LEHMAN BROTHERS INC// - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MAY 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER 1-6817

LEHMAN BROTHERS INC.
(Exact name of registrant as specified in its charter)

DELAWARE 13-2518466
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

745 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
(Address of principal (Zip Code)
executive offices)

(212) 526-7000
(Registrant's telephone number, including area code)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. Yes |X| No |_|

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE PERMITTED THEREBY.

AS OF JULY 15, 2002, 1,006 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$0.10 PER SHARE, WERE OUTSTANDING.

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LEHMAN BROTHERS INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MAY 31, 2002

INDEX

PAGE
NUMBER
------

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements - (unaudited)

Consolidated Statement of Income -
Three and Six Months Ended
May 31, 2002 and May 31, 2001.............................................. 2

Consolidated Statement of Financial Condition -
May 31, 2002 and November 30, 2001......................................... 4

Consolidated Statement of Cash Flows -
Six Months Ended
May 31, 2002 and May 31, 2001.............................................. 6

Notes to Consolidated Financia Statements................................. 7

Item 2. Management's Analysis of Results of Operations.................................. 17

PART II. OTHER INFORMATION

Item 1. Legal Proceedings............................................................... 28

Item 6. Exhibits and Reports on Form 8-K................................................ 30

SIGNATURE ......................................................................................... 32

EXHIBIT INDEX ......................................................................................... 33

EXHIBITS

LEHMAN BROTHERS INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN MILLIONS)

Three months ended
-------------------------------------
May 31 May 31
2002 2001
---------------- ----------------

Revenues
Principal transactions $ 206 $ 679
Investment banking 344 426
Commissions 272 221
Interest and dividends 2,360 3,616
Other 10 6
---------------- ----------------
Total revenues 3,192 4,948
Interest expense 2,150 3,421
---------------- ----------------
Net revenues 1,042 1,527
---------------- ----------------
Non-interest expenses
Compensation and benefits 531 778
Brokerage and clearance 60 57
Occupancy 60 23
Technology and communications 51 67
Business development 28 34
Professional fees 18 19
Management fees, net 18 10
Other 7 12
---------------- ----------------
Total non-interest expenses 773 1,000
---------------- ----------------
Income before taxes 269 527
Provision for income taxes 71 155
---------------- ----------------
Net income $ 198 $ 372
================ ================

See notes to consolidated financial statements.

2

LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN MILLIONS)

Six months ended
-------------------------------------
May 31 May 31
2002 2001
---------------- ----------------

Revenues
Principal transactions $ 706 $ 1,280
Investment banking 733 775
Commissions 503 438
Interest and dividends 4,634 8,211
Other 18 15
---------------- ----------------
Total revenues 6,594 10,719
Interest expense 4,205 7,915
---------------- ----------------
Net revenues 2,389 2,804
---------------- ----------------
Non-interest expenses
Compensation and benefits 1,218 1,429
Brokerage and clearance 119 116
Occupancy 94 54
Technology and communications 89 122
Business development 48 66
Professional fees 29 38
Management fees, net 12 11
Other 24 28
---------------- ----------------
Total non-interest expenses 1,633 1,864
---------------- ----------------
Income before taxes 756 940
Provision for income taxes 222 297
---------------- ----------------
Net income $ 534 $ 643
================ ================

See notes to consolidated financial statements.

3

LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)

May 31 November 30
2002 2001
------------------ ------------------

ASSETS
Cash and cash equivalents $ 246 $ 648

Cash and securities segregated and on deposit for regulatory and
other purposes 1,172 2,793

Securities and other financial instruments owned:
Pledged as collateral 23,826 19,105
Not pledged as collateral 48,224 48,562
------------------ --- ------------------
72,050 67,667
------------------ --- ------------------

Collateralized short-term agreements:
Securities purchased under agreements to resell 79,208 75,185
Securities borrowed 30,552 22,467

Receivables:
Brokers, dealers and clearing organizations 3,221 4,209
Customers 3,522 7,284
Others 10,975 9,846

Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $164 in 2002 and
$140 in 2001)
266 273

Other assets 346 412

Excess of cost over fair value of net assets acquired (net of
accumulated amortization of $133 in 2002 and $131 in 2001) 153 154
------------------ ------------------
Total assets $201,711 $190,938
================== ==================

See notes to consolidated financial statements.

4

LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - (CONTINUED)
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)

May 31 November 30
2002 2001
---------------- ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 144 $ 1,038

Securities and other financial instruments sold but not yet purchased 42,456 32,970

Collateralized short-term financing:
Securities sold under agreements to repurchase 90,435 86,201
Securities loaned 30,423 26,535
Advances from Holdings and other affiliates 16,061 21,487
Payables:
Brokers, dealers and clearing organizations 3,711 3,599
Customers 4,703 7,004
Accrued liabilities and other payables 2,202 2,537
Long-term debt:
Senior notes 3,644 1,930
Subordinated indebtedness 3,946 4,197
---------------- ----------------
Total liabilities 197,725 187,498
---------------- ----------------

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value; 10,000 shares authorized; none
outstanding
Common stock, $0.10 par value; 10,000 shares authorized;
1,006 shares issued and outstanding
Additional paid-in capital 1,682 1,682
Accumulated other comprehensive income 3 2
Retained earnings 2,301 1,756
---------------- ----------------
Total stockholders' equity 3,986 3,440
---------------- ----------------
Total liabilities and stockholders' equity $201,711 $190,938
================ ================

See notes to consolidated financial statements.

5

LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)

Six Months Ended
-------------------------------------
May 31 May 31
2002 2001
---------------- ----------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 534 $ 643
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 29 39
Other adjustments 11 (18)
Net change in:
Cash and securities segregated and on deposit 1,621 (212)
Securities and other financial instruments owned (4,414) 9,960
Securities borrowed (8,085) (9,990)
Receivables from brokers, dealers and clearing organizations 988 (2,209)
Receivables from customers 3,762 83
Securities and other financial instruments sold but not yet purchased 9,486 4,976
Securities loaned 3,888 7,130
Payables to brokers, dealers and clearing organizations 112 (522)
Payables to customers (2,301) 249
Other operating assets and liabilities, net (1,397) (3,004)
---------------- ----------------
Net cash provided by operating activities 4,234 7,125
---------------- ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes 1,745 1,765
Principal payments of senior notes - (207)
Proceeds from issuance of subordinated indebtedness - 800
Principal payments of subordinated indebtedness (255) (194)
Net proceeds from (payments for) short-term debt (894) (39)
Resale agreements net of repurchase agreements 211 (14,293)
Increase (decrease) in advances from Holdings and other affiliates (5,426) 4,333
Dividends paid (4) (1,060)
---------------- ----------------
Net cash used in financing activities (4,623) (8,895)
---------------- ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements, net (13) (56)
---------------- ----------------
Net cash used in investment activities (13) (56)
---------------- ----------------
Net change in cash and cash equivalents (402) (1,826)
---------------- ----------------
Cash and cash equivalents, beginning of period 648 2,323
---------------- ----------------
Cash and cash equivalents, end of period $ 246 $ 497
================ ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $4,212 and $7,969 for the six months ended May 31, 2002
and May 31, 2001, respectively. Income taxes paid totaled $204 and $524 for the
six months ended May 31, 2002 and May 31, 2001, respectively.

See notes to consolidated financial statements

6

LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

The consolidated financial statements include the accounts of Lehman Brothers
Inc., a registered broker-dealer ("LBI") and subsidiaries (collectively, the
"Company"). LBI is a wholly-owned subsidiary of Lehman Brothers Holding Inc.
("Holdings"). (Holdings and its subsidiaries are collectively referred to as
"Lehman Brothers".) The Company is one of the leading global investment banks
serving institutional, corporate, government and high-net-worth individual
clients and customers. The Company's worldwide headquarters in New York are
complemented by offices in additional locations in North America, Europe, the
Middle East, Latin America and the Asia Pacific Region. The Company is engaged
primarily in providing financial services. All material intercompany accounts
and transactions have been eliminated in consolidation. The Company's financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (the "SEC") with respect to the Form 10-Q
and reflect all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Pursuant to such rules and regulations, certain footnote
disclosures which are normally required under generally accepted accounting
principles have been omitted. It is recommended that these consolidated
financial statements be read in conjunction with the audited consolidated
financial statements included in LBI's Annual Report on Form 10-K for the twelve
months ended November 30, 2001 (the "Form 10-K"). The Consolidated Statement of
Financial Condition at November 30, 2001 was derived from the audited financial
statements.

