LEHMAN BROTHERS HOLDINGS INC - 10-Q Quarterly Report

Lehman Brothers Holdings Inc.
(Exact name of registrant as specified in its charter)

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 ý No o

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

As of June 30, 2003, 241,910,856 shares of the Registrant's Common Stock, par value $0.10 per share, were outstanding.

LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MAY 31, 2003

CONTENTS

Lehman Brothers Holdings Inc. ("Holdings") files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document Holdings files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Holdings' electronic SEC filings are available to the public at http://www.sec.gov.

Holdings' public internet site is http://www.lehman.com. Holdings makes available free of charge through its internet site, via a link to the SEC's internet site at http://www.sec.gov, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.

In addition, Holdings currently makes available on http://www.lehman.com its most recent annual report on Form 10-K, its quarterly reports on Form 10-Q for the current fiscal year, its most recent proxy statement and its most recent annual report to shareholders, although in some cases these documents are not available on that site as soon as they are available on the SEC's site. You will need to have on your computer the Adobe® Acrobat® Reader® software to view these documents, which are in the.PDF format. If you do not have Adobe Acrobat, a link to Adobe Systems Incorporated's internet site, from which you can download the software, is provided.

LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)

LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION
(Unaudited)
(In millions)

LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS
(Unaudited)
(In millions)

LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements include the accounts of Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers"). Lehman Brothers 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 and regional headquarters in London and Tokyo 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. The principal U.S. subsidiary of Holdings is Lehman Brothers Inc. ("LBI"), a registered broker-dealer. 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 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. These consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and the notes thereto (the "2002 Consolidated Financial Statements") incorporated by reference in Holdings' Annual Report on Form 10-K for the twelve months ended November 30, 2002 (the "Form 10-K"). The Consolidated Statement of Financial Condition at November 30, 2002 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.

The Company's second quarter of 2003 results include a $77 million pre-tax real estate charge ($45 million after-tax). This charge represents an adjustment of the real estate charge taken in the fourth quarter of 2002 and reflects the further deterioration in the sublease market for properties in New York and London since the fourth quarter of 2002.

During the six months ended May 31, 2003, the Company issued $8,151 million of long-term debt of which $8,019 million were senior notes and $132 million were subordinated notes. These issuances were primarily utilized to refinance current maturities of long-term debt in 2003 and to increase total capital (stockholders' equity, long-term debt and trust issued securities subject to mandatory redemption). The Company believes that total capital is a useful measurement of the Company's financial strength.

The Company had $5,162 million of long-term debt ($4,880 million of senior notes and $282 million of subordinated notes) mature during the six months ended May 31, 2003. Long-term debt at May 31, 2003 scheduled to mature within one year totaled $6,693 million.

The Company operates globally through a network of subsidiaries, with several subject to regulatory requirements. In the United States, LBI, as a registered broker-dealer, 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, 2003, LBI's regulatory net capital, as defined, of $1,675 million exceeded the minimum requirement by $1,432 million.

Lehman Brothers International (Europe) ("LBIE"), a United Kingdom registered broker-dealer and subsidiary of Holdings, is subject to the capital requirements of the Financial Services Authority ("FSA") of the United Kingdom. Financial resources, as defined, must exceed the total financial resources requirement of the FSA. At May 31, 2003, LBIE's financial resources of approximately $2,827 million exceeded the minimum requirement by approximately $874 million. Lehman Brothers Japan Inc.'s Tokyo branch, a regulated broker-dealer, is subject to the capital requirements of the Financial Services Agency and at May 31, 2003, had net capital of approximately $429 million which was approximately $170 million in excess of the specified levels required. Lehman Brothers Bank, FSB (the "Bank"), the Company's thrift subsidiary, is regulated by the Office of Thrift Supervision ("OTS"). The Bank exceeds all regulatory capital requirements and is considered well capitalized by the OTS. Certain other non-U.S. subsidiaries are subject to various securities, commodities and banking regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. At May 31, 2003, these other subsidiaries were in compliance with their applicable local capital adequacy requirements. In addition, 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, 2003, LBFP and LBDP each had capital which exceeded the requirements of the rating agencies.

The regulatory rules referred to above, and certain covenants contained in various debt agreements, may restrict Holdings' ability to withdraw capital from its regulated subsidiaries, which in turn could limit its ability to pay dividends to shareholders.

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-user) are recorded at fair value on the 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 was included in Interest expense on the Consolidated Statement of Income and was immaterial for the three and six months ended May 31, 2003 and 2002.

Market or fair value is generally determined by either quoted market prices (for exchange-traded futures and options) or pricing models (for 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 on the Consolidated Statement of Financial Condition for those transactions with counterparties executed under a legally enforceable master netting agreement 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 trading-related derivative activities. Assets and liabilities represent net unrealized gains (amounts receivable from counterparties) and net unrealized losses (amounts payable to counterparties), respectively.

