rule," and has
elected to compute its net capital in accordance with the "Alternative Net
Capital Requirement" of that rule. As of November 1999 and November 1998, GS&Co.
had regulatory net capital, as defined, of $2.92 billion and $3.25 billion,
respectively, which exceeded the amounts required by $2.31 billion and $2.70
billion, respectively.

GSI, a registered U.K. broker-dealer and subsidiary of Group Inc., is
subject to the capital requirements of the Securities and Futures Authority
Limited, and GSJL, a Tokyo-based broker-dealer, is subject to the capital
requirements of the Japanese Ministry of Finance and the Financial Supervisory
Agency. As of November 1999 and November 1998, GSI and GSJL were in compliance
with their local capital adequacy requirements.

Certain other subsidiaries of the firm are also subject to capital adequacy
requirements promulgated by authorities of the countries in which they operate.
As of November 1999 and November 1998, these subsidiaries were in compliance
with their local capital adequacy requirements.

NOTE 13/BUSINESS SEGMENTS

In reporting to management, the firm's operating results are categorized
into the following two principal segments: Global Capital Markets; and Asset
Management and Securities Services.

GLOBAL CAPITAL MARKETS

The Global Capital Markets segment includes services related to the
following:

INVESTMENT BANKING. The firm provides a broad range of investment banking
services to a diverse group of corporations, financial institutions, governments
and individuals. The firm's investment banking activities are divided into two
categories:

- - FINANCIAL ADVISORY. Financial Advisory includes advisory assignments with
respect to mergers and acquisitions, divestitures, corporate defense
activities, restructurings and spin-offs; and

- - UNDERWRITING. Underwriting includes public offerings and private placements
of equity and debt securities.

TRADING AND PRINCIPAL INVESTMENTS. The firm's Trading and Principal
Investments business facilitates transactions with a diverse group of
corporations, financial institutions, governments and individuals and takes
proprietary positions through market making in and trading of fixed income and
equity products, currencies, commodities, and swaps and other derivatives.
Trading and Principal Investments is divided into three categories:

- - FICC. The firm makes markets in and trades fixed income products, currencies
and commodities, structures and enters into a wide variety of derivative
transactions, and engages in proprietary trading and arbitrage activities;

- - EQUITIES. The firm makes markets in and trades equities and equity-related
products, structures and enters into equity derivative transactions, and
engages in proprietary trading and equity arbitrage; and

- - PRINCIPAL INVESTMENTS. Principal Investments primarily represents net
revenues from the firm's merchant banking investments.

ASSET MANAGEMENT AND SECURITIES SERVICES

The Asset Management and Securities Services segment includes services
related to the following:

- - ASSET MANAGEMENT. Asset Management generates management fees by providing
investment advisory services to a diverse client base of institutions and
individuals;

- - SECURITIES SERVICES. Securities Services includes prime brokerage, financing
ser-

F-26
135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

vices and securities lending and the firm's matched book businesses, all of
which generate revenue primarily in the form of fees or interest rate spreads;
and

- - COMMISSIONS. Commissions include agency transactions for clients on major
stock and futures exchanges and revenues from the increased share of the
income and gains derived from the firm's merchant banking funds.

BASIS OF PRESENTATION

In reporting segments, certain of the firm's business lines have been
aggregated where they have similar economic characteristics and are similar in
each of the following areas: (i) the nature of the services they provide, (ii)
their methods of distribution, (iii) the types of clients they serve and (iv)
the regulatory environments in which they operate.

The firm allocates revenues and expenses between the two segments. Due to
the integrated nature of the business segments, estimates and judgments have
been made in allocating certain revenue and expense items. Transactions between
segments are based on specific criteria or approximate third-party rates. Total
operating expenses include corporate items that have not been allocated to
either business segment. The allocation process is based on the manner in which
management views the business of the firm.

The segment information presented in the table below is prepared according
to the following methodologies:

- - Revenues and expenses directly associated with each segment are included in
determining pre-tax earnings.

- - Net revenues in the firm's segments include allocations of interest income and
expense to specific securities, commodities and other positions in relation to
the cash generated by, or funding requirements of, the underlying positions.
Net interest is allocated to the Trading and Principal Investments component
of Global Capital Markets and the Securities Services component of Asset
Management and Securities Services. Net interest is included within segment
net revenues as it is consistent with the way in which management assesses
segment performance.

- - Overhead expenses not directly allocable to specific segments are allocated
ratably based on direct segment expenses.

- - The nonrecurring expenses associated with the firm's conversion to corporate
form and related transactions are not allocated to individual segments as
management excludes them in evaluating segment performance.

F-27
136

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEGMENT OPERATING RESULTS

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

YEAR ENDED NOVEMBER
--------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Global Capital Markets
Net revenues(1)............................... $ 10,132 $ 5,747 $ 5,513
Operating expenses(2)......................... 6,232 3,978 3,228
-------- -------- --------
Pre-tax earnings(3)........................... $ 3,900 $ 1,769 $ 2,285
======== ======== ========
Segment assets................................ $127,515 $102,724 $ 99,974
======== ======== ========
Asset Management and Securities Services
Net revenues(1)............................... $ 3,213 $ 2,773 $ 1,934
Operating expenses(2)......................... 2,396 1,621 1,205
-------- -------- --------
Pre-tax earnings(3)........................... $ 817 $ 1,152 $ 729
======== ======== ========
Segment assets................................ $121,693 $114,293 $ 78,193
======== ======== ========
Total
Net revenues(1)............................... $ 13,345 $ 8,520 $ 7,447
Operating expenses(2)......................... 11,353(5) 5,599 4,433
-------- -------- --------
Pre-tax earnings.............................. $ 1,992 $ 2,921 $ 3,014
======== ======== ========
Total assets(4)............................... $250,491 $217,380 $178,401
======== ======== ========

- ---------------

(1) Net revenues include net interest as set forth in the table below:

YEAR ENDED NOVEMBER
------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Global Capital Markets...................................... $ 15 $ 364 $ 623
Asset Management and Securities Services.................... 689 688 478
---- ------ ------
Total net interest.......................................... $704 $1,052 $1,101
==== ====== ======

(2) Operating expenses include depreciation and amortization as set forth in the
table below:

YEAR ENDED NOVEMBER
------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Global Capital Markets...................................... $228 $ 158 $ 119
Asset Management and Securities Services.................... 109 84 59
---- ------ ------
Total depreciation and amortization......................... $337 $ 242 $ 178
==== ====== ======

(3) The pre-tax earnings of the firm's segments in 1999 reflect payments for
services rendered by managing directors who, prior to the firm's conversion
to corporate form, were profit participating limited partners. In prior
years, these payments were accounted for as distributions of partners'
capital rather than as compensation and benefits expense. As a result, these
payments are not reflected in the operating expenses of the firm's segments
in 1998 and 1997 and, therefore, the pre-tax earnings of the firm's segments
in these years are not comparable with 1999.