The nature of the Company's business is such that the results of any interim
period may vary significantly from quarter to quarter and may not be indicative
of the results to be expected for the fiscal year. Certain prior period amounts
reflect reclassifications to conform to the current period's presentation.

CONSOLIDATION ACCOUNTING POLICIES

OPERATING COMPANIES
The Company follows Statement of Financial Accounting Standards ("SFAS") No. 94,
"Consolidation of All Majority-Owned Subsidiaries", and consolidates operating
entities when the Company has a controlling financial interest over the business
activities of such entities. Non-controlled operating entities are accounted for
under the equity method when the Company is able to exercise significant
influence over the business activities of such entities. The cost method is
applied when the ability to exercise significant influence is not present.

SPECIAL PURPOSE ENTITIES
For those entities which do not meet the definition of conducting a business,
often referred to as special purpose entities ("SPE's"), the Company follows the
accounting guidance under SFAS 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities--a replacement of FASB No.
125," and Emerging Issues Task Force ("EITF") Topic D-14, "Transactions
Involving Special-Purpose Entities," to determine whether or not such SPE's are
required to be consolidated. The majority of the Company's involvement with
SPE's relates to securitization transactions meeting the SFAS 140 definition of
a qualifying special purpose entity ("QSPE"). A QSPE can generally be described
as an entity with significantly limited powers which are intended to limit it to
passively holding financial assets and distributing cash flows based upon
predetermined criteria. Based upon the guidance in SFAS 140, the Company does
not consolidate such QSPE's. Rather, the Company accounts for its involvement
with such QSPE's under a financial components approach in which the Company
recognizes only its retained involvement with the QSPE. The Company accounts for
such retained interests at fair value.

7

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain special purpose entities do not meet the QSPE criteria due to their
permitted activities not being sufficiently limited, or because the assets are
not deemed qualifying financial instruments (e.g., real estate). In the limited
instances in which the Company is either the sponsor of or transferor of assets
to a non-qualifying SPE, the Company follows the accounting guidance provided by
EITF Topic D-14 to determine whether consolidation is required. Under this
guidance, the Company would not consolidate such SPE if a third party investor
made a substantial equity investment in the SPE (minimum of 3%), was subject to
first dollar risk of loss of such SPE, and had a controlling financial interest.

TRANSFERS OF FINANCIAL ASSETS
The Company accounts for transfers of financial assets in accordance with SFAS
140. In accordance with this guidance the Company recognizes the transfer of
financial assets as sales provided that control has been relinquished. Control
is deemed to be relinquished only when all of the following conditions have been
met: i) the assets have been isolated from the transferor even in bankruptcy or
other receivership (true sale opinions are required), ii) the transferee has the
right to pledge or exchange the assets received and iii) the transferor has not
maintained effective control over the transferred assets (e.g., a unilateral
ability to repurchase a unique or specific asset).

REVENUE RECOGNITION POLICIES

PRINCIPAL TRANSACTIONS
Securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased (both of which are recorded on
a trade date basis) are valued at market or fair value, as appropriate, with
unrealized gains and losses reflected in Principal Transactions in the
Consolidated Statement of Income. Market value is generally based on listed
market prices. If listed market prices are not available, or if liquidating the
Company's position is reasonably expected to affect market prices, fair value is
determined based on broker quotes, internal valuation pricing models which take
into account time value and volatility factors underlying the financial
instruments, or management's estimate of the amounts that could be realized
under current market conditions, assuming an orderly liquidation over a
reasonable period of time.

INVESTMENT BANKING
Underwriting revenues and fees for merger and acquisition advisory services are
recognized when services for the transactions are determined to be completed.
Underwriting expenses are deferred and recognized at the time the related
revenues are recorded.

COMMISSIONS
Commissions primarily include fees from executing and clearing client
transactions on stock, options and futures markets worldwide. These fees are
recognized on a trade date basis.

INTEREST REVENUE/EXPENSE
The Company recognizes contractual interest on securities and other financial
instruments owned and securities and other financial instruments sold but not
yet purchased on an accrual basis as a component of Interest and Dividends
revenues and Interest Expense, respectively. Interest flows on the Company's
derivative transactions are included as part of the Company's mark-to-market
valuation of these contracts within Principal Transactions and are not
recognized as a component of interest revenue/expense.

The Company accounts for its secured financing activities, and short and
long-term borrowings on an accrual basis with related interest recorded as
interest revenue or interest expense, as applicable.

8

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. EVENTS OF SEPTEMBER 11, 2001:

As a result of the September 11, 2001 terrorist attack, the Company's leased
facilities in the World Trade Center were destroyed and its leased and owned
facilities in the World Financial Center complex (including the 3 World
Financial Center building owned jointly with American Express) were
significantly damaged.

During the fourth quarter of 2001, the Company recognized a pretax special
charge of $51 million ($29 million after-tax) associated with the net losses
stemming from the events of September 11, 2001. This charge was of comprised of
charges and costs of $291 million, less estimated insurance recoveries of $240
million.

During the first six months of 2002, the Company incurred additional costs
resulting from the September 11, 2001 terrorist attack of approximately $25
million, primarily related to technology restoration, repair costs to the
Company's 3 World Financial Center facility and other costs associated with
temporary facilities, which were fully offset by estimated insurance recoveries.
Included within these amounts were costs of $14 million and $11 million recorded
in the first and second quarters of 2002, respectively.

In addition, the Company's repair of its facilities at 3 World Financial Center
is ongoing and estimated to cost approximately $30 million. Such costs are
anticipated to be fully recoverable under the Company's insurance policy.

For further information regarding the special charge associated with the events
of September 11, 2001 recognized during 2001, refer to Note 2 to the
Consolidated Financial Statements included in the Form 10-K.

3. CAPITAL REQUIREMENTS:

As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the Net
Capital Rule, which requires LBI to maintain net capital of not less than the
greater of 2% of aggregate debit items arising from customer transactions, as
defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At May 31, 2002, LBI's regulatory net capital,
as defined, of $1,964 million exceeded the minimum requirement by $1,862
million.

As a clearing broker-dealer, the Company has elected to compute a reserve
requirement for Proprietary Accounts of Introducing Broker-Dealer ("PAIB
calculation"). The PAIB calculation is completed in order for each correspondent
firm that uses the Company as its clearing broker-dealer to classify its assets
held by the Company as allowable assets in the correspondent's net capital
calculation. At May 31, 2002, the Company did not have a reserve requirement for
PAIB, however the Company had $51 million of qualified securities or cash on
deposit in a Special Reserve Bank Account as of May 31, 2002.

The Company's "AAA" rated derivatives subsidiaries, Lehman Brothers Financial
Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc. ("LBDP"),
have established certain capital and operating restrictions which are reviewed
by various rating agencies. At May 31, 2002, LBFP and LBDP each had capital
which exceeded the requirement of the most stringent rating agency by
approximately $67 million and $28 million, respectively.

Repayment of subordinated indebtedness and certain advances and dividend
payments by LBI are restricted by the regulations of the SEC and other
regulatory agencies. In addition, certain investments governing the indebtedness
of LBI contractually limit its ability to pay dividends.

9

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. DERIVATIVE FINANCIAL INSTRUMENTS:

In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end-user. The Company's
derivative activities (both trading and end-users) are recorded at fair value on
the Company's Consolidated Statement of Financial Condition. As an end user, the
Company utilizes derivatives to modify the market risk exposures of certain
assets and liabilities. In this regard, the Company primarily enters into fair
value hedges utilizing interest rate swaps to convert a substantial portion of
the Company's fixed rate long-term debt and certain term fixed rate secured
financing activities to a floating interest rate. The ineffective portion of the
fair value hedges were included in "Interest Expense" on the Consolidated
Statement of Income and were immaterial for the three and six months ended May
31, 2002 and 2001.

Market or fair value for derivative instruments is generally determined by
either quoted market prices (for exchange-traded futures and options) or pricing
models (for over-the-counter swaps, forwards and options). Pricing models
utilize a series of market inputs to determine the present value of future cash
flows, with adjustments, as required for credit risk and liquidity risk. Further
valuation adjustments may be recorded, as deemed appropriate for new or complex
products or for positions with significant concentrations. These adjustments are
integral components of the mark-to-market process. Credit-related valuation
adjustments represent estimates of expected losses which incorporate business
and economic conditions, historical experience, concentrations, and the
character, quality and performance of credit sensitive financial instruments.

Unrealized gains and losses on derivative contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreements
and are netted across products when such provisions are stated in the master
netting agreement. Listed in the following table is the fair value of the
Company's derivative activities. Assets and liabilities represent net unrealized
gains (amounts receivable from counterparties) and net unrealized losses
(amounts payable to counterparties), respectively.

