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Back to 2002 Annual Report Home Goldman Sachs

Henry Paulson, John L. Thornton, John A. Thain

From right:

Chairman and Chief Executive Officer

President and Co-Chief Operating Officer

President and Co-Chief Operating Officer

Fellow Shareholders
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It was a challenging year for Goldman Sachs. The business environment was perhaps the most difficult in recent history, marked by weak or negative growth throughout much of the world, international uncertainty, the third consecutive year of broad equities market declines and the continued aftermath of the technology/telecommunications bubble collapse.

As a firm, we cannot control the external forces that shape the business climate. What we can control is how we manage our business and execute our strategy. On those terms, Goldman Sachs' 2002 results demonstrated the firm's resilience and ability to produce a solid performance for shareholders.

Net earnings for the year were $2.11 billion, on total net revenues of $13.99 billion. Earnings per diluted share were $4.03, down 5% from 2001. Return on shareholders' equity was 11% for the year, and return on tangible shareholders' equity was 15%. Evident in this performance were both the strength and diversity of the Goldman Sachs franchise and our discipline concerning expense reduction. This performance also reflected, as it has throughout the 133 years since the firm's founding, in good times and bad, the quality of the people of Goldman Sachs and their ability to develop and execute business.

Investment banking activity and net revenues for the industry declined throughout the year. Those declines are clearly seen in our investment banking results, although relative performance remained strong. Once again, Goldman Sachs ranked first in announced and completed global mergers and acquisitions, and we advised on seven of the ten largest deals completed during 2002.(1) We were also the leading underwriter of global public equity offerings in 2002, and ranked second in global initial public offerings.(1)

Within our Trading and Principal Investments business, Fixed Income, Currency and Commodities (FICC) produced record net revenues for the firm, demonstrating the ability to serve clients and take risk prudently. In particular, we were able to avoid significant credit losses as the business environment deteriorated and spreads widened. Performance was strong across most of our FICC businesses, particularly in currencies, mortgages and fixed income derivatives. Net revenues declined in our Equities trading business, reflecting weaknesses in global equities markets in what continues to be a very difficult environment. At the same time, however, we continued to strengthen our equities franchise in the most important trading centers across the globe. And, as a result of the fuller integration of Spear, Leeds & Kellogg, we are truly at the cutting edge of technology-driven innovation and efficiency. Principal Investments had another disappointing year, with further declines in the value of several technology and telecom investments more than offsetting favorable results from the real estate portfolio. During the year, however, we were successful at finding a number of very attractive investments in which to participate, and we continue to believe this is a particularly good time to be an active investor.

Asset Management and Securities Services continued its strong performance in 2002. Despite significant equities market depreciation, assets under management declined only slightly, reflecting net inflows. This is, we believe, an affirmation of our investment track record as well as our focus on client service.

In response to the difficult operating environment, we reduced operating expenses by 11% from the prior year's level. Non-compensation expenses were pared back and we made painful but necessary reductions to our workforce, taking great care not to impair our ability to compete today or in the future. Compensation is, of course, our largest expense and we imposed rigorous discipline in making 2002 bonus awards. Most professionals saw reductions in total compensation, starting with the firm's senior management.

1   Thomson Financial Services Data—January 1, 2002 through December 31, 2002

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