(4) Includes deferred tax assets relating to the firm's conversion to corporate
form and certain other assets that management believes are not allocable to
a particular segment.

(5) Includes the following expenses that have not been allocated to the firm's
segments: (i) nonrecurring employee initial public offering awards of $2.26
billion, (ii) the ongoing amortization of employee initial public offering
awards of $268 million and (iii) the charitable contribution to The Goldman
Sachs Foundation of $200 million made at the time of the firm's initial
public offering.

F-28
137

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the net revenues of the firm's two segments:

YEAR ENDED NOVEMBER
---------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Financial Advisory.................................... $ 2,270 $1,774 $1,184
Underwriting.......................................... 2,089 1,594 1,403
------- ------ ------
Investment Banking.................................... 4,359 3,368 2,587
------- ------ ------
FICC.................................................. 2,862 1,438 2,055
Equities.............................................. 1,961 795 573
Principal Investments................................. 950 146 298
------- ------ ------
Trading and Principal Investments..................... 5,773 2,379 2,926
------- ------ ------
Total Global Capital Markets.......................... 10,132 5,747 5,513
------- ------ ------
Asset Management...................................... 919 675 458
Securities Services................................... 772 730 487
Commissions........................................... 1,522 1,368 989
------- ------ ------
Total Asset Management and Securities Services........ 3,213 2,773 1,934
------- ------ ------
Total net revenues.................................... $13,345 $8,520 $7,447
======= ====== ======

GEOGRAPHIC INFORMATION

Due to the highly integrated nature of international financial markets, the
firm manages its businesses based on the profitability of the enterprise as a
whole. Accordingly, management believes that profitability by geographic region
is not necessarily meaningful.

The firm's revenues, expenses and identifiable assets are generally
allocated based on the country of domicile of the legal entity providing the
service.

F-29
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the total net revenues, pre-tax earnings,
and identifiable assets of the firm and its consolidated subsidiaries by
geographic region allocated on the basis described above:

YEAR ENDED NOVEMBER
-------------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)

Net Revenues
United States.............................. $ 8,536 $ 5,133 $ 4,724
Other Americas............................. 327 308 379
United Kingdom............................. 3,103 1,893 1,570
Other Europe............................... 375 333 190
Asia....................................... 1,004 853 584
--------- --------- ---------
Total net revenues......................... $ 13,345 $ 8,520 $ 7,447
========= ========= =========
Pre-tax Earnings(1)
United States.............................. $ 2,878 $ 1,315 $ 1,737
Other Americas............................. 184 209 302
United Kingdom............................. 1,203 746 625
Other Europe............................... 198 216 89
Asia....................................... 254 435 261
Other...................................... (2,725)(3) -- --
--------- --------- ---------
Total pre-tax earnings..................... $ 1,992 $ 2,921 $ 3,014
========= ========= =========
Identifiable Assets
United States.............................. $ 238,875 $ 213,971 $ 189,622
Other Americas............................. 6,118 6,596 8,512
United Kingdom............................. 119,350 94,025 69,260
Other Europe............................... 11,737 8,820 7,555
Asia....................................... 18,088 19,536 13,085
Eliminations and other(2).................. (143,677) (125,568) (109,633)
--------- --------- ---------
Total identifiable assets.................. $ 250,491 $ 217,380 $ 178,401
========= ========= =========

- ---------------

(1) The pre-tax earnings of the firm in 1999 reflect payments for services
rendered by managing directors who, prior to the firm's conversion to
corporate form, were profit participating limited partners. In prior years,
these payments were accounted for as distributions of partners' capital
rather than as compensation and benefits expense. As a result, these
payments are not reflected in the firm's operating expenses in 1998 and 1997
and, therefore, the pre-tax earnings in these years are not comparable with
1999.

(2) Reflects eliminations and certain assets that are not allocable to a
particular geographic region.

(3) Includes the following expenses that have not been allocated to the firm's
geographic regions: (i) nonrecurring employee initial public offering awards
of $2.26 billion, (ii) the ongoing amortization of employee initial public
offering awards of $268 million and (iii) the charitable contribution to The
Goldman Sachs Foundation of $200 million made at the time of the firm's
initial public offering.

NOTE 14/SUBSEQUENT EVENTS

On December 20, 1999, the Board of Directors of Group Inc. declared a
dividend of $0.12 per share to be paid on February 24, 2000 to voting and
nonvoting common shareholders of record on January 24, 2000.

F-30
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SUPPLEMENTAL FINANCIAL INFORMATION

QUARTERLY RESULTS (UNAUDITED)

The following represents the firm's unaudited quarterly results for 1999
and 1998. These quarterly results conform with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments, that are, in the opinion of management, necessary for a fair
presentation of the results.

1999 FISCAL QUARTER
---------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)

Total revenues............................ $5,856 $ 6,355 $6,440 $6,712
Interest expense.......................... 2,861 2,886 3,032 3,239
------ ------- ------ ------
Revenues, net of interest expense......... 2,995 3,469 3,408 3,473
Operating expenses........................ 1,807 4,956 2,326 2,264
------ ------- ------ ------
Pre-tax earnings/(loss)................... 1,188 (1,487)(1) 1,082 1,209
Provision/(benefit) for taxes............. 181 (1,827)(2) 444 486
------ ------- ------ ------
Net earnings............................ $1,007 $ 340 $ 638 $ 723
====== ======= ====== ======
Earnings per share
Basic................................... -- $ 0.72 $ 1.34 $ 1.51
Diluted................................. -- 0.71 1.32 1.48
Dividends paid per share.................. -- -- 0.12 0.12

- ---------------

(1) Includes nonrecurring expenses of $2.26 billion associated with the firm's
conversion to corporate form and the firm's charitable contribution to The
Goldman Sachs Foundation of $200 million made at the time of the firm's
initial public offering.

(2) Includes a net tax benefit of $825 million related to the firm's conversion
to corporate form, a benefit of $880 million related to the granting of
employee initial public offering awards and a benefit of $80 million related
to the charitable contribution to The Goldman Sachs Foundation.

1998 FISCAL QUARTER
------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
(IN MILLIONS)

Total revenues............................... $5,903 $6,563 $5,735 $4,277
Interest expense............................. 3,431 3,574 3,591 3,362
------ ------ ------ ------
Revenues, net of interest expense............ 2,472 2,989 2,144 915
Operating expenses........................... 1,450 1,952 1,389 808
------ ------ ------ ------
Pre-tax earnings............................. 1,022 1,037 755 107
Provision for taxes.......................... 138 190 102 63
------ ------ ------ ------
Net earnings............................... $ 884 $ 847 $ 653 $ 44
====== ====== ====== ======

F-31
140

PLAN OF DISTRIBUTION

Goldman, Sachs & Co., a subsidiary of The Goldman Sachs Group, Inc., will
use this prospectus in connection with offers and sales of the notes in
market-making transactions from time to time. These transactions may occur in
the open market or may be privately negotiated, at prices related to prevailing
market prices at the time of sale or at negotiated prices. In these
transactions, Goldman, Sachs & Co. may act as principal or agent, including as
agent for the counterparty in a transaction in which Goldman, Sachs & Co. acts
as principal or as agent for both counterparties in a transaction in which
Goldman, Sachs & Co. does not act as principal. Goldman, Sachs & Co. may receive
compensation in the form of discounts and commissions, including from both
counterparties in some transactions.