FAIR VALUE* FAIR VALUE*
MAY 31, 2002 NOVEMBER 30, 2001
------------------------------------------------------------------
(IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------

Interest rate, currency and credit default swaps,
and options (including caps, collars and floors)
$5,291 $ 4,866 $5,474 $5,025
Foreign exchange forward contracts and options
431 640 240 197
Other fixed income securities contracts (including
futures contracts, options and TBAs)
286 426 476 226
Equity contracts (including equity swaps, warrants
and options) 383 494 537 510
------------------------------------------------------------------
TOTAL $6,391 $6,426 $6,727 $5,958
------------------------------------------------------------------

* Amounts represent carrying value (exclusive of collateral). Amounts do not
include receivables or payables related to exchange-traded futures contracts.

Assets included in the table above represent the Company's net
receivable/payable for derivative financial instruments before consideration of
collateral held by the Company. Included within the $6,391 million fair value of
assets at May 31, 2002 was $6,011 million related to swaps and other
over-the-counter ("OTC")

10

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contracts and $380 million related to exchange-traded option and warrant
contracts. Included within the $6,727 million fair value of assets at November
30, 2001 was $6,239 million related to swaps and other OTC contracts and $488
million related to exchange-traded option and warrant contracts.

With respect to OTC contracts, the Company views its net credit exposure to be
$4,405 million at May 31, 2002, representing the fair value of the Company's OTC
contracts in an unrealized gain position, after consideration of collateral.
Presented below is an analysis of the Company's net credit exposure at May 31,
2002 for OTC contracts based upon actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Credit Risk Management Department.

COUNTERPARTY S&P/MOODY'S NET CREDIT
RISK RATING EQUIVALENT EXPOSURE
----------- ---------- --------
1 AAA/Aaa 18%
2 AA-/Aa3 or higher 31%
3 A-/A3 or higher 29%
4 BBB-/Baa3 or higher 17%
5 BB-/Ba3 or higher 4%
6 B+/B1 or lower 1%

The Company is also subject to credit risk related to its exchange-traded
derivative contracts. Exchange-traded contracts, including futures and certain
options, are transacted directly on the exchange. To protect against the
potential for a default, all exchange clearinghouses impose net capital
requirements on their members. Additionally, exchange clearinghouses require
counterparties to futures contracts to post margin upon the origination of the
contracts and for any changes in the market value of the contracts on a daily
basis (certain foreign exchanges provide for settlement within three days).
Therefore, the potential for losses from exchange-traded products is limited.

For a further discussion of the Company's derivative related activities, refer
to the Notes to the Consolidated Financial Statements included in the Form 10-K.

5. SECURITIZATIONS:

The Company is a market leader in mortgage- and asset-backed securitizations and
other structured financing arrangements. In connection with these activities,
the Company utilizes special purpose entities principally for (but not limited
to) the securitization of commercial and residential mortgages, home equity
loans, government and corporate bonds, and lease and trade receivables. The
Company derecognizes financial assets transferred in securitizations provided
that the Company has relinquished control over such assets. For further
information regarding the accounting for securitization transactions, refer to
Note 1, BASIS OF PRESENTATION - CONSOLIDATION ACCOUNTING POLICIES - TRANSFERS
OF FINANCIAL ASSETS. The Company may retain an interest in the financial assets
it securitizes ("Retained Interests") which may include assets in the form of
residual interests in the special purpose entities established to facilitate the
securitization. Any Retained Interests are included in Securities and Other
Financial Instruments Owned (principally Mortgages and Mortgage-Backed) within
the Company's Consolidated Statement of Financial Condition. The Company records
its Securities and Other Financial Instruments Owned, including Retained
Interests, at fair value with changes in fair value reported in earnings. Fair
value is determined based upon listed market prices, if available. When listed
market prices are not available, fair value is determined based on other
relevant factors, including broker or dealer price quotations and valuation
pricing models which take into account time value and volatility factors
underlying the financial instruments among other factors. During the first six
months of 2002, the Company securitized approximately $53 billion of financial
assets including: $39

11

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

billion of residential mortgages, $2 billion of commercial
mortgages and $12 billion of other fixed income assets.

As of May 31, 2002 and November 30, 2001, the Company held approximately $1.0
billion and $1.5 billion, respectively, of non-investment grade Retained
Interests from its securitization activities (principally a junior security
interest in the securitization) including $0.3 billion and $0.4 billion of
residential mortgages, $0.5 billion and $0.9 billion of commercial mortgages and
$0.2 billion and $0.2 billion of other fixed income assets, respectively. The
Company records its trading assets on a mark-to-market basis, including those
assets held prior to securitization, as well as any retained interest post
securitization. Mark-to-market gains or losses are recorded as a component of
"Principal Transactions" in the Consolidated Statement of Income.

6. FINANCIAL INSTRUMENTS:

Securities and other financial instruments owned and securities and other
financial instruments sold, but not yet purchased are recorded at fair value,
and were comprised of the following:

MAY 31 NOVEMBER 30
2002 2001
---------------- -------------------

Securities and other financial instruments owned:
Mortgages and mortgage backed $ 9,649 $ 8,079
Government and agencies 26,586 19,868
Derivatives and other contractual agreements 6,391 6,727
Corporate debt and other 11,307 9,423
Corporate equities 16,362 20,433
Certificates of deposits and other money market instruments 1,755 3,137
---------------- -------------------
$72,050 $67,667
================ ===================

Securities and other financial instruments sold but not yet purchased:
Government and agencies $27,856 $19,294
Derivatives and other contractual agreements 6,426 5,958
Corporate debt and other 6,153 4,342
Corporate equities 2,022 3,376
---------------- -------------------
$42,457 $32,970
================ ===================

7. SECURITIES PLEDGED AS COLLATERAL:

The Company enters into secured borrowing and lending transactions to finance
trading inventory positions, obtain securities for settlement, and meet
customers' needs. The Company primarily receives collateral in connection with
resale agreements, securities borrowed transactions, customer margin loans and
other loans. The Company is generally permitted to sell or repledge these
securities held as collateral and use the securities to secure repurchase
agreements, enter into securities lending transactions or deliver to
counterparties to cover short positions. The Company carries secured financing
agreements for financial reporting purposes on a net basis when permitted under
the provision of Financial Accounting Standards Board Interpretations No. 41
("FIN 41").

At May 31, 2002 and November 30, 2001, the fair value of securities received as
collateral and securities owned that have not been sold, repledged or otherwise
encumbered totaled approximately $11 billion and $9

12

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

billion, respectively. At May 31, 2002 and November 30, 2001, the gross fair
value of securities received as collateral where the Company was permitted to
sell or repledge the securities was approximately $220 billion and $190 billion,
respectively. Of this collateral, approximately $214 billion and $183 billion at
May 31, 2002 and November 30, 2001, respectively, has been sold or repledged,
generally as collateral under repurchase agreements or to cover securities and
other financial instruments sold but not yet purchased.

The Company also pledges its own assets, principally to collateralize certain
financing arrangements. These pledged securities, where the counterparty has the
right, by contract or custom, to rehypothcate the financial instruments are
classified as securities and other financial instruments owned, pledged as
collateral on the Company's Consolidated Statement of Financial Condition as
required by SFAS 140.

In addition, the carrying value of securities and other financial instruments
owned that have been pledged to counterparties where those counterparties do not
have the right to sell or repledge were approximately $31 billion and $40
billion at May 31, 2002 and November 30, 2001, respectively.

8. OTHER COMMITMENTS AND CONTINGENCIES:

As of May 31, 2002 and November 30, 2001, the Company was contingently liable
for $0.7 billion and $0.9 billion, respectively, of letters of credit, primarily
used to provide collateral for securities and commodities borrowed and to
satisfy margin deposits at option and commodity exchanges, and other guarantees.

In connection with its financing activities, the Company had outstanding
commitments under certain lending arrangements of approximately $1.6 billion and
$1.5 billion at May 31, 2002 and November 30, 2001, respectively. These
commitments require borrowers to provide acceptable collateral, as defined in
the agreements, when amounts are drawn under the lending facilities. Advances
made under the above lending arrangements are typically at variable interest
rates and generally provide for over-collateralization based upon the borrowers'
creditworthiness. At May 31, 2002, the Company had commitments to enter into
forward starting secured financing transactions including reverse repurchase
agreements and repurchase agreements of approximately $48.5 billon and $26.9
billion, respectively, as compared to $43.6 billion and $21.5 billion,
respectively, at November 30, 2001.