Assets included in the table above represent the Company's net receivable/payable for derivative financial instruments before consideration of collateral. Included within the $20,004 million fair value of assets at May 31, 2003 was $19,196 million related to swaps and other over-the-counter ("OTC") contracts and $808 million related to exchange-traded option and warrant contracts. Included within the $13,862 million fair value of assets at November 30, 2002 was $12,846 million related to swaps and other OTC contracts and $1,016 million related to exchange-traded option and warrant contracts.

With respect to OTC contracts, including swaps, the Company views its net credit exposure to be $11,959 million at May 31, 2003, 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, 2003 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 Risk Rating	S&P/Moody's Equivalent	Net Credit Exposure
1	AAA/Aaa	15%
2	AA-/Aa3 or higher	28%
3	A-/A3 or higher	35%
4	BBB-/Baa3 or higher	17%
5	BB-/Ba3 or higher	4%
6	B+/B1 or lower	1%

The Company's net credit exposure from OTC contracts, by maturity, is set forth below:

Counterparty Risk Rating	Less Than 1 Year		1-5 Years		5-10 Years		Greater than 10 Years		Total
1	4	%	3	%	4	%	4	%	15	%
2	8	%	5	%	7	%	8	%	28	%
3	12	%	8	%	6	%	9	%	35	%
4	6	%	4	%	2	%	5	%	17	%
5	1	%	1	%	1	%	1	%	4	%
6	1	%	—		—		—		1	%

Total	32	%	21	%	20	%	27	%	100	%

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 for their membership. 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 credit losses from exchange-traded products is limited.

For a further discussion of the Company's derivative related activities, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements—Derivatives" and the Notes 1 and 15 to the 2002 Consolidated Financial Statements, incorporated by reference in the Form 10-K.

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. 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) on the Consolidated Statement of Financial Condition. For further information regarding the accounting for securitization transactions, see Notes 1 and 16 to the 2002 Consolidated Financial Statements, incorporated by reference in the Form 10-K. During the six months ended May 31, 2003 and 2002, the Company securitized approximately $76 billion and $60 billion of financial assets, including: $63.7 billion and $43.4 billion of residential mortgages, $4.2 billion and $4.4 billion of commercial mortgages, and $7.6 billion and $12.2 billion of other asset-backed financial instruments, respectively.

As of May 31, 2003 and November 30, 2002, the Company had approximately $654 million and $1,060 million, respectively, of non-investment grade retained interests from its securitization activities (principally junior security interests in securitizations) including $347 million of residential mortgages,

$198 million of other asset-backed financial instruments and $109 million of commercial mortgages as of May 31, 2003; and $350 million of residential mortgages, $200 million of other asset-backed financial instruments and $510 million of commercial mortgages as of November 30, 2002. The Company records its trading assets on a mark-to-market basis, including those assets held prior to securitization, as well as any retained interests post securitization. Mark-to-market gains or losses are recorded in Principal transactions on the Consolidated Statement of Income. Fair value is determined based upon listed market prices, if available. When market prices are not available, fair value is determined based on valuation pricing models which take into account relevant factors such as discount, credit and prepayment assumptions, and also considers comparisons to similar market transactions.

The tables below outline the key economic assumptions used in measuring the fair value of retained interests:

At May 31, 2003:	Residential Mortgages	Other Asset-Backed	Commercial Mortgages
Weighted-average life	2 years	10 years	1 year
Annual prepayment rate	15–80 CPR	8–39 CPR	0–15 CPR
Credit loss assumption	.5–6%	3–12%	2–27%
Weighted-average discount rate	19%	5%	16%

At November 30, 2002:	Residential Mortgages	Other Asset-Backed	Commercial Mortgages
Weighted-average life	3 years	5 years	1 year
Annual prepayment rate	4–65 CPR	8–15 CPR	0–15 CPR
Credit loss assumption	.5–6%	3–10%	2–17%
Weighted-average discount rate	17%	5%	20%

The tables below outline the sensitivity of the fair value of the retained interests to immediate 10% and 20% adverse changes in the above assumptions:

The sensitivity analysis in the preceding table is hypothetical and should be used with caution as the above stresses are performed without consideration of the impact of hedges, which serve to reduce the Company's actual risk. In addition, these results are calculated by stressing a particular economic assumption independent of changes in any other assumption (as required by U.S. GAAP); in reality,

changes in one factor often result in changes in another (for example, changes in discount rates will often impact expected prepayment speeds). Further, changes in the fair value based upon a 10% or 20% variation in an assumption should not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.