Other affiliates of The Goldman Sachs Group, Inc. may also engage in
transactions of this kind and may use this prospectus for this purpose. Neither
Goldman, Sachs & Co. nor any other affiliate of The Goldman Sachs Group, Inc.,
however, is obligated to make a market in the notes and may stop doing so at any
time without notice.

The Goldman Sachs Group, Inc. does not expect to receive the proceeds from
market-making transactions. The Goldman Sachs Group, Inc. does not expect
Goldman, Sachs & Co. or any other affiliate that engages in these transactions
to pay the proceeds from their market-making resales to The Goldman Sachs Group,
Inc.

Goldman, Sachs & Co. does not expect the amount of notes held, as a result
of market-making resales, by accounts over which it exercises discretionary
authority to exceed, at any time, five percent of the aggregate initial offering
price of the notes.

The initial public offering price of the notes when originally issued was
99.779% of their par value. Goldman, Sachs & Co. acted as the lead underwriter
in connection with the original offering and sale of the notes and received
underwriting compensation in the form of a discount totaling $6,339,000.

In this prospectus the term "offering" means the initial offering of the
notes, which occurred in connection with their original issuance on May 19,
1999. This term does not refer to any subsequent resale of the notes by Goldman,
Sachs & Co. or other affiliates in market-making transactions.

P-1
141

GENERAL INFORMATION

The board of directors of The Goldman Sachs Group, Inc. authorized the
issuance of the notes by a resolution dated March 29, 1999.

Euroclear and Clearstream have accepted the notes for clearance through
their systems. The Common Code for the notes is 9761284, the International
Security Identification Number (ISIN) for the notes is US38141GAA22 and the
CUSIP number for the notes is 38141G AA 2.

The notes are listed on the Luxembourg Stock Exchange. Prior to the
listing, a legal notice relating to the notes with The Goldman Sachs Group,
Inc.'s certificate of incorporation and by-laws was registered with the Greffier
en Chef du Tribunal d'Arrondissement de et a Luxembourg, where copies may be
obtained upon request.

As long as the notes are listed on the Luxembourg Stock Exchange, The
Goldman Sachs Group, Inc. will maintain a paying agent in Luxembourg. The
initial paying agent and listing agent in Luxembourg is Banque Internationale a
Luxembourg.

As long as any notes remain outstanding, you may obtain copies of our
certificate of incorporation, by-laws and most recent annual report on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K during
normal business hours on any weekday (except Saturdays, Sundays and public
holidays) at the specified office of, or upon written request to, the trustee
and, as long as the notes are listed on the Luxembourg Stock Exchange and its
rules require, free of charge at the office of the listing agent in Luxembourg.
In addition, a copy of the indenture will be available for inspection at those
offices during those hours.

The Goldman Sachs Group, Inc. has taken all reasonable care to ensure that
the information with regard to Goldman Sachs and the notes stated in this
prospectus is true and accurate in all material respects as of the date of this
prospectus and that there are no other material facts the omission of which
would make the information contained in this prospectus as of its date
misleading in any material respect, and The Goldman Sachs Group, Inc. accepts
responsibility accordingly.

Since November 26, 1999 to the date of this prospectus there has been no
material change in our capitalization as set forth above in the table under
"Capitalization", other than as indicated in or contemplated by this prospectus.

As of the date of this prospectus and except as indicated in or
contemplated by this prospectus, there has been no material adverse change in
the financial position of Goldman Sachs as set forth in its financial statements
included in this prospectus since the date of those financial statements.

Various legal actions and proceedings involving Goldman Sachs are currently
pending. Management does not anticipate that any losses resulting from those
actions and proceedings would be material with respect to Goldman Sachs.

P-2
142

PRINCIPAL EXECUTIVE OFFICE OF THE ISSUER

The Goldman Sachs Group, Inc.
85 Broad Street
New York, New York 10004

TRUSTEE, REGISTRAR, TRANSFER AGENT AND PRINCIPAL PAYING AGENT

The Bank of New York
101 Barclay Street
New York, New York 10286

LISTING AGENT, TRANSFER AGENT AND PAYING AGENT IN LUXEMBOURG

Banque Internationale a Luxembourg
69, route d'Esch
L-1470 Luxembourg

LEGAL ADVISORS

TO THE ISSUER TO THE UNDERWRITERS

Sullivan & Cromwell Cleary, Gottlieb, Steen & Hamilton
125 Broad Street One Liberty Plaza
New York, New York 10004 New York, New York 10006

INDEPENDENT AUDITORS
FOR THE ISSUER

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
143

- -------------------------------------------------------
- -------------------------------------------------------

No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell or a solicitation of an offer to buy the securities it
describes, but only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only as of its
date.

------------------

TABLE OF CONTENTS

Page
----

Our Business Principles............... 2
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 21
Capitalization........................ 22
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 49
Management............................ 66
Principal Shareholders................ 79
Certain Relationships and Related
Transactions........................ 82
Description of the Notes Being
Offered............................. 87
United States Taxation................ 103
Employee Retirement Income Security
Act................................. 106
Validity of the Notes................. 106
Experts............................... 106
Available Information................. 107
Cautionary Statement Pursuant to the
Private Securities Litigation Reform
Act of 1995......................... 107
Index to Consolidated Financial
Statements.......................... F-1
Plan of Distribution.................. P-1
General Information................... P-2

- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------

THE GOLDMAN SACHS
GROUP, INC.

6.65% Notes due 2009

------------------

[GOLDMAN SACHS LOGO]

------------------

GOLDMAN, SACHS & CO.