In addition, the Company, through its high grade and high yield sales, trading
and underwriting activities, makes commitments to extend credit in loan
syndication transactions. The Company utilizes various hedging and funding
strategies to actively manage its market, credit and liquidity exposures on
these commitments. In addition, total commitments are not indicative of actual
risk or funding requirements, as the commitments may not be drawn or fully
utilized. These commitments and any related draw downs of these facilities
typically have fixed maturity dates and are contingent upon certain
representations, warranties and contractual conditions applicable to the
borrower.

At May 31, 2002 and November 30, 2001, the Company had lending commitments to
investment grade borrowers of $6.4 billion and $4.3 billion, respectively.
However, the Company views its credit risk associated with these commitments
after consideration of hedges to be $3.2 billion at both May 31, 2002 and
November 30, 2001. Lending commitments to non-investment grade borrowers totaled
approximately $1.0 billion at May 31, 2002 and November 30, 2001, respectively.
The Company had available undrawn borrowing facilities with third parties of
approximately $2.5 billion and $2.9 billion, respectively at those dates, which
can be drawn upon to provide funding for these commitments. These funding
facilities contain limits for certain concentrations of counterparty, industry
or credit ratings of the underlying loans.

At May 31, 2002 and November 30, 2001, the Company had commitments to invest up
to $273 million and $169 million, respectively, directly and through
partnerships in private equity related investments. These

13

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

commitments will be funded as required through the end of the respective
investment periods, principally expiring in 2004.

In the normal course of its business, the Company has been named a defendant in
a number of lawsuits and other legal proceedings. After considering all relevant
facts, available insurance coverage, established reserves and the advice of
counsel, in the opinion of the Company such litigation will not, in the
aggregate, have a material adverse effect on the Company's consolidated
financial position or cash flows, but may be material to the Company's operating
results for any particular period, depending on the level of income for such
period.

As a leading global investment bank, risk is an inherent part of all of the
Company's businesses and activities. The extent to which the Company properly
and effectively identifies, assesses, monitors and manages each of the various
types of risks involved in its trading (including derivatives), brokerage, and
investment banking activities is critical to the success and profitability of
the Company. The principal types of risks involved in the Company's activities
are market, credit or counterparty, liquidity, legal and operational risks.
Management has developed a control infrastructure throughout the Company to
monitor and manage these risks on a global basis. For further discussion of
these matters, refer to the Risk Management section of Management's Analysis of
Results of Operations included in the Form 10K.

9. SEGMENTS

The Company operates in three segments: Investment Banking, Capital Markets and
Client Services.

The Investment Banking Division provides advice to corporate, institutional and
government clients throughout the world on mergers, acquisitions and other
financial matters. The Division also raises capital for clients by underwriting
public and private offerings of debt and equity securities.

The Capital Markets Division includes the Company's institutional sales,
trading, research and financing activities in equity and fixed income cash and
derivatives products. Through the Division, the Company is a global market-maker
in numerous equity and fixed income products, including U.S., European and Asian
equities, government and agency securities, money market products, corporate
high grade, high yield and emerging market securities, mortgage- and
asset-backed securities, municipal securities, bank loans, foreign exchange and
derivatives products. The Division also includes the Company's risk arbitrage
and secured financing businesses, as well as realized and unrealized gains and
losses related to the Company's direct private equity investments. The financing
business manages the Company's equity and fixed income matched book activities,
supplies secured financing to institutional clients and customers, and provides
secured funding for the Company's inventory of equity and fixed income products.

Client Services revenues reflect earnings from the Company's private client and
private equity businesses. Private Client revenues reflect the Company's
high-net-worth retail customer flow activities as well as asset management fees
earned from these clients. Private Equity revenues include the management and
incentive fees earned in the Company's role as general partner for thirty-three
private equity partnerships.

14

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's segment information for the three and six months ended May 31,
2002 and May 31, 2001 is prepared utilizing the following methodologies:

o Revenues and expenses directly associated with each segment are
included in determining pre-tax earnings.

o Expenses not directly associated with specific segments are allocated
based upon the most relevant measures applicable, including each
segment's revenues, headcount and other factors.

o Net revenues include allocations of interest income and interest
expense to securities and other positions in relation to the cash
generated by, or funding requirements of, the underlying positions.

o Segment assets include an allocation of indirect corporate assets
which have been fully allocated to the Company's business segments,
generally based on each segment's respective headcount figures.

SEGMENTS (THREE MONTHS ENDED):

INVESTMENT CAPITAL CLIENT
(In millions) BANKING MARKETS SERVICES TOTAL
- -----------------------------------------------------------------------------------------------------------------

MAY 31, 2002
Gross Revenues $ 343 $2,646 $ 203 $3,192
Interest Expense -- 2,145 5 2,150
- -----------------------------------------------------------------------------------------------------------------
Net Revenue $ 343 $ 501 $ 198 $1,042
- -----------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense 3 12 2 17
Other Expenses 256 353 147 756
- -----------------------------------------------------------------------------------------------------------------
Earnings Before Taxes (1) $ 84 $ 136 $ 49 $ 269
=================================================================================================================
Segment Assets (billions) $ 0.4 $198.4 $ 2.9 $201.7
=================================================================================================================

(1) Before dividends on preferred securities.

INVESTMENT CAPITAL CLIENT
(In millions) BANKING MARKETS SERVICES TOTAL
- -----------------------------------------------------------------------------------------------------------------

MAY 31, 2001
Gross Revenues $ 426 $4,315 $ 207 $4,948
Interest Expense -- 3,397 24 3,421
- ------------------------------------------------------------------------------------------------------------------
Net Revenue $ 426 $ 918 $ 183 $1,527
- ------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense 3 19 3 25
Other Expense 330 512 133 975
- ------------------------------------------------------------------------------------------------------------------
Earnings Before Taxes (1) $ 93 $ 387 $ 47 $ 527
==================================================================================================================
Segment Assets (billions) $ .8 $170.8 $ 4.0 $175.6
==================================================================================================================

(1) Before dividends on preferred securities.

15

LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEGMENTS (SIX MONTHS ENDED):

INVESTMENT CAPITAL CLIENT
(In millions) BANKING MARKETS SERVICES TOTAL
- -----------------------------------------------------------------------------------------------------------------

MAY 31, 2002
Gross Revenues $ 732 $5,461 $ 401 $6,594
Interest Expense -- 4,193 12 4,205
- ------------------------------------------------------------------------------------------------------------------
Net Revenue $ 732 $1,268 $ 389 $2,389
- ------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense 4 21 4 29
Other Expense 516 808 280 1,604
- ------------------------------------------------------------------------------------------------------------------
Earnings Before Taxes (1) $ 212 $ 439 $ 105 $ 756
==================================================================================================================
Segment Assets (billions) $ .4 $198.4 $ 2.9 $201.7
==================================================================================================================

(1) Before dividends on preferred securities.

INVESTMENT CAPITAL CLIENT
(In millions) BANKING MARKETS SERVICES TOTAL
- -----------------------------------------------------------------------------------------------------------------

MAY 31, 2001
Gross Revenues $ 773 $ 9,517 $ 429 $10,719
Interest Expense -- 7,858 57 7,915
- ----------------------------------------------------------------------------------------------------------------------
Net Revenue $ 773 $ 1,659 $ 372 $ 2,804
- ----------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense 6 28 5 39
Other Expense 615 948 262 1,825
- ----------------------------------------------------------------------------------------------------------------------
Earnings Before Taxes (1) $ 152 $ 683 $ 105 $ 940
======================================================================================================================
Segment Assets (billions) $ 0.8 $ 170.8 $ 4.0 $ 175.6
======================================================================================================================

(1) Before dividends on preferred securities.

The following are net revenues by geographic region:

THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------------------------
(IN MILLIONS) MAY 31 MAY 31 MAY 31 2002 MAY 31 2001
2002 2001
---------------------------------------------------------

U.S. $779 $1,378 $1,999 $2,494
Europe 211 135 296 283
Asia Pacific and other 52 14 94 27
---------------------------------------------------------
Total $1,042 $1,527 $2,389 $2,804
=========================================================

10. RELATED PARTIES:

In the normal course of business, the Company engages in various securities
trading, investment banking and financial activities with Holdings and many of
its subsidiaries (the "Related Parties"). Various charges, such as compensation
and benefits, occupancy, administration and computer processing are allocated
between the Related Parties, based upon specific identification and allocation
methods.