The following table summarizes cash flows from securitization trusts for the six months ended May 31, 2003:

		Six months ended May 31, 2003
(in millions)		Residential Mortgages			Other Asset- Backed			Commercial Mortgages
Cash flows received on retained interests		$	96		$	68		$	4

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

(in millions)		May 31 2003		November 30 2002
Securities and other financial instruments owned:
	Mortgages and mortgage backed	$	37,367	$	34,431
	Government and agencies		30,509		28,543
	Derivatives and other contractual agreements		20,004		13,862
	Corporate debt and other		18,712		15,620
	Corporate equities		21,622		21,252
	Certificates of deposit and other money market instruments		2,877		5,570

		$	131,091	$	119,278

Securities and other financial instruments sold but not yet purchased:
	Government and agencies	$	42,346	$	40,852
	Derivatives and other contractual agreements		13,440		10,126
	Corporate debt and other		6,395		8,927
	Corporate equities		11,923		9,129

		$	74,104	$	69,034

The Company enters into secured borrowing and lending transactions to finance trading inventory positions, obtain securities for settlement and meet customers' needs. The Company receives collateral in connection with resale agreements, securities borrowed transactions, customer margin loans and certain 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 provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" ("FIN 41").

At May 31, 2003 and November 30, 2002, the fair value of securities received as collateral and securities owned that have not been sold, repledged or otherwise encumbered totaled approximately $64 billion and $51 billion, respectively. At May 31, 2003 and November 30, 2002, the gross fair value of securities received as collateral where the Company was permitted to sell or repledge the securities was approximately $388 billion and $345 billion, respectively. Of this collateral, approximately $370 billion and $338 billion at May 31, 2003 and November 30, 2002, 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. Included in the $388 billion and $345 billion at May 31, 2003 and November 30, 2002 above, the Company had pledged securities, primarily fixed income, having a market value of approximately $55.8 billion and $41.6 billion, respectively, as collateral for securities borrowed having a market value of approximately $54.9 billion and $40.6 billion, respectively.

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 rehypothecate the financial instruments are classified as Securities and other financial instruments owned, pledged as collateral, on the Consolidated Statement of Financial Condition as required by Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", ("SFAS 140").

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 $35 billion and $39 billion at May 31, 2003 and November 30, 2002, respectively.

In the normal course of business the Company enters into various commitments and guarantees, including lending commitments to high grade and high yield borrowers, liquidity commitments and other guarantees. In all instances, the Company marks-to-market these commitments and guarantees with changes in fair value recognized in Principal transactions on the Consolidated Statement of Income.

In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $4.2 billion and $1.5 billion at May 31, 2003 and November 30, 2002, 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. In addition, at May 31, 2003, the Company had commitments to enter into forward starting, secured reverse repurchase and repurchase agreements, of $74.2 billion and $55.2 billion, respectively, as compared to $89.9 billion and $50.3 billion, respectively, at November 30, 2002. These are principally secured by government and government agency obligations.

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 drawdowns

of these facilities typically have fixed maturity dates and are contingent upon certain representations, warranties and contractual conditions applicable to the borrower.

The Company had credit risk associated with lending commitments to investment grade borrowers (after consideration of hedges) of $3.1 billion and $3.2 billion at May 31, 2003 and November 30, 2002, respectively. In addition, the Company had credit risk associated with lending commitments to non-investment grade borrowers (after consideration of hedges) of $1.8 billion and $1.7 billion at May 31, 2003 and November 30, 2002, respectively. Before consideration of hedges, the Company had commitments to investment and non-investment grade borrowers of $7.8 billion and $2.0 billion as compared to $7.1 billion and $1.8 billion at May 31, 2003 and November 30, 2002, respectively. The Company had available undrawn borrowing facilities with third parties of approximately $5.3 billion and $5.2 billion at May 31, 2003 and November 30, 2002, respectively, 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.

In addition, the Company provided high yield contingent commitments related to acquisition financing of approximately $1.6 billion and $2.8 billion at May 31, 2003 and November 30, 2002, respectively. The Company's intent is, and its past practice has been, to sell down significantly all the credit risk associated with these loans, if closed, through loan syndications consistent with the Company's credit facilitation framework. These commitments are not indicative of the Company's actual risk as the borrowers' ability to draw is subject to there being no material adverse change in either market conditions or the borrowers' financial condition, among other factors. In addition, these commitments contain certain flexible pricing features in order to further adjust for changing market conditions.

At May 31, 2003 and November 30, 2002, the Company had commitments to invest up to $398 million and $672 million, respectively, directly and through partnerships in private equity related investments. These commitments will be funded as required, in whole or in part, through the end of the respective investment periods, principally expiring in 2004.

In accordance with FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), the Company is required to disclose certain guarantees, including derivative contracts that require the Company to make payments to a counterparty based on changes on an underlying instrument or index (e.g., security prices, interest rates, and currency rates). Derivatives that meet the FIN 45 definition of a guarantee include credit default swaps, written put options, written foreign exchange ("FX") options and written interest rate caps and floors. According to FIN 45, derivatives are not considered guarantees if such contracts are cash settled and the Company has no basis to determine that it is probable that the derivative counterparty held the related underlying instrument. Accordingly, if these conditions were met, the Company has not included such derivatives contracts in its guarantee disclosures.

mitigated its risk on these contracts through hedges, such as other derivative contracts and/or cash instruments. The Company manages risk associated with derivative guarantees consistent with the Company's global risk management policies. The Company records derivative contracts, including those considered to be guarantees under FIN 45, on a fair value basis with related gains/losses recognized in Principal transactions on the Consolidated Statement of Income.