-------------------------------------------------------

-------------------------------------------------------
144

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following is a statement of the expenses (all of which are estimated
other than the SEC registration fee and the NASD fees), other than underwriting
discounts and commissions, to be incurred by the registrant in connection with
the distribution of the securities registered under this registration statement:

AMOUNT
TO BE PAID
-----------

SEC registration fee........................................ $ 417,000
NASD fees................................................... 30,500
Legal fees and expenses..................................... 700,000
Listing fees................................................ 8,400
Fees and expenses of qualification under state securities
laws (including legal fees)............................... 10,000
Accounting fees and expenses................................ 700,000
Printing fees............................................... 900,000
Rating agency fees.......................................... 15,000
Trustee's fees and expenses................................. 10,000
Miscellaneous............................................... 709,100
-----------
Total.................................................. $ 3,500,000
===========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee of or agent to the registrant. The
statute provides that it is not exclusive of other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise. Section 6.4 of the
registrant's by-laws provides for indemnification by the registrant of any
director or officer (as such term is defined in the by-laws) of the registrant
who is or was a director of any of its subsidiaries, is or was a member of the
Shareholders' Committee (as defined in the prospectus included in this
registration statement) acting pursuant to the shareholders' agreement (as
defined in the prospectus included in this registration statement) or, at the
request of the registrant, is or was serving as a director or officer of, or in
any other capacity for, any other enterprise, to the fullest extent permitted by
law. The by-laws also provide that the registrant shall advance expenses to a
director or officer and, if reimbursement of such expenses is demanded in
advance of the final disposition of the matter with respect to which such demand
is being made, upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it is ultimately determined that the director
or officer is not entitled to be indemnified by the registrant. To the extent
authorized from time to time by the board of directors of the registrant, the
registrant may provide to any one or more employees of the registrant, one or
more officers, employees and other agents of any subsidiary or one or more
directors, officers, employees and other agents of any other enterprise, rights
of indemnification and to receive payment or reimbursement of expenses,
including attorneys' fees, that are similar

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145

to the rights conferred in the by-laws of the registrant on directors and
officers of the registrant or any subsidiary or other enterprise. The by-laws do
not limit the power of the registrant or its board of directors to provide other
indemnification and expense reimbursement rights to directors, officers,
employees, agents and other persons otherwise than pursuant to the by-laws. The
registrant has entered into agreements with certain directors, officers and
employees who are asked to serve in specified capacities at subsidiaries and
other entities.

The registrant has entered into an agreement that provides indemnification
to its directors and officers and to the directors and certain officers of the
general partner of The Goldman Sachs Group, L.P., members of its Management
Committee or its Partnership Committee or the former Executive Committee of The
Goldman Sachs Group, L.P. and all other persons requested or authorized by the
registrant's board of directors or the board of directors of the general partner
of The Goldman Sachs Group, L.P. to take actions on behalf of the registrant,
The Goldman Sachs Group, L.P. or the general partner of The Goldman Sachs Group,
L.P. in connection with the plan of incorporation, this registration statement
and certain other registration statements for all losses, damages, costs and
expenses incurred by the indemnified person arising out of the relevant
registration statements or the transactions contemplated by the plan of
incorporation. The registrant has also entered into a similar indemnification
agreement with its directors, some of its officers and all other persons
requested or authorized by the registrant's board of directors or any committee
thereof to take actions on behalf of the registrant in connection with certain
other registration statements. These agreements are in addition to the
registrant's indemnification obligations under its by-laws. These agreements are
in addition to the registrant's indemnification obligations under its by-laws.

Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The registrant's amended and restated certificate of incorporation
provides for such limitation of liability.

Policies of insurance are maintained by the registrant under which its
directors and officers are insured, within the limits and subject to the
limitations of the policies, against certain expenses in connection with the
defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.

Reference is also made to Section 9 of the underwriting agreement filed as
Exhibit 1.1 to the registration statement for information concerning the
underwriters' obligation to indemnify the registrant and its officers and
directors in certain circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In connection with its conversion to corporate form, the registrant issued:
(i) 265,019,073 shares of the registrant's common stock, par value $0.01 per
share, to certain managing directors who were profit participating limited
partners of The Goldman Sachs Group, L.P. in exchange for all of these managing
directors' interests in The Goldman Sachs Group, L.P. and certain other
affiliates; (ii) 47,270,551 shares of common stock and $295 million principal
amount of 12% junior subordinated debentures of the registrant to certain
retired limited partners of The Goldman Sachs Group, L.P. in exchange for all of
such limited partners' interests in The Goldman Sachs Group, L.P. and certain
other affiliates; (iii) 30,425,052 shares of common stock and 7,440,362 shares
of the registrant's nonvoting common stock, par value $0.01 per share, to

II-2
146

Sumitomo Bank Capital Markets, Inc. in exchange for its interests in The Goldman
Sachs Group, L.P. and Goldman, Sachs & Co.; and (iv) 30,975,421 shares of common
stock to Kamehameha Activities Association in exchange for its interests in The
Goldman Sachs Group, L.P. Also, simultaneously with its conversion to corporate
form on May 7, 1999, the registrant made awards of restricted stock units and/or
stock options to substantially all of its employees and made an irrevocable
contribution of shares of common stock to a nonqualified defined contribution
plan. The offering and sale of the shares of common stock, junior subordinated
debentures and nonvoting common stock to the managing directors who were profit
participating limited partners, retired limited partners, Sumitomo Bank Capital
Markets, Inc. and Kamehameha Activities Association were not registered under
the Securities Act of 1933, because the offering and sale (i) was made in
reliance on the exemption provided by Section 4(2) of the Securities Act of 1933
and Rule 506 thereunder for transactions by an issuer not involving a public
offering (with the recipients representing their intentions to acquire the
securities for their own accounts and not with a view to the distribution
thereof and acknowledging that the securities were issued in a transaction not
registered under the Securities Act of 1933) or (ii) were made outside the
United States pursuant to Regulation S under the Securities Act of 1933 to
persons who were not citizens or residents of the United States. The foregoing
employee awards and contribution of common stock were not registered under the
Securities Act of 1933 because the awards and contribution either did not
involve an offer or sale for purposes of Section 2(a)(3) of the Securities Act
of 1933, in reliance on the fact that the awards were made to a relatively broad
class of employees who provided no consideration in exchange for their awards,
or were offered and sold in transactions not involving a public offering, exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2) and
in compliance with Rule 506 thereunder.

On April 13, 1999, the registrant entered into an arrangement with a group
of 10 employees pursuant to which a portion of a performance-based bonus that is
payable to such employees in 2002 will be paid in shares of common stock of the
registrant valued at $53.00 per share. Under this arrangement, up to 386,500
shares of common stock may be issued. The offering and sale of these 386,500
shares of common stock was made pursuant to Rule 701 under the Securities Act of
1933.

On September 24, 1999, the registrant issued 4,024,637 shares of common
stock in connection with its acquisition of The Hull Group, Inc. These shares
were issued in a transaction not involving a public offering in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506
thereunder for transactions by an issuer not involving a public offering (with
the recipients representing their intentions to acquire the shares for their own
accounts and not with a view to the distribution thereof and acknowledging that
the shares were issued in a transaction not registered under the Securities Act
of 1933).

During the period from May 7, 1999 to February 11, 2000 the registrant
issued a series of $1 billion aggregate principal amount of Medium-Term Notes,
Series A, with a thirteen-month final maturity, exchangeable monthly for a new
like security. This series was issued in a transaction not involving a public
offering in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933 and Rule 506 thereunder for transactions by an issuer not
involving a public offering (with the purchasers representing their intentions
to acquire the notes for their own accounts and not with a view to the
distribution thereof and acknowledging that the notes were not registered under
the Securities Act of 1933). Goldman, Sachs & Co. acted as the sole placement
agent for this offering.