16

ITEM 2 LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

SOME OF THE STATEMENTS CONTAINED IN THIS MANAGEMENT'S ANALYSIS OF RESULTS OF
OPERATIONS, INCLUDING THOSE RELATING TO THE COMPANY'S STRATEGY AND OTHER
STATEMENTS THAT ARE PREDICTIVE IN NATURE, THAT DEPEND UPON OR REFER TO FUTURE
EVENTS OR CONDITIONS OR THAT INCLUDE WORDS SUCH AS "EXPECTS," "ANTICIPATES,"
"INTENDS," "PLANS," "BELIEVES," "ESTIMATES" AND SIMILAR EXPRESSIONS, ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE STATEMENTS ARE NOT HISTORICAL FACTS BUT INSTEAD
REPRESENT ONLY THE COMPANY'S EXPECTATIONS, ESTIMATES AND PROJECTIONS REGARDING
FUTURE EVENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT, WHICH MAY
INCLUDE MARKET, CREDIT OR COUNTERPARTY, LIQUIDITY, LEGAL AND OPERATIONAL RISKS.
MARKET AND LIQUIDITY RISKS INCLUDE CHANGES IN INTEREST AND FOREIGN EXCHANGE
RATES AND SECURITIES AND COMMODITIES VALUATIONS, THE AVAILABILITY AND COST OF
CAPITAL AND CREDIT, CHANGES IN INVESTOR SENTIMENT, GLOBAL ECONOMIC AND POLITICAL
TRENDS, CONCERNS ABOUT POSSIBLE TERRORIST ACTIVITY AND INDUSTRY COMPETITION.
LEGAL RISKS INCLUDE LEGISLATIVE AND REGULATORY DEVELOPMENTS IN THE U.S. AND
THROUGHOUT THE WORLD. THE COMPANY'S ACTUAL RESULTS AND FINANCIAL CONDITION MAY
DIFFER, PERHAPS MATERIALLY, FROM THE ANTICIPATED RESULTS AND FINANCIAL CONDITION
IN ANY SUCH FORWARD-LOOKING STATEMENTS AND, ACCORDINGLY, READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.

RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 31, 2002 AND MAY 31, 2001

The Company reported net income of $198 million for the quarter ended May 31,
2002, a decrease of 47% from the second quarter of 2001. These results reflect
the difficult market conditions experienced in 2002, lead by a decline in equity
capital markets and reduced investment banking and M&A activities. The Company
continued to maintain strict discipline with regard to expense management, risk
management and capital deployment.

REVENUES

Net revenues were $1,042 million for the second quarter of 2002 as compared to
$1,527 for the second quarter of 2001. Revenues declined 32% as compared to the
prior year's levels, reflecting the negative trends in global equity markets and
reduced investment banking activities.

PRINCIPAL TRANSACTIONS, COMMISSIONS AND NET INTEREST REVENUES

The Company measures the profitability of its capital markets and client
services activities in the aggregate, including Principal Transactions,
Commissions and Net Interest. Decisions relating to these activities are based
on an overall review of aggregate revenues, which includes an assessment of the
potential gain or loss associated with a transaction, including any associated
commissions, and the interest income or expense associated with financing or
hedging the Company's positions. Therefore, the Company views net revenues from
principal transactions, commissions and interest, offset by related interest
expense, in the aggregate, because the revenue classifications, when analyzed
individually, are not always indicative of the profitability of the Company's
overall Capital Markets and Client Services activities.

Principal Transactions, Commissions and Net Interest revenues were $688 million
for the second quarter of 2002 as compared to $1,095 for the second quarter of
2001. Principal Transactions, Commissions and Net Interest revenues decreased
37% from the second quarter 2001 as a result of solid fixed income results being
more than offset by weakness in the global equity markets. Fixed income results
were fueled by historically

17

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

low interest rate levels and increased trading volumes, particularly investment
grade debt and mortgage related products, as investors rebalanced portfolios
into fixed income products amid geopolitical and accounting uncertainties. The
weakness in equity results was driven by continued depressed levels of market
volatility and declining equity indexes, which negatively impacted derivatives
revenues.

Within these amounts, Principal Transactions revenues were $206 million for the
second quarter of 2002 as compared to $679 million for the second quarter of
2001, a decrease of 70%. This decrease represents solid fixed income results,
driven by historically low interest rate levels and resulting increased trading
volumes, that were more than offset by weakness in the global equity markets
from the continued depressed levels of market volatility and declining equity
indexes. In addition, Principal Transactions revenues in 2002 decreased as a
result of the transition to a commission-based revenue structure on certain
Nasdaq trades. In the prior year, the Company's Nasdaq trades for substantially
all of its institutional customers were transacted on a spread basis (with
related revenues classified within Principal Transactions).

Interest and dividend revenues were $2,360 million for the second quarter of
2002 as compared to $3,616 million for the second quarter of 2001. Interest
expense was $2,150 million for the second quarter of 2002 as compared to $3,421
million for the second quarter 2001. Interest and dividend revenues and interest
expense are a function of the level and mix of total assets and liabilities,
principally financial instruments owned and secured financing activities, the
prevailing level of interest rates, as well as the term structure of the
Company's financings. Interest and dividend revenues and interest expense are
integral components of trading activities. The decline in interest revenue by
35% and interest expense by 37% from the previous year have been primarily due
to a substantial decline in interest rates over the period. In addition, net
interest income benefited in part due to increased spreads resulting from
declining interest rates as well as higher balance sheet levels in the second
quarter of 2002 as compared to the second quarter of 2001.

Commissions revenues were $272 million for the second quarter of 2002 as
compared to $221 million for the second quarter of 2001. Commissions revenues
increased 23% as compared to the prior year's level primarily due to the record
levels of institutional and high-net-worth customer flow driven by the Firm's
increased secondary market share in both the listed and Nasdaq markets. In
addition, commissions revenues in 2002 were bolstered by the increase in the
share of revenue derived from institutional commission-based pricing in the
Nasdaq market, whereas in the prior year the Company's Nasdaq trades for
institutional customers were primarily transacted on a spread basis with related
revenues classified within Principal Transactions.

INVESTMENT BANKING

Investment Banking revenues were $344 million for the second quarter of 2002 as
compared to $426 million for the second quarter of 2001. Investment Banking
revenues result mainly from fees earned by the Company for underwriting public
and private offerings of fixed income and equity securities, and advising
clients on mergers and acquisitions ("M&A") activities and other services.
Investment Banking revenues have decreased 19% from the second quarter of 2001
as a result of the lower volumes of equity origination and M&A activity in the
overall marketplace. This was partially offset by near record results in fixed
income origination, where markets were characterized by low interest rates,
tighter credit spreads and corporate preferences for long-term financing.

SEGMENTS

The Company is segregated into three business segments (each of which is
described below): Investment Banking, Capital Markets and Client Services. Each
segment represents a group of activities and products with similar
characteristics. These business activities result in revenues from both
institutional and high-net-worth retail clients, which are recognized across all
revenue categories contained in the Company's

18

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

Consolidated Statement of Income. (Net revenues also contain certain internal
allocations, including funding costs, which are centrally managed.)

SEGMENT RESULTS - THREE MONTHS ENDED MAY 31, 2002 AND MAY 31, 2001

THREE MONTHS ENDED MAY 31, 2002 THREE MONTHS ENDED MAY 31, 2001
-------------------------------------------------- ------------------------------------------------

Investment Capital Client Investment Capital Client
IN MILLIONS Banking Markets Services Total Banking Markets Services Total
---------- ----------- ----------- ----------- -------------- ------------ ------------ ---------

Principal Transactions $ -- $ 75 $ 131 $ 206 $ -- $ 563 $ 116 $ 679
Interest and Dividend
Income -- 2,351 9 2,360 -- 3,587 29 3,616
Investment Banking 343 -- 1 344 426 -- -- 426
Commissions -- 216 56 272 -- 164 57 221
Other -- 4 6 10 1 5 6
------ ------ ------ ------ ------ ------ ------ ------
Total Revenues $ 343 $2,646 $ 203 $3,192 $ 426 $4,315 $ 207 $4,948
Interest Expense -- 2,145 5 2,150 -- 3,397 24 3,421
------ ------ ------ ------ ------ ------ ------ ------
Net Revenues $ 343 $ 501 $ 198 $1,042 $ 426 $ 918 $ 183 $1,527

Non-Interest Expenses 259 365 149 773 333 531 136 1,000
------ ------ ------ ------ ------ ------ ------ ------
Earnings Before Taxes(1) $ 84 $ 136 $ 49 $ 269 $ 93 $ 387 $ 47 $ 527
====== ====== ====== ====== ====== ====== ====== ======

(1) Before dividends on preferred securities

The following discussion provides an analysis of the Company's net revenues by
segment for the periods above.

