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                              GOLDMAN, SACHS & CO.
 
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                    Prospectus dated                , 2000.
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                            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.
<PAGE>   4
 
 
                         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.
 
                     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 have 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.
 
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<PAGE>   5
 
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 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.
 
 
 
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                                  RISK FACTORS
 
     An investment in the common stock involves a number of risks, some of
which, including market, liquidity, credit, operational, legal and regulatory
risks, could be substantial and are inherent in our businesses. You should
carefully consider the following information about these risks, together with
the other information in this prospectus, before buying shares of common stock.
 
                   MARKET FLUCTUATIONS COULD ADVERSELY AFFECT
                          OUR BUSINESSES IN MANY WAYS
 
     As an investment banking and securities firm, our businesses are materially
affected by conditions in the financial markets and economic 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.
 
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
 
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<PAGE>   8
 
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.
 
     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
 
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<PAGE>   9
 
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 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.
 
                    LIQUIDITY RISK COULD IMPAIR OUR ABILITY
                     TO FUND OPERATIONS AND JEOPARDIZE OUR
                              FINANCIAL CONDITION
 
     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.
 
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 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.
 
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<PAGE>   10
 
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. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity -- Credit Ratings" for additional information concerning
our credit ratings.
 
                    CREDIT RISK EXPOSES US TO LOSSES CAUSED
                         BY FINANCIAL OR OTHER PROBLEMS
                          EXPERIENCED BY THIRD PARTIES
 
     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.
 
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.
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<PAGE>   11
 
See "-- We Are Exposed to Special Risks in Emerging and Other Markets" 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 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.
 
                  LEGAL AND REGULATORY RISKS ARE INHERENT AND
                         SUBSTANTIAL IN OUR BUSINESSES
 
     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.
 
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 con-
 
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<PAGE>   12
 
sistent 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. 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 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.
 
                         EMPLOYEE MISCONDUCT COULD HARM
                       GOLDMAN SACHS AND IS DIFFICULT TO
                                DETECT AND DETER
 
     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.
 
                  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.
 
We Face Increased Competition Due to a Trend Toward Consolidation
 
     In recent years, there has been substantial consolidation and convergence
among
 
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<PAGE>   13
 
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 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
 
     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.
 
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
 
                                       12
<PAGE>   14
 
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
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 -- 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 managing directors'
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 our
managing directors may not be effective. For a description of the compensation
plan for our senior professionals 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.
 
GOLDMAN SACHS IS CONTROLLED BY ITS MANAGING DIRECTORS WHOSE INTERESTS MAY DIFFER
                        FROM THOSE OF OTHER SHAREHOLDERS
 
     As of January 21, 2000, our managing directors collectively owned
275,764,110 shares of common stock, or 62.5% of the total shares of common stock
outstanding. Of these shares, 273,584,282 shares are subject to a shareholders'
agreement, which provides for coordinated voting by the parties. Further, both
Sumitomo Bank Capital Markets, Inc. and Kamehameha Activities Association, which
together owned 43,400,473 shares of
 
                                       13
<PAGE>   15
 
common stock, or 9.9% of the total shares of common stock outstanding, as of
January 21, 2000, have agreed to vote their shares of common stock in the same
manner as a majority of the shares held by our managing directors are voted. See
"Certain Relationships and Related Transactions -- Shareholders'
Agreement -- Voting" and "-- Voting Agreement" for a discussion of these voting
arrangements.
 
     As a result of these arrangements, the managing directors currently are
able to elect our entire board of directors, control the management and policies
of Goldman Sachs and, in general, determine, without the consent of the other
shareholders, the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations and the sale
of all or substantially all of the assets of Goldman Sachs. The managing
directors currently are able to prevent or cause a change in control of Goldman
Sachs.
 
Provisions of Our Organizational Documents May Discourage an Acquisition of
Goldman Sachs
 
     Our organizational documents contain provisions that impede the removal of
directors and may discourage a third party from making a proposal to acquire us.
For example, our board of directors may, without the consent of shareholders,
issue preferred stock with greater voting rights than the common stock. See
"Description of Capital Stock -- Certain Anti-Takeover Matters" for a discussion
of these anti-takeover provisions.
 
                     OUR SHARE PRICE MAY DECLINE DUE TO THE
                        LARGE NUMBER OF SHARES ELIGIBLE
                                FOR FUTURE SALE
 
     Sales of substantial amounts of common stock, or the possibility of such
sales, may adversely affect the price of the common stock and impede our ability
to raise capital through the issuance of equity securities. See "Shares Eligible
for Future Sale" for a discussion of possible future sales of common stock.
 
                                       14
<PAGE>   16
 
 
                               BUSINESS SEGMENTS
 
GLOBAL CAPITAL MARKETS
 
     Net revenues in Global Capital Markets, which includes Investment Banking
and Trading and Principal Investments, were $3.3 billion, a 30% increase from
the prior quarter and 47% above last year's first quarter.
 