During the period from May 7, 1999 to February 11, 2000, the registrant
issued its Euro Medium-Term Notes, Series C, with maturities ranging from 12
months to 180 months, in an aggregate face or principal amount equivalent to
$547 million (including certain of those notes which were not denominated in
U.S. dollars). All of these notes were offered and sold outside the United
States pursuant to Regulation S under the Securities Act of 1933 to persons who

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147

were not citizens or residents of the United States. Goldman Sachs International
acted as the sole placement agent for these offerings.

During the period from May 7, 1999 to February 11, 2000, the registrant
issued its debt securities (other than its Euro Medium-Term Notes, Series C,
referred to above), with a maturity of 60 months, in an aggregate principal
amount equivalent to $229.6 million (those debt securities were denominated in
Japanese yen). All of those debt securities were offered and sold outside the
United States pursuant to Regulation S under the Securities Act of 1933 to
persons who were not citizens or residents of the United States. Goldman Sachs
International, Nomura International and Norinchukin International plc acted as
placement agents for that offering.

During the period from May 7, 1999 to February 11, 2000, the registrant
issued its Medium-Term Notes, Series C, with maturities of 12 months, in an
aggregate face or principal amount equivalent to $42.8 million. All of these
notes were issued in transactions not involving a public offering in reliance
upon the exemption provided by Rule 144A under the Securities Act of 1933.
Goldman, Sachs & Co. acted as the sole placement agent for these offerings.

During the period from May 7, 1999 to February 11, 2000, the registrant
issued an aggregate principal amount of $5.3 billion of extendable commercial
notes. These notes have an initial maturity of not more than 90 days and bear
commercial paper interest rates during that period. They are extendable at the
registrant's option to a total maturity of 13 months and bear interest at a
floating rate depending on the registrant's credit rating during the extension
period. These notes were issued in a transaction not involving a public offering
in reliance upon the exemption provided by Section 4(2) of the Securities Act of
1933. Goldman Sachs & Co. acted as the sole placement agent for these offerings.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

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148

10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P., as
amended.*
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.*
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and The Goldman Sachs Group, L.P.*
10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) Goldman Sachs
International, (iii) Restamove Limited, (iv) The Goldman
Sachs Group, L.P. and (v) Itochu Corporation.*
10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998,
among (i) JC No. 3 (UK) Limited and Fleet Street Square
Management Limited trading as Fleet Street Partnership, (ii)
Goldman Sachs International, (iii) Restamove Limited, (iv)
The Goldman Sachs Group, L.P. and (v) Itochu Corporation
(Form of Occupational Lease among (i) JC No. 3 (UK) Limited
and Fleet Street Square Management Limited trading as Fleet
Street Partnership, (ii) Goldman Sachs International and
(iii) The Goldman Sachs Group, L.P.).*
10.7 Agreement relating to Developer's Fit Out Works to be
carried out at 120 Fleet Street, London, dated April 2,
1998, among (i) JC No. 3 (UK) Limited and Fleet Street
Square Management Limited, (ii) Goldman Sachs Property
Management, (iii) Itochu Corporation and (iv) The Goldman
Sachs Group, L.P.*
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, Goldman
Sachs International, The Goldman Sachs Group, L.P., English
Property Corporation plc and MEPC plc.*
10.9 Fit Out Works Agreement relating to One Carter Lane, London
EC4, dated March 25, 1998, among Britel Fund Trustees
Limited, Goldman Sachs International, Goldman Sachs Property
Management, The Goldman Sachs Group, L.P., English Property
Corporation plc and MEPC plc.*
10.10 Underlease of premises known as One Carter Lane, London EC4,
dated September 9, 1998, among Britel Fund Trustees Limited,
Goldman Sachs International and The Goldman Sachs Group,
L.P.*
10.11 Lease, dated March 5, 1994, among Shine Hill Development
Limited, Shine Belt Limited, Fair Page Limited, Panhy
Limited, Maple Court Limited and Goldman Sachs (Asia)
Finance, as amended.*
10.12 Guarantee, dated November 17, 1993, between Shine Hill
Development Limited and The Goldman Sachs Group, L.P.*
10.13 Agreement for Lease, dated November 29, 1998, between Turbo
Top Limited and Goldman Sachs (Asia) Finance.*
10.14 Summary of Tokyo Leases.*
10.15 The Goldman Sachs 1999 Stock Incentive Plan.**
10.16 The Goldman Sachs Defined Contribution Plan.**
10.17 Letter Agreement with Mr. John L. Weinberg.*
10.18 The Goldman Sachs Partner Compensation Plan.**
10.19 Form of Employment Agreement.**
10.20 Form of Agreement Relating to Noncompetition and Other
Covenants.**
10.21 Form of Pledge Agreement.**
10.22 Form of Award Agreement (Formula RSUs).**

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149

10.23 Form of Award Agreement (Discretionary RSUs).**
10.24 Form of Option Agreement (Discretionary Options).**
10.25 Tax Indemnification Agreement, dated as of May 7, 1999, by and among The Goldman Sachs Group, Inc. and
various parties.**
10.26 Form of Shareholders' Agreement among The Goldman Sachs Group, Inc. and various parties.
10.27 Instrument of Indemnification.**
10.28 Form of Indemnification Agreement.
10.29 Subscription Agreement, dated as of April 24, 1992, among the Trustees of the Estate of Bernice Pauahi
Bishop, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc. and The Goldman Sachs Group,
L.P.*
10.30 Subscription Agreement, dated as of November 21, 1994, among the Trustees of the Estate of Bernice Pauahi
Bishop, Pauahi Holdings Corporation, Royal Hawaiian Shopping Center, Inc. and The Goldman Sachs Group,
L.P.*
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha Activities Association and The Goldman Sachs
Group, L.P. (the "Kamehameha Letter Agreement").*
10.32 Amended and Restated Subscription Agreement, dated March 28, 1989, among The Sumitomo Bank, Limited,
Sumitomo Bank Capital Markets, Inc., Goldman, Sachs & Co. and The Goldman Sachs Group, L.P.*
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo Bank, Limited, Sumitomo Bank Capital Markets,
Inc. and The Goldman Sachs Group, L.P. (the "Sumitomo Letter Agreement").*
10.34 Lease, dated September 24, 1992, from LDT Partners to Goldman Sachs International.*
10.35 Amendment to Kamehameha Letter Agreement (filed as Exhibit 10.31), dated April 30, 1999, among Kamehameha
Activities Association, the Trustees of the Estate of Bernice Pauahi Bishop, The Goldman Sachs Group, L.P.
and The Goldman Sachs Group, Inc.**
10.36 Amendment to Sumitomo Letter Agreement (filed as Exhibit 10.33), dated April 30, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc., The Goldman Sachs Group, L.P., The Goldman Sachs
Group, Inc. and Goldman, Sachs & Co.**
10.37 Voting Agreement, dated as of April 30, 1999, by and among The Goldman Sachs Group, Inc., on the one hand,
and The Trustees of the Estate of Bernice Pauahi Bishop and Kamehameha Activities Association, on the
other hand.**
10.38 Voting Agreement, dated as of April 30, 1999, by and among The Goldman Sachs Group, Inc., on the one hand,
and The Sumitomo Bank, Limited, and Sumitomo Bank Capital Markets, Inc., on the other hand.**
10.39 Letter Agreement, dated August 18, 1999, between The Goldman Sachs Group, Inc. and Mr. James A. Johnson
(incorporated by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 27, 1999).
10.40 Letter Agreement, dated August 18, 1999, between The Goldman Sachs Group, Inc. and Sir John Browne
(incorporated by reference to Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended August 27, 1999).
10.41 Letter Agreement, dated November 9, 1999, between The Goldman Sachs Group, Inc. and Mr. John H. Bryan
(incorporated by reference to Exhibit 10.42 to the registrant's registration statement on Form S-1 (No.
333-90677)).
10.42 Registration Rights Instrument, dated as of December 10, 1999 (incorporated by reference to Exhibit G to
Amendment No. 1 to Schedule 13D, filed December 17, 1999, relating to the registrant's common stock).