In assessing the profitability of Capital Markets and Client Services, the
Company measures principal transactions, commissions and net interest revenues
in the aggregate. Decisions relating to capital markets and client services
activities are based on an overall review of aggregate revenues, which includes
an assessment of the potential gain or loss associated with a transaction
including any associated commissions, and the interest income or expense
associated with financing or hedging the Company's positions. Therefore, the
Company views net revenues from principal transactions, commissions and
interest, offset by related interest expense, in the aggregate, because the
revenue classifications, when analyzed individually, are not always indicative
of the profitability of the Company's capital markets and client services
activities.

INVESTMENT BANKING This segment's earnings result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities, and advising clients on M&A activities and other services.

Investment Banking pre-tax earnings of $84 million decreased 10% in the second
quarter of 2002 compared to second quarter of 2001 pre-tax earnings of $93
million, as a 19% decrease in net revenues were partially offset by a 22%
decrease in non-interest expenses. The decrease in non-interest expenses
primarily reflected reduced compensation and benefits associated with lower
revenue levels, as well as reduced discretionary spending on business
development and professional fees as the Company continued to focus on
minimizing expenses in a down market.

19

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

Investment Banking's net revenues decreased 19% to $343 million during the
second quarter of 2002 from the second quarter of 2001 primarily due to a
decrease in equity underwriting and M&A advisory activity.

Debt underwriting revenues totaled $214 million for the second quarter of 2002,
basically unchanged from the second quarter of 2001. Fixed income origination
remained strong for the three months ended May 31, 2002, as issuers continued to
take advantage of lower interest rates to raise long-term debt and replace
short-term financing and investors displayed an appetite for more defensive
positions.

Equity underwriting revenues decreased 36% to $81 million in the second quarter
of 2002 from the second quarter of 2001. The decrease in equity origination
corresponded with unfavorable secondary markets as industry-wide origination
volumes remained lower than historical issuance levels resulting from declining
equity indices and generally cautious investor sentiment.

M&A advisory fees for the second quarter of 2002 were $48 million, down 41% from
the second quarter of 2001 reflecting the extremely difficult climate for
strategic transactions.

CAPITAL MARKETS This segment's earnings reflect institutional customer flow
activities and secondary trading and financing activities related to fixed
income and equity products. These products include a wide range of cash,
derivative, secured financing and structured instruments.

Capital Markets pre-tax earnings of $136 million decreased 65% from the second
quarter of 2001 pre-tax earnings of $387 million driven by a 45% decrease in net
revenues. Capital Markets non-interest expenses decreased 31% during the second
quarter of 2002 to $365 million from $531 million in the second quarter of 2001,
as a decrease in compensation and benefits associated with lower revenues was
slightly offset by an increase in nonpersonnel expenses, particularly occupancy
costs associated with increased headcount levels.

Capital Markets' net revenues were $501 million for the second quarter of 2002,
down 45% from the second quarter of 2001, as the Company experienced lower
revenues from both fixed income and equity businesses.

Net revenues from the fixed income component of Capital Markets in the second
quarter of 2002 decreased by 39% from the second quarter of 2001. Strong
secondary activity in certain fixed income products, particularly
mortgage-related products, fueled by low interest rate levels and investors
re-balancing into

20

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

fixed income products amid concerns over accounting and corporate governance
issues, was more than offset by difficult market conditions in the credit
sector.

Net revenues from the equities component of Capital Markets were $170 million in
the second quarter of 2002, down 54% from second quarter of 2001. The decrease
resulted from continued difficult conditions in the secondary markets, including
declining global market valuations, and lack of corporate demand for derivative
products and convertibles.

CLIENT SERVICES Client Services earnings reflect earnings from the Company's
Private Client and Private Equity businesses. Private Client net revenues
reflect the Company's high-net-worth retail customer flow activities as well as
asset management fees. Private Equity net revenues include the management and
incentive fees earned in the Company's role as general partner for thirty-three
private equity banking partnerships.

Client Services pre-tax earnings of $49 million increased 4% or $2 million in
the second quarter of 2002 compared to the second quarter of 2001 pre-tax
earnings of $47 million. Non-interest expenses increased 10% to $149 million in
the second quarter of 2002 compared to $136 million second quarter of 2001.

Client Services net revenues were $198 million in the second quarter of 2002,
increasing 8% from the second quarter of 2001. This increase demonstrates the
resiliency of the Company's high-net-worth client business as customers remained
invested in a difficult equity market environment by re-allocating resources to
fixed income products.

NON-INTEREST EXPENSES Non-interest expenses were $773 million for the second
quarter of 2002 compared to $1,000 million for the second quarter of 2001. The
decrease in non-interest expenses highlights the Company's continued disciplined
approach to expense management. This ongoing focus is a key element of the
Company's strategic objectives. Compensation and benefits expense of $531
million in the second quarter of 2002 decreased 32% from $778 million in the
second quarter of 2001, consistent with the decrease in net revenues.

Nonpersonnel expenses were $242 million for the second quarter of 2002, up 9%
compared to the second quarter of 2001. The increase is mainly attributable to
occupancy expenses driven by the increase in space required for the increase in
headcount. Technology and communications, business development and professional
costs decreased from the second quarter of 2001, due to lower discretionary
spending in response to the current market environment. Brokerage and clearance
expenses were relatively consistent with the second quarter of 2001.

INCOME TAXES The Company's income tax provision was $71 million for the second
quarter of 2002 versus $155 million for the second quarter of 2001. The
effective tax rate was 26.3% for the second quarter of 2002 versus 29.4% for the
second quarter of 2001. The decrease in the effective tax rate is primarily due
to an increase in tax benefits from tax preferred items as well as a decrease in
overall pretax earnings.

21

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2002 AND MAY 31, 2001

The Company reported net income of $534 million for the six months ended May 31,
2002, a decrease of 17% from the six months ended May 31, 2001. These results
reflect the difficult market conditions experienced in 2002, led by a decline in
equity capital markets and reduced investment banking and M&A activities.
However, during this six month period, the Company was generally able to
continue to execute its strategy of building market share while maintaining a
strict discipline with regard to its expenses, capital and liquidity. The
Company believes that improvements in its management of Firm resources and focus
on expense management have served to diminish the impact of an unfavorable
market cycle.

REVENUES

Net revenues were $2,389 million for the fist six months of 2002 compared to
$2,804 million for the first six months of 2001. Revenues declined 15% as
compared to the prior year's levels, as strong fixed income results were more
than offset by the negative conditions in equity markets (e.g. declining indices
and low volatility) and historically low levels of M&A activity.

PRINCIPAL TRANSACTIONS, COMMISSIONS AND NET INTEREST REVENUES

The Company measures the profitability of its capital markets and client
services activities in the aggregate including Principal Transactions,
Commissions and Net Interest. Decisions relating to these activities are based
on an overall review of aggregate revenues, which includes an assessment of the
potential gain or loss associated with a transaction, including associated
commissions, and the interest income or expense associated with financing or
hedging the Company's positions. The Company views these revenues in the
aggregate, because the revenue classifications, when analyzed individually, are
not always indicative of the profitability of the Company's Capital Markets and
Client Services activities.

Principal Transactions, Commissions and Net Interest revenues were $1,638
million for the first six months of 2002 as compared to $2,014 million for the
first six months of 2001. Principal Transactions, Commissions and Net Interest
revenues decreased 19% from the first six months of 2001 as a result of strong
fixed income results being more than offset by weakness in the equity markets.
Fixed income results were fueled by historically low interest rate levels and
increased trading volumes, particularly investment grade debt and mortgage
related products, as investors rebalanced portfolios into fixed income products
amid geopolitical and accounting uncertainties. The weakness in equity results
were driven by continued depressed levels of market volatility and declining
equity indices, which negatively impacted revenues.

Within these amounts, Principal Transactions revenue was $706 million for the
first six months of 2002 as compared to $1,280 for the first six months of 2001,
a decrease of 45%. This decrease represents the weakness in the equity markets
from the continued depressed levels of market volatility and declining equity
indices partially offset by strong fixed income results, driven by historically
low interest rate levels and resulting increased trading volumes. In addition,
principal transaction revenues in 2002 decreased as a result of the transition
to a commission-based revenue structure on certain Nasdaq trades. In the prior
year, the Company's Nasdaq trades for substantially all of its institutional
customers were transacted on a spread basis (with related revenues classified
within Principal Transactions).