The Company had liquidity commitments of approximately $3.6 billion related to trust certificates backed by investment grade municipal securities at May 31, 2003, as compared to $4.4 billion at November 30, 2002. The Company's obligation under such liquidity commitments is generally less than one year and is typically further limited by the fact that the Company's obligation ceases if the underlying assets are downgraded below investment grade or default. In addition, the Company had certain other commitments and guarantees associated with special purpose entities of approximately $3.0 billion at May 31, 2003, as compared to $5.0 billion at November 30, 2002, respectively. These commitments and guarantees consist of liquidity facilities and other default protection to investors, which are principally overcollateralized with investment grade collateral.

As of May 31, 2003 and November 30, 2002, the Company was contingently liable for $0.8 billion letters of credit, primarily used to provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodity exchanges.

In the normal course of business, the Company provides guarantees to securities clearinghouses and exchanges. These guarantees are generally required under the standard membership agreements, such that members are required to guarantee the performance of other members. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral. The Company's obligation under such guarantees could exceed the collateral amounts posted; however, the potential for the Company to be required to make payments under such guarantees is deemed remote.

In connection with certain asset sales and securitization transactions, the Company often makes representations and warranties about the assets conforming to specified guidelines. If it is later determined that the underlying assets fail to conform to the specified guidelines, the Company may have an obligation to repurchase the assets or indemnify the purchaser against any losses. To mitigate these risks, to the extent that the assets being securitized may have been originated by other third parties, the Company seeks to obtain appropriate representations and warranties from these third parties upon acquisition of such assets.

In the normal course of business, the Company has been named a defendant in a number of lawsuits and other legal proceedings. After considering all relevant facts and established reserves, 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.

Special purpose entities ("SPEs") are corporations, trusts or partnerships which are established for a limited purpose. SPEs by their nature generally do not provide equity owners with significant voting powers, as the SPE documents govern all material decisions. The Company's primary involvement with SPEs relates to securitization transactions in which transferred assets, including mortgages, loans,

receivables and other assets, are sold to an SPE and repackaged into securities (i.e., securitized). SPEs may also be utilized by the Company to create securities with a unique risk profile desired by investors and as a means of intermediating financial risk. In summary, in the normal course of business, the Company may establish SPEs; sell assets to SPEs; underwrite, distribute and make a market in securities issued by SPEs; transact derivatives with SPEs; own securities or residual interests in SPEs and provide liquidity or other guarantees for SPEs.

The majority of the Company's involvement with SPEs relates to securitization transactions meeting the SFAS 140 definition of a qualifying special purpose entity ("QSPE"). Based upon the guidance in SFAS 140, the Company is not required to and does not consolidate such QSPEs. Rather, the Company accounts for its involvement with QSPEs under a financial components approach in which the Company recognizes only its retained involvement with the QSPE.

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 instances in which the Company is either the sponsor of or transferor to a non-qualifying special purpose entity, the Company follows the accounting guidance provided by Emerging Issues Task Force ("EITF") Topic D-14 and FASB Interpretation No. 46, "Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51" ("FIN 46") (for a discussion of FIN 46, see below) to determine whether consolidation is required. Under this guidance, the Company would not be required to, and does not consolidate such SPE if a third party investor made a substantive equity investment in the SPE, was subject to first dollar risk of loss of such SPE, and had a controlling financial interest. The Company's principal involvement with non-QSPEs relates to Collateralized Debt Obligations ("CDOs"), synthetic credit transactions and other structured financing transactions to facilitate customers' investment and/or funding needs.

With respect to CDO transactions, in which a diversified portfolio of securities and/or loans is owned by a SPE and managed by an independent asset manager, the Company's role is principally limited to acting as structuring and placement agent, warehouse provider, underwriter and market maker in the related CDO securities. In a typical CDO, at the direction of the asset manager, the Company will warehouse securities or loans on its balance sheet pending the transfer to the SPE once the permanent financing is completed in the capital markets. During the second quarter of 2003, the Company acted as warehouse provider and underwriter for approximately $301 million of CDO transactions. At May 31, 2003 the Company did not have any significant continuing involvement in the CDOs arranged by the Company other than acting as market maker, and as such the Company is not required to consolidate the transactions.

The Company is a dealer in credit default swaps and, as such, makes a market in buying and selling credit protection on single issuers as well as on portfolios of credit exposures. One of the mechanisms used by the Company to mitigate credit risk is synthetic credit transactions entered into with SPEs. In these transactions, the Company purchases credit protection in the form of a credit default swap from the SPE on referenced obligations (single issuer or portfolio). The Company pays a premium to the SPE for this protection and is secured by high quality collateral purchased by the SPE. Third party investors in these SPEs are subject to default risk associated with the referenced obligations under the default swap as well as credit risk to the assets held by the SPE. The Company's maximum loss associated with its involvement with such synthetic credit transactions is the fair value of the Company's credit default swaps with such SPEs which approximated $900 million at May 31, 2003 (while this amount represents the maximum loss the Company could potentially lose on such agreements, it is highly unlikely since the underlying collateral held by the SPEs was $7.7 billion and was investment grade quality).