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10.43 Supplemental Registration Rights Instrument, dated as of
December 10, 1999 (incorporated by reference to Exhibit H to
Amendment No. 1 to Schedule 13D, filed December 17, 1999,
relating to the registrant's common stock).
10.44 Form of Indemnification Agreement.
10.45 Letter Agreement, dated January 21, 2000, between the
Goldman Sachs Group, Inc. and Dr. Ruth J. Simmons
(incorporated by reference to Exhibit 10.45 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
12.1 Statement re computation of ratios of earnings to fixed
charges (incorporated by reference to Exhibit 12.1 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
21.1 List of subsidiaries of The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 21.1 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibits 5.1 and
8.1 above).**
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee.**

- ---------------

* Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-74449).

** Previously filed.

(b) FINANCIAL STATEMENT SCHEDULES

Condensed financial information of The Goldman Sachs Group, Inc. and report
of PricewaterhouseCoopers LLP thereon.

ITEM 17. UNDERTAKINGS

(A) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-7
151

(B) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(C) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

II-8
152

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Post-Effective Amendment No. 1 to the registration
statement (No. 333-75213) to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, New York on the 11th day of
February, 2000.

THE GOLDMAN SACHS GROUP, INC.

By: /s/ DAVID A. VINIAR

------------------------------------

Name: David A. Viniar

Title: Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John A. Thain, Robert J. Katz, Gregory K.
Palm and David A. Viniar and each of them severally, his or her true and lawful
attorney-in-fact with power of substitution and resubstitution to sign in his or
her name, place and stead, in any and all capacities, to do any and all things
and execute any and all instruments that such attorney may deem necessary or
advisable under the Securities Act of 1933 (the "Securities Act"), and any
rules, regulations and requirements of the U.S. Securities and Exchange
Commission (the "Commission") in connection with the registration under the
Securities Act of the debt securities of the registrant, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign his or her name in his or her respective capacity as a member of the Board
of Directors or officer of the registrant, this registration statement and/or
such other form or forms as may be appropriate to be filed with the Commission
as any of them may deem appropriate in respect of the debt securities of the
registrant, to any and all amendments thereto (including post-effective
amendments) to this registration statement, to any related Rule 462(b)
registration statement and to any other documents filed with the Commission, as
fully for all intents and purposes as he or she might or could do in person, and
hereby ratifies and confirms all said attorneys-in-fact and agents, each acting
alone, and his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the registration statement (No. 333-75213) has
been signed by the following persons in the capacities indicated on the 11th day
of February, 2000:

TITLE SIGNATURE
----- ---------

Director, Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) /s/ HENRY M. PAULSON, JR.
----------------------------------------------
Henry M. Paulson, Jr.

Director and Vice Chairman /s/ ROBERT J. HURST
----------------------------------------------
Robert J. Hurst

Director, President and Co-Chief Operating Officer /s/ JOHN A. THAIN
----------------------------------------------
John A. Thain

II-9
153

TITLE SIGNATURE
----- ---------

Director, President and Co-Chief Operating
Officer /s/ JOHN L. THORNTON
----------------------------------------------
John L. Thornton

Director
----------------------------------------------
Sir John Browne

Director
----------------------------------------------
John H. Bryan

Director
----------------------------------------------
James A. Johnson

Director
----------------------------------------------
Ruth J. Simmons

Director /s/ JOHN L. WEINBERG
----------------------------------------------
John L. Weinberg

Chief Financial Officer
(Principal Financial Officer) /s/ DAVID A. VINIAR
----------------------------------------------
David A. Viniar

Principal Accounting Officer /s/ SARAH G. SMITH
----------------------------------------------
Sarah G. Smith

II-10
154

REPORT OF INDEPENDENT ACCOUNTANTS

To the Directors and Shareholders,

The Goldman Sachs Group, Inc.:

Our audits of the consolidated financial statements referred to in our
report dated January 21, 2000 included on page F-2 of this prospectus also
included an audit of the financial statement schedule listed in Item 16(b)
herein. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York

January 21, 2000.

S-1
155

SCHEDULE IV

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

THE GOLDMAN SACHS GROUP, INC.

CONDENSED STATEMENTS OF EARNINGS (PARENT COMPANY ONLY)

YEAR ENDED NOVEMBER
--------------------------
1999 1998 1997
---- ---- ----
(in millions)

Revenues
Equity in earnings of subsidiaries.......................... $1,231 $1,780 $2,378
Principal investments....................................... 1,139 540 339
Interest income, principally from affiliates................ 3,305 4,369 2,943
------ ------ ------
Total revenues............................................ 5,675 6,689 5,660
Interest expense............................................ 3,338 4,201 2,858
------ ------ ------
Revenues, net of interest expense......................... 2,337 2,488 2,802

Operating Expenses
Compensation and benefits................................... 251 9 12
Other....................................................... 109 43 29
Charitable contribution..................................... 200 -- --
------ ------ ------
Total operating expenses.................................. 560 52 41
Pre-tax earnings............................................ 1,777 2,436 2,761
(Benefit)/provision for taxes............................... (931) 8 15
------ ------ ------
Net earnings................................................ $2,708 $2,428 $2,746
====== ====== ======

The accompanying note is an integral part of these condensed financial
statements.

S-2
156

SCHEDULE IV

THE GOLDMAN SACHS GROUP, INC.