     INVESTMENT BANKING. Investment Banking generated net revenues of $1.2
billion, a 5% decrease from the record prior quarter and 37% above last year's
first quarter. Underwriting revenues increased significantly over the same
period in 1999 as strong investor demand in global equity markets continued to
create a favorable environment for new issue activity. Net revenues in the
Financial Advisory business increased 12% over the same period in 1999,
resulting from an active global mergers and acquisitions market and an increase
in the number of large transactions. Net revenue growth was particularly strong
in the high technology and communications, media and entertainment sectors as
compared with the first quarter of 1999. Net revenues increased in all major
regions compared to the first quarter of 1999.
 
     TRADING AND PRINCIPAL INVESTMENTS. Net revenues in Trading and Principal
Investments were $2.1 billion for the quarter, significantly above both the
fourth quarter of 1999 and last year's first quarter. FICC net revenues
increased 16% compared to the first quarter of 1999, primarily due to increased
customer activity in fixed income derivatives, partially offset by a reduction
in net revenues from Goldman Sachs' government bond business. Net revenues in
Equities increased substantially over the same 1999 period, primarily due to
favorable conditions in global equity markets that resulted in higher
transaction volumes in Goldman Sachs' global shares businesses, particularly in
Europe, and increased customer flow in equity derivatives. Net revenues in
Principal Investments increased substantially over the same 1999 period,
primarily due to mark-to-market gains on certain of Goldman Sachs' merchant
banking investments in the high technology and telecommunications sectors.
 
ASSET MANAGEMENT AND SECURITIES SERVICES
 
     Net revenues in Asset Management and Securities Services were $1.2 billion,
an increase of 27% over the fourth quarter and 59% above the same prior year
period. Asset Management revenues increased 51% over last year's first quarter,
primarily reflecting a 33% increase in average assets under management as well
as favorable changes in the composition of assets managed. Securities Services
net revenues were 15% higher than the same 1999 period, primarily due to growth
in Goldman Sachs' prime brokerage business and increased customer balances in
securities lending and margin lending. Commissions nearly doubled compared to
the same prior year period as healthy global equity markets led worldwide
transaction volumes to record levels. Revenues from the increased share of gains
from Goldman Sachs' merchant banking funds also contributed to the growth in
Commissions.
 
                                    EXPENSES
 
     Operating expenses were $3.0 billion for the quarter. The ratio of
compensation and benefits to net revenues was 50% for the first quarter of 2000.
Non-compensation-related expenses rose 23% compared to the same period in 1999,
primarily due to costs associated with higher employment levels, global
expansion and growth in business activity. Goldman Sachs' effective tax rate for
the first quarter was 40%.
 
                                       18
<PAGE>   20
 
 
                              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.
 
 
                             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 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 Adversely Affect Our Businesses in Many Ways" 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
 
                                       38
<PAGE>   40
 
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 departments, 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.
 
                                       39
<PAGE>   41
 
     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.
 
 
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 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.
 
                                       43
<PAGE>   45
 
     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 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.
 
                                       44
<PAGE>   46
 
                            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.
 
                                       45
<PAGE>   47
 
                                    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
 
<TABLE>
<CAPTION>
                                                                    ASSET MANAGEMENT AND
                   GLOBAL CAPITAL MARKETS                           SECURITIES SERVICES
------------------------------------------------------------    ----------------------------
                                   TRADING AND PRINCIPAL
     INVESTMENT BANKING                 INVESTMENTS
----------------------------    ----------------------------
<S>                             <C>                             <C>
-- Equity and debt              -- Bank loans                   -- Commissions
   underwriting                 -- Commodities                  -- Institutional and
-- Financial restructuring      -- Currencies                      high-net-worth
   advisory services            -- Equity and fixed income         asset 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
</TABLE>
 
                                       46
<PAGE>   48
 
                             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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<PAGE>   49
 
     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 proprietary 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 around the world, including the United States, Japan, the United
Kingdom and Canada. We
 
                                       48
<PAGE>   50
 
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 Adversely Affect Our Businesses in Many
Ways -- 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
maker in exchange-traded equity derivatives and an active market maker in equity
securities worldwide.
 
                                       49
<PAGE>   51
 
     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;
 
- 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.
 
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 high-net-worth individuals, on which we earn commissions.
 
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<PAGE>   52
 
     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 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.
 
                                       51
<PAGE>   53
 
 
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.
 
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.
 
                                       52
<PAGE>   54
 
     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.
 
                               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
 
                                       53
<PAGE>   55
 
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 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
 
                                       54
<PAGE>   56
 
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.
 
     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 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 international
operations and to execute large global transactions.
 
     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.
 
     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
 
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<PAGE>   57
 
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 registered 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.
 
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<PAGE>   58
 
     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 Commission 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.
 
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                               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.
 
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.
 
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     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 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.
 
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     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 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
 
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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, (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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