The Company also enters into certain structured financing transactions with SPEs to facilitate customers' investment and/or funding needs. The Company's involvement in these transactions is generally limited to providing liquidity or other default protection to investors. At May 31, 2003 and November 30, 2002, the Company had approximately $3.0 billion and $5.0 billion, respectively, of such commitments, which represented the Company's maximum loss; however, the Company's expected exposure for these commitments is significantly less as these commitments were principally overcollateralized with investment grade collateral.

In January 2003, the FASB issued FIN 46. This interpretation provides consolidation accounting guidance for entities involved with SPEs. This guidance does not impact the accounting for securitizations transacted through QSPEs, but rather will replace EITF Topic D-14 as it is applied to non-QSPEs. This interpretation will require a primary beneficiary, defined as an entity which participates in either a majority of the risks or rewards of such SPE, to consolidate the SPE. An SPE would not be subject to this interpretation if such entity has sufficient voting equity capital (presumed to require that total voting equity is at least 10% of total assets), such that the entity is able to finance its activities without the additional subordinated financial support from other parties. The interpretation became effective for all new transactions after January 31, 2003 and will be effective for all other existing transactions with SPEs beginning in the Company's fourth quarter of 2003. While the Company has not yet completed its analysis of the impact of the new interpretation, the Company does not anticipate that the adoption of this interpretation will have a material impact to the Company's financial condition or its results of operations.

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. This 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 this 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. This 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 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.

LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS

The Company's segment information for the three and six months ended May 31, 2003 and May 31, 2002 is prepared utilizing the following methodologies:

The Company accounts for stock-based compensation in accordance with the intrinsic value-based method rather than the fair value method in SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). The disclosure requirements of SFAS 123 require companies which elect not to record the fair value of stock-based compensation awards on the Consolidated Statement of Income to provide pro-forma disclosures of net income and earnings per share as if the fair value of stock- based compensation had been recorded. Had the Company adopted the provisions of SFAS 123 and elected the retroactive alternative to SFAS 123 in which all employee stock awards are recognized at fair value, the Company would have recognized additional pre-tax compensation expense of $63 million and $32 million for the three months ended May 31, 2003 and 2002, respectively and $127 million and $65 million for the first six months of 2003 and 2002, respectively. Net income would have decreased by $36 million and $18 million for the three months ended May 31, 2003 and 2002, respectively and $72 million and $37 million for the first six months of 2003 and 2002, respectively. As the Company already recognizes compensation expense for the fair value of restricted stock units, net income has already been reduced by approximately $73 million and $79 million for these awards for the three months ended May 31, 2003 and 2002, respectively, and $137 million and $147 million for the first six months of 2003 and 2002, respectively.

The following table represents the proforma effects of adopting SFAS 123 under the retroactive method. These proforma amounts do not include the impacts of 2003 stock option awards not yet granted.

Had the Company elected to expense its stock options under the prospective alternative to SFAS 123, net income and diluted earnings per share would have decreased by $3 million and $0.01 and $6 million and $0.02 in the three and six month periods ended May 31, 2003, respectively.

LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS

Some of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and in other parts of this Report, 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, but are not limited to, market fluctuations and volatility, industry competition and changes in the competitive environment, investor sentiment, liquidity risks, credit ratings changes, credit exposure and legal and regulatory proceedings and changes. (For further discussion of these risks, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Affecting Results of Operations" incorporated by reference in the Form 10-K.) 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.

The principal business activities of Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers") are investment banking and capital markets facilitation, which by their nature are subject to volatility, primarily due to changes in interest and foreign exchange rates and security valuations, global economic and political trends and industry competition. Through the Company's investment banking, trading, research, structuring and distribution capabilities in equity and fixed income products, the Company continues to build on its client/customer business model. This model focuses on "customer flow" activities. The "customer flow" model is based upon the Company's principal focus of facilitating customer transactions in all major global capital markets products and services. The Company generates customer flow revenues from institutional and high-net-worth clients/customers by (i) advising on and structuring transactions specifically suited to meet client needs, (ii) serving as a market maker and/or intermediary in the global marketplace, including having securities and other financial instrument products available to allow clients to rebalance their portfolios and diversify risks across different market cycles and (iii) acting as underwriter to clients.

Marketplace uncertainties experienced throughout 2002 continued through the first quarter of 2003 and into the early part of the second quarter. However, the latter part of the second quarter of 2003 experienced an emergence of world markets from a prolonged slump. The generally poor economic data and uncertainty that negatively influenced the financial markets ahead of the conflict in Iraq was replaced with somewhat renewed investor confidence and increased trading volumes as the conflict reached resolution in April 2003. In addition, a number of central banks took actions to reduce interest rates over the period, which along with the enactment of a U.S. tax package, helped build investor confidence and fuel both investor and issuer activities.