CONDENSED STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)

AS OF NOVEMBER
--------------------
1999 1998
---- ----
(in millions, except
share and per share
amounts)

Assets
Cash and cash equivalents................................... $ 1 $ 11
Financial instruments owned, at fair value.................. 3,476 2,147
Receivables from affiliates................................. 41,511 33,562
Subordinated loan receivables from affiliates............... 9,048 8,668
Investment in subsidiaries.................................. 7,526 5,077
Other assets................................................ 2,284 1,123
------- -------
$63,846 $50,588
======= =======
Liabilities and Equity
Short-term borrowings, including commercial paper........... $32,286 $23,364
Payables to affiliates...................................... 207 1,679
Other liabilities and accrued expenses...................... 572 147
Long-term borrowings
With third parties........................................ 20,262 18,584
With affiliates........................................... 374 430
------- -------
53,701 44,204
Commitments and contingencies
Partners' capital allocated for income taxes and potential
withdrawals............................................... -- 74
Partners' capital........................................... -- 6,310
Preferred stock, par value $0.01 per share; 150,000,000
shares authorized, no shares issued and outstanding....... -- --
Common stock, par value $0.01 per share; 4,000,000,000
shares authorized, 441,421,899 shares issued and
outstanding............................................... 4 --
Restricted stock units; 76,048,404 units issued and
outstanding............................................... 4,339 --
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, 7,440,362 shares issued and
outstanding............................................... -- --
Additional paid-in capital.................................. 7,359 --
Retained earnings........................................... 444 --
Unearned compensation....................................... (2,038) --
Accumulated other comprehensive income...................... 37 --
------- -------
10,145 6,310
------- -------
$63,846 $50,588
======= =======

The accompanying note is an integral part of these condensed financial
statements.

S-3
157

SCHEDULE IV

THE GOLDMAN SACHS GROUP, INC.

CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)

YEAR ENDED NOVEMBER
-----------------------------
1999 1998 1997
---- ---- ----
(in millions)

Cash flows from operating activities
Net earnings.............................................. $ 2,708 $ 2,428 $ 2,746
Noncash items included in net earnings
Equity in earnings of subsidiaries...................... (1,231) (1,780) (2,378)
Depreciation and amortization........................... 71 35 19
Deferred income taxes................................... (1,030) -- --
Other, net.............................................. 46 -- --
Changes in operating assets and liabilities
Financial instruments owned, at fair value................ (1,575) (8) (395)
Other, net................................................ 553 (501) (98)
------- ------- -------
Net cash (used for)/provided by operating activities.... (458) 174 (106)
Cash flows from investing activities
Financial instruments owned, at fair value................ 246 (243) (331)
Receivables from affiliates, net.......................... (6,416) (8,235) (4,320)
Subordinated loan receivables from affiliates............. (380) (1,779) (1,528)
Investment in subsidiaries, net........................... (850) 1,362 2,147
Property, leasehold improvements and equipment............ (292) (145) (4)
Acquisition............................................... (196) -- --
------- ------- -------
Net cash used for investing activities.................. (7,888) (9,040) (4,036)
Cash flows from financing activities
Short-term borrowings, net................................ 12 2,586 39
Issuance of long-term borrowings.......................... 10,755 10,289 7,498
Repayment of long-term borrowings......................... (587) (1,698) (1,005)
Capital contributions..................................... 48 9 89
Dividends paid............................................ (107) -- --
Returns on capital and certain distributions to
partners................................................ (306) (619) (557)
Termination of the profit participation plan.............. -- (21) --
Proceeds from issuance of common stock.................... 2,633 -- --
Partners' capital distributions, net...................... (4,112) -- --
Partners' capital allocated for income taxes and potential
withdrawals............................................. -- (1,673) (2,034)
------- ------- -------
Net cash provided by financing activities............... 8,336 8,873 4,030
Net (decrease)/increase in cash and cash equivalents...... (10) 7 (112)
Cash and cash equivalents, beginning of year................ 11 4 116
------- ------- -------
Cash and cash equivalents, end of year...................... $ 1 $ 11 $ 4
======= ======= =======

- ----------------

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest approximated the related expense for each of the
fiscal years presented. Payments of income taxes were immaterial.

Noncash activities:

Receivables from affiliates includes $2.94 billion of stock-based compensation
awards granted to employees of affiliated entities.

In connection with the firm's conversion to corporate form, junior subordinated
debentures of $371 million were issued to the retired limited partners in
exchange for their partnership interests.

Common stock issued in connection with the acquisition was $245 million in 1999.

The accompanying note is an integral part of these condensed financial
statements.

S-4
158

SCHEDULE IV

THE GOLDMAN SACHS GROUP, INC.

NOTE TO CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The condensed unconsolidated financial statements of The Goldman Sachs
Group, Inc. should be read in conjunction with the consolidated financial
statements of The Goldman Sachs Group, Inc. and subsidiaries and the notes
thereto.

Investments in subsidiaries are accounted for using the equity method.

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

S-5
159

INDEX TO EXHIBITS

SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------

1.1 Form of Underwriting Agreement.**
2.1 Plan of Incorporation.*
2.2 Agreement and Plan of Merger of The Goldman Sachs
Corporation into The Goldman Sachs Group, Inc.**
2.3 Agreement and Plan of Merger of The Goldman Sachs Group,
L.P. into The Goldman Sachs Group, Inc.**
3.1 Certificate of Incorporation of The Goldman Sachs Group,
Inc.*
3.2 Amended and Restated Certificate of Incorporation of The
Goldman Sachs Group, Inc.**
3.3 Amended and Restated By-Laws of The Goldman Sachs Group,
Inc.**
4.1 Indenture, dated as of May 19, 1999, between The Goldman
Sachs Group, Inc. and The Bank of New York, as trustee
(incorporated by reference to Exhibit 6 of the registrant's
registration statement on Form 8-A filed on June 29, 1999).
4.2 Form of debt securities of The Goldman Sachs Group, Inc.
(included in Exhibit 4.1).**
Certain instruments defining the rights of holders of other
long-term debt securities of the registrant and its
subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of
Regulation S-K. The registrant hereby undertakes to furnish
to the SEC, upon request, copies of any such instruments.
5.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc.**
8.1 Opinion of Sullivan & Cromwell, counsel to The Goldman Sachs
Group, Inc., re tax matters.**
10.1 Lease, dated June 11, 1985, between Metropolitan Life
Insurance Company and Goldman, Sachs & Co.*
10.2 Lease, dated April 5, 1994, between The Chase Manhattan Bank
(National Association) and The Goldman Sachs Group, L.P., as
amended.*
10.3 Lease, dated as of August 22, 1997, between Ten Hanover LLC
and The Goldman Sachs Group, L.P.*
10.4 Lease, dated as of July 16, 1998, between TCC Acquisition
Corp. and The Goldman Sachs Group, L.P.*
10.5 Agreement for Lease, dated April 2, 1998, among (i) JC No. 3
(UK) Limited and Fleet Street Square Management Limited
trading as Fleet Street Partnership, (ii) Goldman Sachs
International, (iii) Restamove Limited, (iv) The Goldman
Sachs Group, L.P. and (v) Itochu Corporation.*
10.6 Annexure 1 to Agreement for Lease, dated April 2, 1998,
among (i) JC No. 3 (UK) Limited and Fleet Street Square
Management Limited trading as Fleet Street Partnership, (ii)
Goldman Sachs International, (iii) Restamove Limited, (iv)
The Goldman Sachs Group, L.P. and (v) Itochu Corporation
(Form of Occupational Lease among (i) JC No. 3 (UK) Limited
and Fleet Street Square Management Limited trading as Fleet
Street Partnership, (ii) Goldman Sachs International and
(iii) The Goldman Sachs Group, L.P.).*