Interest and Dividends revenue were $4,634 million for the first six months of
2002 as compared to $8,211 million for the first six months of 2001. Interest
Expense was $4,205 million for the first six months of 2002 as compared to
$7,915 million for the first six months of 2001. Interest and dividends revenues
and interest expense are a function of the level and mix of total assets and
liabilities, including financial instruments owned and secured financing
activities, the prevailing level of interest rates, as well as term structure
and

22

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

volatility of the Company's financings. Interest and Dividends revenues and
Interest Expense are integral components of trading activities. The decline in
interest revenue by 44% and interest expense by 47% from the previous year is
principally due to a substantial decline in interest rates over the period.
However, net interest income benefited in part to a steepening yield curve
environment and higher interest and dividend earning asset levels in the first
six months of 2002 as compared to the first six months of 2001.

Commissions revenues were $503 million for the first six months of 2002 as
compared to $438 million for the first six months of 2001. Commissions revenues
increased 15% as compared to the prior year's level, driven by increased
secondary market share in both listed and Nasdaq markets as well as the
migration to institutional commission-based pricing in the Nasdaq market.

INVESTMENT BANKING

Investment Banking revenues were $733 million for the first six months of 2002
as compared to $775 million for the first six months of 2001. Investment Banking
revenues result mainly from fees earned by the Company for underwriting public
and private offerings of fixed income and equity securities, and advising
clients on M&A activities and other services. Investment Banking revenues
decreased 5% from the first six months of the previous year as a result of the
decline in equity origination and M&A activity in the overall marketplace,
partially offset by record performance in fixed income origination.

SEGMENTS

The Company is segregated into three business segments (each of which is
described below): Investment Banking, Capital Markets and Client Services. Each
segment represents a group of activities and products with similar
characteristics. These business activities result in revenues from both
institutional and high-net-worth retail clients, which are recognized across all
revenue categories contained in the Company's Consolidated Statement of Income.
(Net revenues also contain certain internal allocations, including funding
costs, which are centrally managed.)

SEGMENT RESULTS - SIX MONTHS ENDED MAY 31, 2002 AND MAY 31, 2001

(1) Before dividends on preferred securities

23

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

The following discussion provides an analysis of the Company's net revenues by
segment for the periods above.

In assessing the profitability of Capital Markets and Client Services, the
Company measures principal transactions, commissions and net interest revenues
in the aggregate. Decisions relating to capital markets and client services
activities are based on an overall review of aggregate revenues, which includes
an assessment of the potential gain or loss associated with a transaction
including any associated commissions, and the interest income or expense
associated with financing or hedging the Company's positions. The Company views
these revenues in the aggregate, because the revenue classifications, when
analyzed individually, are not always indicative of the profitability of the
Company's capital markets and client services activities.

INVESTMENT BANKING This segment's earnings result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities and advising clients on M&A activities and other services.

Investment Banking pre-tax earnings of $212 million increased 39% during the
first half of 2002 compared to first half 2001 pre-tax earnings of $152 million,
as a 5% decrease in net revenues was more than offset by lower non-interest
expenses. The decrease in non-interest expenses reflected reduced compensation
and benefits and non-compensation related expenses (business development and
professional fees) as the Company focused on minimizing discretionary spending
in light of reduced revenue levels.

Investment Banking's net revenues of $732 million decreased 5% in the first six
months of 2002 when compared to $773 million for the first six months of 2001.
The decrease was a result of the decline in M&A advisory revenues partially
offset by increases in debt and equity underwriting revenues.

Debt underwriting revenues remained virtually unchanged at $401 million in the
first six months of 2002 as compared to $399 million in the first six months of
2001. Debt origination volumes market wide increased from the first six months
of the previous fiscal year by approximately 11%.

Equity underwriting revenues increased by 10% to $214 million in the first half
of 2002 as compared to $194 million in the first half of 2001 as market volume
picked up slightly, although syndicate activity remained comparatively slow and
issuers and investors continued to be cautious. The increase in revenues was
driven by a shift in business from predominantly convertible deals in 2001 to
more profitable common stock offerings in the current year.

M&A advisory revenues decreased by 35% to $117 million for the first six months
of 2002 from $180 million for the first six months of 2001. The decrease
reflected the extremely difficult market conditions, partially attributed to
weak equity share valuations and corporate governance issues, as the market
volume was the lowest it has been in several years.

24

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

CAPITAL MARKETS This segment's earnings reflect institutional customer flow
activities and secondary trading and financing activities related to fixed
income and equity products. These products include a wide range of cash,
derivative, secured financing and structured instruments.

Capital Markets pre-tax earnings of $439 million decreased 36% from the first
half of 2001 pre-tax earnings of $683 million driven by a 24% decrease in net
revenues. Capital Markets non-interest expenses decreased 15% during the first
half of 2002 to $829 million from $976 million in the first half of 2001, as a
decrease in compensation and benefits was partially offset by an increase in
non-personnel expenses.

Capital Markets' net revenues were $1,268 million for the first six months of
2002, down 24% from the first six months of 2001 as an extremely weak equities
market was partially offset by increased customer flow in fixed income products.
Interest expense decreased from the second quarter of the previous year by 47%,
mainly as a result of the substantial decline in interest rates over the period.
However, net interest income benefited due to a steepening yield curve
environment and higher interest earning asset levels in the first six months of
2002 as compared to the first six months of 2001.

Net revenues from the fixed income component of Capital Markets increased 8% to
$1,028 million in the first six months of 2002 from $948 million in the first
six months of 2001. These record results were driven by strong institutional
customer flow activity in credit and mortgage related products.

Net revenues from the equities component of Capital Markets decreased 66% to
$240 million in the first half of 2002 from $711 million in the comparable 2001
period. The decrease was a result of the difficult market conditions in the
first six months of 2002, which were evidenced by declining equity indices and
the historical lows in volatility levels, which negatively impacted revenue
levels, particularly from derivatives.

CLIENT SERVICES Client Services' earnings reflect earnings from the Company's
private client and private equity businesses. Private client net revenues
reflect the Company's high-net-worth retail customer flow activities as well as
asset management fees. Private equity net revenues include the management and
incentive fees earned in the Company's role as general partner in its private
equity partnerships.

Client Services pre-tax earnings of $105 million remained flat in the first six
months of 2002 compared to the first six months of 2001 pre-tax earnings of $105
million. Non-interest expenses increased slightly to $284 million in the first
six months of 2002 as compared to $267 million during the first six months of
2001.

25

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

Client Services' net revenues increased to $389 million for the first six months
of 2002 as compared to $372 million for the first six months of 2001. Despite
the weak equity markets, private client net revenues increased to $388 million
in the first six months of 2002 from $370 million in the previous year because
record fixed income activity offsetting the decline in equities as the Company's
high-net-worth clients continued to adjust their
portfolios.

NON-INTEREST EXPENSES Non-interest expenses were $1,633 million for the first
six months of 2002 compared to $1,864 million for the first six months of 2001.
The decrease in non-interest expenses highlights the Company's continued
disciplined approach to expense management. This ongoing focus is a key element
of the Company's strategic objectives. Compensation and benefits expense of
$1,218 million decreased 15% from $1,429 million in the first six months of
2001, consistent with the decrease in net revenues.

Nonpersonnel expenses were $415 million for the first six months of 2002, down
5% compared to the first six months of 2001. The decrease is mainly attributable
to a decline in technology and communications, business development and
professional costs, resulting from lower discretionary spending in response to
the current market environment.

INCOME TAXES The Company's income tax provision was $222 million for the six
months of 2002 compared to $297 million for the six months of 2001. The
effective tax rate was 29.3% for the first half of 2002 versus 31.6% for the
first half of 2001. The decrease in the effective tax rate is primarily due to
an increase in tax benefits from tax preferred items as well as a decrease in
overall pretax earnings

SIGNIFICANT ACCOUNTING POLICIES

The Company's financial statements are prepared in conformity with generally
accepted accounting principles, many of which require the use of management
estimates and assumptions. Management believes that the estimates utilized in
preparing its financial statements are reasonable and prudent. Actual results
could differ from these estimates.

FAIR VALUE The Company records its inventory positions, including Securities and
Other Financial Instruments Owned and Securities Sold but not yet Purchased, at
fair value, with unrealized gains and losses reflected in Principal Transactions
in the Consolidated Statement of Income. Market value is generally based on
listed prices. If listed market prices are not available, or if liquidating the
Company's position is reasonably expected to affect market prices, fair value is
determined based on either internal valuation pricing models, which take into
account time value and volatility factors underlying the financial instruments,
or management's estimate of the amounts that could be realized under current
market conditions, assuming an orderly liquidation over a reasonable period of
time. The determination of fair value is fundamental to the Company's financial
condition and results of operations and, in certain circumstances, it requires
the use of complex judgments. The use of different pricing models or assumptions
could produce different estimates of fair value.