Fixed income markets continued their strong run in the first six months of 2003, benefiting from risk-averse investors seeking yield in the face of weak equity markets. These markets reached near ideal levels toward the latter portion of the second quarter. The second quarter of 2003 saw a decline in the absolute levels of interest rates, whereby the U.S. Treasury rate hit 45 year lows; credit spreads tightened significantly, with spreads on U.S. investment grade and high yield bonds decreasing a further 33 basis points and 153 basis

points, respectively, from first quarter 2003 levels. These factors led to improved secondary trading volumes as well as increased global debt origination activity. Investment grade issuance increased 9% from the previous quarter, while high yield increased by 57% over the same period.

U.S. equity markets increased 10-20% in the second quarter of 2003. In addition, major foreign indices also improved over the course of the quarter: the FTSE 100 rose by 11% and the DAX composite increased by 17%. Despite these gains, key market indices remained lower as compared to the end of fiscal year 2002 with the FTSE 100, DAX composite and Nikkei down 3%, 10% and 9%, respectively.

Highly favorable fixed income market conditions led to an 18% improvement in global debt origination in the first six months of 2003 from the robust levels experienced in the first half of 2002. Global equity origination market volume increased 49% during the second quarter of 2003 from the severely impaired levels of the first quarter; however, these gains were primarily driven by convertible issuances, a lower margin product. Despite these gains, 2003 year-to-date equity origination was down approximately 45% from the same period in the previous year.

Completed Merger and Acquisition ("M&A") advisory activity for the six months ended May 31, 2003 continued its negative trend, down approximately 19% over the same period last year. However, in the second quarter of 2003 signs of activity emerged, as completed M&A volume increased 14% from the trailing quarter, helping to promote moderate optimism that late quarter increases could lead to renewed deal activity. (Statistics according to Thomson Financial Securities Data Corp ("TFSD").)

The Company reported record net income of $437 million for the second quarter ended May 31, 2003, an increase of 48% when compared to $296 million for the second quarter of 2002. Earnings per common share (diluted) for the second quarter of 2003 were $1.67 versus $1.08 for the second quarter of 2002. The Company's pre-tax margin for the second quarter of 2003 was 27.4%, and return on common equity was 19.6%, up from 26.2% and 14.1%, respectively, for the same quarter last year. These results included a $77 million pre-tax real estate charge ($45 million after-tax) associated with the Company's previous decision to dispose of certain excess real estate. The effect of this charge was to decrease second quarter diluted earnings per share by $0.17, return on common equity by 2.1% and pre-tax margin by 3.4%. The Company believes that the significant increase in net revenues in the second quarter of 2003 reflects the more positive economic environment experienced in the quarter, which, together with improvements the Company has achieved in its market position and overall franchise, bolstered results in this challenging market environment. The Company continues to maintain its disciplined approach with regard to its core competencies in expense, risk and liquidity management.

Second quarter 2003 net revenues were a record $2,291 million as compared to $1,663 million for the second quarter 2002, and $1,711 million for the first quarter of 2003, an increase of 38% and 34%, respectively. The Company's second quarter 2003 revenues were driven by strong technicals including historically low interest rates, declining credit spreads, and appreciating equity markets. These market conditions resulted in improved customer flow trading activity in both the fixed income and equity products as investors became decidedly more active following the resolution of the conflict in Iraq. However, M&A and equity origination activity remained weak in 2003 compared to historical norms.

The Company evaluates the performance of its Capital Markets and Client Services revenues in the aggregate, including Principal transactions, Commissions and net interest. Decisions relating to these activities are based on a review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction, including associated commissions, and the interest and dividends revenue and expense associated with financing or hedging the Company's positions. Therefore, the Company evaluates its Net revenues from Principal transactions, Commissions and Interest and dividends revenues, offset by Interest expense, in the aggregate. Caution should be used when analyzing these revenue categories individually, as they may not be indicative of the performance of the Company's overall Capital Markets and/or Client Services activities.

Principal transactions, Commissions and net interest revenues increased 55% to $1,840 million for the second quarter of 2003 as compared to $1,185 million for the second quarter of 2002, driven by record revenues from fixed income products and a 39% increase in revenues from equity products. The near perfect fixed income market conditions in the second quarter of 2003 resulted in record customer driven volumes and strong performances in virtually all fixed income asset classes. Equity revenues benefited from the overall upward movement in equity market indices worldwide during the second quarter of 2003 and improvements in customer flow activities, primarily in convertibles and derivatives.

Principal transactions revenues were $1,275 million for the second quarter of 2003 as compared to $627 million for the second quarter of 2002. Commissions revenues were $299 million for the second quarter of 2003 as compared to $332 million for the second quarter of 2002. Interest and dividends revenues were $2,445 million for the second quarter of 2003 as compared to $2,910 million for the second quarter of 2002. Interest expense decreased to $2,179 million for the second quarter of 2003 as compared to $2,684 million for the second quarter of 2002.