160

SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------

10.7 Agreement relating to Developer's Fit Out Works to be
carried out at 120 Fleet Street, London, dated April 2,
1998, among (i) JC No. 3 (UK) Limited and Fleet Street
Square Management Limited, (ii) Goldman Sachs Property
Management, (iii) Itochu Corporation and (iv) The Goldman
Sachs Group, L.P.*
10.8 Agreement relating to One Carter Lane, London EC4, dated
March 25, 1998, among Britel Fund Trustees Limited, Goldman
Sachs International, The Goldman Sachs Group, L.P., English
Property Corporation plc and MEPC plc.*
10.9 Fit Out Works Agreement relating to One Carter Lane, London
EC4, dated March 25, 1998, among Britel Fund Trustees
Limited, Goldman Sachs International, Goldman Sachs Property
Management, The Goldman Sachs Group, L.P., English Property
Corporation plc and MEPC plc.*
10.10 Underlease of premises known as One Carter Lane, London EC4,
dated September 9, 1998, among Britel Fund Trustees Limited,
Goldman Sachs International and The Goldman Sachs Group,
L.P.*
10.11 Lease, dated March 5, 1994, among Shine Hill Development
Limited, Shine Belt Limited, Fair Page Limited, Panhy
Limited, Maple Court Limited and Goldman Sachs (Asia)
Finance, as amended.*
10.12 Guarantee, dated November 17, 1993, between Shine Hill
Development Limited and The Goldman Sachs Group, L.P.*
10.13 Agreement for Lease, dated November 29, 1998, between Turbo
Top Limited and Goldman Sachs (Asia) Finance.*
10.14 Summary of Tokyo Leases.*
10.15 The Goldman Sachs 1999 Stock Incentive Plan.**
10.16 The Goldman Sachs Defined Contribution Plan.**
10.17 Letter Agreement with Mr. John L. Weinberg.*
10.18 The Goldman Sachs Partner Compensation Plan. **
10.19 Form of Employment Agreement.**
10.20 Form of Agreement Relating to Noncompetition and Other
Covenants.**
10.21 Form of Pledge Agreement.**
10.22 Form of Award Agreement (Formula RSUs).**
10.23 Form of Award Agreement (Discretionary RSUs).**
10.24 Form of Option Agreement (Discretionary Options).**
10.25 Tax Indemnification Agreement, dated as of May 7, 1999, by
and among The Goldman Sachs Group, Inc. and various
parties.**
10.26 Form of Shareholders' Agreement among The Goldman Sachs
Group, Inc. and various parties.
10.27 Instrument of Indemnification.**
10.28 Form of Indemnification Agreement.
10.29 Subscription Agreement, dated as of April 24, 1992, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.*

161

SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------

10.30 Subscription Agreement, dated as of November 21, 1994, among
the Trustees of the Estate of Bernice Pauahi Bishop, Pauahi
Holdings Corporation, Royal Hawaiian Shopping Center, Inc.
and The Goldman Sachs Group, L.P.*
10.31 Letter Agreement, dated March 15, 1999, among Kamehameha
Activities Association and The Goldman Sachs Group, L.P.
(the "Kamehameha Letter Agreement").*
10.32 Amended and Restated Subscription Agreement, dated March 28,
1989, among The Sumitomo Bank, Limited, Sumitomo Bank
Capital Markets, Inc., Goldman, Sachs & Co. and The Goldman
Sachs Group, L.P.*
10.33 Letter Agreement, dated March 15, 1999, among The Sumitomo
Bank, Limited, Sumitomo Bank Capital Markets, Inc. and The
Goldman Sachs Group, L.P. (the "Sumitomo Letter
Agreement").*
10.34 Lease, dated September 24, 1992, from LDT Partners to
Goldman Sachs International.*
10.35 Amendment to Kamehameha Letter Agreement (filed as Exhibit
10.31), dated April 30, 1999, among Kamehameha Activities
Association, the Trustees of the Estate of Bernice Pauahi
Bishop, The Goldman Sachs Group, L.P. and The Goldman Sachs
Group, Inc.**
10.36 Amendment to Sumitomo Letter Agreement (filed as Exhibit
10.33), dated April 30, 1999, among The Sumitomo Bank,
Limited, Sumitomo Bank Capital Markets, Inc., The Goldman
Sachs Group, L.P., The Goldman Sachs Group, Inc. and
Goldman, Sachs & Co.**
10.37 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Trustees of the Estate of Bernice Pauahi Bishop and
Kamehameha Activities Association, on the other hand.**
10.38 Voting Agreement, dated as of April 30, 1999, by and among
The Goldman Sachs Group, Inc., on the one hand, and The
Sumitomo Bank, Limited, and Sumitomo Bank Capital Markets,
Inc., on the other hand.**
10.39 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Mr. James A. Johnson (incorporated by
reference to Exhibit 10.1 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August
27, 1999).
10.40 Letter Agreement, dated August 18, 1999, between The Goldman
Sachs Group, Inc. and Sir John Browne (incorporated by
reference to Exhibit 10.2 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended August
27, 1999).
10.41 Letter Agreement, dated November 9, 1999, between The
Goldman Sachs Group, Inc. and Mr. John H. Bryan
(incorporated by reference to Exhibit 10.42 to the
registrant's registration statement on Form S-1 (No.
333-90677)).
10.42 Registration Rights Instrument, dated as of December 10,
1999 (incorporated by reference to Exhibit G to Amendment
No. 1 to Schedule 13D, filed December 17, 1999, relating to
the registrant's common stock).

162

SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------ ------------

10.43 Supplemental Registration Rights Instrument, dated as of
December 10, 1999 (incorporated by reference to Exhibit H to
Amendment No. 1 to Schedule 13D, filed December 17, 1999,
relating to the registrant's common stock).
10.44 Form of Indemnification Agreement.
10.45 Letter Agreement, dated January 21, 2000, between The
Goldman Sachs Group, Inc. and Dr. Ruth J. Simmons
(incorporated by reference to Exhibit 10.45 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
12.1 Statement re computation of ratios of earnings to fixed
charges (incorporated by reference to Exhibit 12.1 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
21.1 List of subsidiaries of The Goldman Sachs Group, Inc.
(incorporated by reference to Exhibit 21.1 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended November 26, 1999).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibits 5.1 and
8.1 above).**
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee.**

- ---------------

* Incorporated by reference to the corresponding exhibit to the registrant's
registration statement on Form S-1 (No. 333-74449).

** Previously filed.