TRANSFERS OF FINANCIAL ASSETS The Company accounts for transfers of financial
assets in accordance with Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities--a replacement of FASB No. 125". In accordance with this guidance
the Company recognizes transfers of financial assets as sales provided that
control has been

26

LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

relinquished. Control is deemed to be relinquished only when all of the
following conditions have been met: (i) the assets have been isolated from the
transferor, even in bankruptcy or other receivership (true sale opinions are
required), (ii) the transferee has the right to pledge or exchange the assets
received and (iii) the transferor has not maintained effective control over the
transferred assets (e.g. a unilateral ability to repurchase a unique or specific
asset). The Company is a market leader in mortgage- and asset-backed
securitizations and other structured financing arrangements. In connection with
these activities, the Company utilizes special purposes entities principally for
(but not limited to) the securitization of commercial and residential mortgages,
home equity loans, government and corporate bonds, and lease and trade
receivables. The Company derecognizes financial assets transferred in
securitizations provided that the Company has relinquished control over such
assets.

The Company may retain an interest in the financial assets it securitizes
("Retained Interests"), which may include assets in the form of residual
interests in the special purpose entities established to facilitate the
securitization. Any Retained Interests are included in Securities and Other
Financial Instruments Owned (principally Mortgages and mortgage-backed) within
the Company's Consolidated Statement of Financial Condition. The Company records
its Securities and Other Financial Instruments Owned, including Retained
Interests, at fair value, with changes in fair value reported in earnings.

For additional information on the Company's significant accounting policies see
Note 1 to the Consolidated Financial Statements (Summary of Significant
Accounting Policies) included in the Form 10-K.

27

LEHMAN BROTHERS INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an underwriter
or financial advisor, actions arising out of the Company's activities as a
broker or dealer in securities and commodities and actions brought on behalf of
various classes of claimants against many securities and commodities firms,
including the Company.

Although there can be no assurance as to the ultimate outcome, the Company
generally has denied, or believes it has a meritorious defense and will deny,
liability in all significant cases pending against it including the matters
described below, and it intends to defend vigorously each such case. Based on
information currently available, advice of counsel, available insurance coverage
and established reserves, the Company believes that the eventual outcome of the
actions against it, including the matters described below, will not, in the
aggregate, have a material adverse effect on the consolidated financial position
or cash flows of the Company but may be material to the Company's operating
results for any particular period, depending on the level of the Company's
income for such period.

LEHMAN BROTHERS COMMERCIAL CORPORATION AND LEHMAN BROTHERS SPECIAL FINANCING
INC. V. MINMETALS INTERNATIONAL NON-FERROUS METALS TRADING COMPANY
(reported in LBI's 2001 Annual Report on Form 10-K)

In June, 2002, the parties entered into an agreement to settle all claims.

ACTIONS REGARDING FRANK GRUTTADAURIA (reported in LBI's 2001 Annual Report on
Form 10-K and Quarterly Report on Form 10-Q for the quarter ended February
28, 2002)

To date, the following cases have been filed against Lehman Brothers and SG
Cowen Securities Corporation: seven cases in the United States District Court
for the Northern District of Ohio, four cases in the United States District
Court for the Northern District of Illinois, one case in the United States
District Court for the Southern District of California and one case in Wisconsin
Circuit Court, Milwaukee County. Two arbitrations have been filed before the New
York Stock Exchange ("NYSE"). Generally speaking, the complaints, amended
complaints and statements of claim allege violations of federal securities laws,
violations of state and Blue Sky laws, civil conspiracy, and common law claims
for fraud, promissory estoppel, negligent and reckless failure to supervise and
breach of fiduciary duty. On the whole, plaintiffs seek compensatory and
punitive damages, pre- and post-judgment interest, attorneys fees and costs, an
accounting, and in some instances, treble damages. With the exception of one
case, each case pending in federal court is or will be subject to a motion to
compel arbitration based on plaintiffs' contractual agreement to arbitrate their
claims against defendants. One of the NYSE arbitrations has been set for a
December 2002 hearing.

LBI has received, and is responding to, requests for information, documents
and/or testimony from the NYSE, the SEC, the Division of Securities of the
Department of Commerce of the State of Ohio and the House of Representatives
Committee on Financial Services, Subcommittee on Oversight and Investigations,
in connection with the Gruttadauria matter.

28

FIRST ALLIANCE MORTGAGE COMPANY MATTERS

During 1999 and the first quarter of 2000, Lehman Commercial Paper, Inc.
("LCPI") provided a warehouse line of credit to First Alliance Mortgage Company
("FAMCO"), and LBI underwrote securitizations of mortgages originated by FAMCO.
In March 2000, FAMCO filed for protection from its creditors under Chapter 11 of
the United States Bankruptcy Code. In August 2001, a purported adversary class
action was filed in the United States Bankruptcy Court for the Central District
of California (the "Bankruptcy Court"), allegedly on behalf of a class of FAMCO
borrowers seeking equitable subordination of LPCI's (among other creditors')
liens and claims in the Bankruptcy Court. In October, 2001, the complaint was
amended by adding LBI as a defendant and adding claims for aiding and abetting
alleged fraudulent lending activities by FAMCO and for unfair competition under
the California Business and Professions Code. In addition to equitable
subordination, the complaint seeks actual damages, the imposition of a
constructive trust on all proceeds paid or being paid by FAMCO to LCPI and LBI,
disgorgement of profits, and attorneys' fees and costs.

In November, 2001, the Official Joint Borrowers Committee (the "Committee")
initiated an adversary proceeding, allegedly on behalf of the FAMCO-related
debtors, in the Bankruptcy Court by filing a complaint against LCPI, LBI,
Holdings and several individual officers and directors of FAMCO and its
affiliates. As to the Lehman Brothers defendants, the Committee asserted
bankruptcy claims for avoidance of lien, recovery of property, equitable
subordination, and disallowance of claim and also asserted claims for
declaratory relief and aiding and abetting breach of fiduciary duty. In
December, 2001, the Committee amended its complaint, dropping Holdings as a
defendant and adding claims for equitable indemnification and contribution. In
addition to relief under the Bankruptcy Code, the Committee seeks unspecified
compensatory and punitive damages as well as attorneys' fees and costs.

These two actions have been transferred to the United States District Court for
the Central District of California and have been consolidated. A January 2003
trial date has been set.

Separately, LBI is in discussions with the Attorney General's office in Florida
about that office's investigation of LBI regarding LBI's role in connection with
First Alliance.

29

LEHMAN BROTHERS INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

The following exhibits are filed as part of this Quarterly Report, or
where indicated, were heretofore filed and are hereby incorporated by
reference:

3.01 Restated Certificate of Incorporation of the Registrant
dated September 3, 1981 (INCORPORATED BY REFERENCE TO
EXHIBIT 3.01 TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED NOVEMBER 30, 2001)

3.02 Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant dated May 11, 1984
(INCORPORATED BY REFERENCE TO EXHIBIT 3.02 TO THE
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2001)

3.03 Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, dated March 6, 1985
(INCORPORATED BY REFERENCE TO EXHIBIT 3.03 TO THE
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2001)

3.04 Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, dated August 31, 1987
(INCORPORATED BY REFERENCE TO EXHIBIT 3.04 TO THE
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2001))

3.05 Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, dated January 28, 1988
(INCORPORATED BY REFERENCE TO EXHIBIT 3.05 TO THE
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2001))

3.06 Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, dated July 19, 1990.
(INCORPORATED BY REFERENCE TO EXHIBIT 3.06 TO THE
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2001)

3.07 Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, dated August 2, 1993
(INCORPORATED BY REFERENCE TO EXHIBIT 3.07 TO THE
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
NOVEMBER 30, 2001)

3.08 Certificate of Designations of Floating Rate Preferred
Stock, filed April 30, 1996 (INCORPORATED BY REFERENCE TO
EXHIBIT 3.8 TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996)

3.09 By-Laws of the Registrant, amended as of January 30, 1997
(INCORPORATED BY REFERENCE TO EXHIBIT 3.9 TO THE
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996)

12.01 Computation of Ratio of Earnings to Fixed Charges (FILED
HEREWITH)

30

LEHMAN BROTHERS INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

(b) Reports on Form 8-K:

The following reports on Form 8-K were filed during the quarter for
which this Quarterly Report is filed:

None

31

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

LEHMAN BROTHERS INC.
(Registrant)

Date: July 15, 2002 By: /S/ DAVID GOLDFARB
--------------------------------------
Chief Financial Officer
(Principal Financial Officer)

32

EXHIBIT INDEX

EXHIBIT NO. EXHIBIT

Exhibit 12.01 Computation of Ratio of Earnings to Fixed Charges

33