The increase in Principal transactions revenues primarily reflects record fixed income revenues with significant gains in mortgage products, interest rate derivatives, high yield and high grade credit, foreign exchange and municipals. The decrease in Commissions revenues is reflective of reduced demand for equity products when compared to the second quarter of 2002.

Interest and dividends revenues and Interest expense are functions 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 dividends revenues and Interest expense are integral components of the Company's overall customer flow activities. The decline in Interest and dividends revenues and Interest expense from the previous year is principally due to an overall decrease in interest rates between the periods. The 18% increase in net interest revenue to $266 million in the second quarter of 2003 from $226 million in the second quarter of 2002 was principally due to an increase in total inventory as compared to the prior year.

Investment banking revenues were $432 million for the second quarter of 2003 as compared to $465 million for the second quarter of 2002. Investment banking revenues result mainly from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, advising clients on M&A activities and other services. Investment banking revenues decreased 7% from the second quarter of 2002, reflecting decreased activity in equity origination and mergers and acquisitions. Debt underwriting activities continued at robust levels reflecting the positive environment. Equity underwriting weakened further with market volumes decreasing 39% over the prior year's second quarter; however, the

Company's volumes decreased only 12% for the same period. M&A advisory activities, while still anemic, showed modest signs of improvement as compared to the second quarter of 2002.

Non-interest expenses were $1,663 million for the second quarter of 2003 as compared to $1,227 million for the second quarter of 2002. Non-interest expenses for the second quarter of 2003 include a $77 million real estate charge ($45 million after-tax). This charge represents an adjustment of the real estate charge taken in the fourth quarter of 2002 and reflects the further deterioration in the sublease market for properties in New York and London since the fourth quarter.

Compensation and benefits expense of $1,168 million increased 38% from $848 million in the second quarter of 2002 as Net revenues increased over the same period. However, compensation and benefits expense (including both variable and fixed costs) as a percentage of net revenues remained at 51% for the second quarter of 2003, consistent with the second quarter of 2002. Variable compensation expenses increased by 61% from the second quarter of 2002, reflecting higher revenue levels. Fixed compensation, consisting primarily of salaries and benefits, increased by 7% from the second quarter of 2002, due to an increase in pension related costs and increased salary costs associated with the purchase of the controlling interest of Aurora Loan Services (See below).

Nonpersonnel expenses, excluding the real estate reconfiguration charge, were $418 million for the second quarter of 2003, up 10% compared to the second quarter of 2002. Brokerage and clearance fees increased 18% in the second quarter of 2003 as a result of higher volumes in many fixed income and equity based products. Professional fees increased 21% in the second quarter of 2003 as a result of increased legal, and accounting and audit costs. Other expenses increased $14 million in the second quarter of 2003 as compared to the second quarter of 2002 due in part to increased insurance premiums.

During the second quarter of 2003, the Company acquired a controlling interest in Aurora Loan Services ("ALS"), a residential loan originator and servicer. The Company had previously maintained an equity investment in ALS. The Company believes that this acquisition adds long-term value to its mortgage franchise by allowing further integration of the business platform. The mortgage loans originated by ALS are expected to provide a source of loan product for our securitization pipeline. The acquisition cost for ALS in the second quarter of 2003 was not material and resulted in increases of $29 million of net revenues, $11 million of non-personnel expenses and essentially break even net income. In addition, this acquisition increased the Company's headcount by approximately 1,200 people, mostly in servicing and other support functions.

The Company recorded a provision for income taxes of $173 million for the second quarter of 2003 versus $126 million for the second quarter of 2002 which resulted in effective tax rates of 28% and 29%, respectively. The decrease in the effective tax rate is primarily due to a more favorable mix of geographic earnings.

International net revenues of $585 million for the second quarter of 2003 were up 5% as compared to $558 million in the second quarter of 2002. Compared to second quarter 2002, Asia Pacific revenues were up 30% as a result of increased market share and ranking in M&A completions. In Europe, revenues were relatively flat as compared to second quarter 2002; however, fixed income customer activity from interest rate and credit products was robust, with additional revenue growth arising from a strong level of investment grade issuances.

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 on the Consolidated Statement of Income. (Segment net revenues also contain certain internal allocations, including funding costs, which are centrally managed. For further discussion of these allocations, see Note 10 to the Consolidated Financial Statements included in this Report.)

In assessing the performance of Capital Markets and Client Services, the Company evaluates 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 associated commissions, and the Interest and dividends revenues and Interest expense associated with financing or hedging the Company's positions. Therefore, the Company evaluates its net revenues from Principal transactions, Commissions and Interest and dividends revenues, offset by related Interest expense, in the aggregate, because the revenue classifications, when analyzed individually, may not be indicative of the performance of the Company's Capital Markets and Client Services activities.

Investment Banking This segment's net revenues result from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, and advising clients on merger and acquisition activities and other services.

Investment Banking's Net revenues decreased 6% during the second quarter of 2003 to $426 million from $454 million in the second quarter of 2002, as an increase in M&A advisory activity was more than offset by reduced equity underwriting.

Debt underwriting revenues were relatively flat at $258 million in the second quarter of 2003 as compared to $266 million in the second quarter 2002, but increased 20% from the first quarter of 2003. Fixed income originations remained at robust levels, as many issuers continued to take advantage of the low interest rate environment, tight credit spreads and strong investor demand for new product. Industry-wide fixed income underwriting volumes were up 4% over the prior year's second quarter, with the Company's volume up 5% over this same period. (Statistics according to TFSD)

Equity underwriting revenues were $75 million in the second quarter of 2003, down 31% from the second quarter of 2002, but 27% higher than the first quarter 2003. The decrease in equity origination was due to the continued weakness in the global equity markets, as industry-wide volumes for the second quarter 2003 dropped 39% to their lowest quarterly levels in seven years. (Statistics according to TFSD)

M&A advisory fees increased 18% to $93 million from $79 million in the second quarter 2002. Market volume for completed transactions was down 21% in the second quarter of 2003 from the same period in 2002; however, the Company's volume increased 31%. Industry-wide M&A announced transactions declined 23% over the second quarter of 2002, while the Company's volume of announced transactions declined only 18% over the same period. Although M&A activity remained sluggish, the Company advised on four of the top 20 transactions to close this calendar year. Each of these transactions closed during our fiscal second quarter. (Statistics according to TFSD)

Investment Banking pre-tax income of $81 million in the second quarter of 2003 decreased 24% from $107 million in the second quarter of 2002, as a 6% decrease in net revenues was only partially offset by a 1% decrease in non-interest expenses. The decrease in non-interest expenses primarily reflected the impacts of the Company's continued focus on minimizing discretionary spending in the current market environment, as personnel expenses were essentially flat over the prior year's second quarter.

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. This segment also includes the Company's risk arbitrage business, as well as realized and unrealized gains and losses related to the Company's private equity investments.

Capital Markets net revenues were $1,636 million for the second quarter of 2003, an increase of 64% from the second quarter of 2002, reflecting record performance in fixed income and improved performance in equities.

The fixed income component of Capital Markets in the second quarter of 2003 realized a third consecutive quarter of record results, as net revenues increased 75% from the second quarter of 2002 and 33% over the first quarter of 2003. The increase over the prior year was principally driven by near optimal market conditions, which led to record customer-driven volumes and strong performances in virtually all asset classes. The second quarter of 2003 saw a decline in the absolute levels of interest rates, whereby the U.S. Treasury rate hit 45 year lows, and credit spreads tightened significantly, with spreads on U.S. investment grade and high yield bonds decreasing 33 basis points and 153 basis points, respectively, from first quarter 2003 levels. These conditions resulted in increased customer flow trading activity and revenues from mortgage products, interest rate derivatives, high yield and high grade credit, foreign exchange, and municipals. Increased revenues in mortgage-related products were driven by continued strength in securitization activity and distribution of various mortgage loan products, particularly in the residential sector. Interest rate derivatives had a record quarter as origination clients used derivatives to customize a significant volume of refinancings, and investors increased their utilization of such products in response to the higher volatility levels. The volatility in the currency markets during the second quarter of 2003 drove increased customer flow activities. In municipals, state and local deficits drove a strong issuance calendar, which, in turn, prompted increased secondary market trading activity.

Net revenues from the equities component of Capital Markets were $450 million in the second quarter of 2003, up 39% from second quarter of 2002. Global equity indices rallied in the second quarter of 2003 as the end of the Iraq conflict and improved corporate earnings prompted increased investor activity. The increase was principally due to convertibles, derivatives, and private equity. Convertibles benefited from improved credit markets and increased new issuance activity, which led to increased secondary trading as investors sought defensive assets with upside potential. Equity derivatives increased due in part to increased demand for OTC products in Europe. In addition, equity capital markets revenues increased due to improvements in the Company's private equity portfolio relating to certain publicly traded investments. The Company increased its secondary market share in listed securities to 7.3% from 6.8% during the second quarter of 2003 as compared to the prior year period.

Capital Markets pre-tax earnings of $566 million in the second quarter of 2003 increased 102% from pre-tax earnings of $280 million in the second quarter of 2002 driven by a 64% increase in net revenues. Capital Markets non-interest expenses increased 49% during the second quarter of 2003 to $1,070 million from $720 million in the second quarter of 2002 driven by an increase in compensation and benefits.

Interest and Dividends The Company evaluates the performance of its Capital Markets business revenues in the aggregate, including Principal transactions, Commissions and net interest. Substantially all of the Company's net interest is allocated to its Capital Markets segment. 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 revenue and expense associated with financing or hedging the Company's positions; therefore caution should be utilized when analyzing revenue categories individually.

Interest and dividends revenues for Capital Markets businesses decreased by 16% from the second quarter of 2002, while Interest expense decreased by 19% over this same period, reflecting the decline in interest rates from the previous year's second quarter of approximately 50 basis points. Net interest revenue increased 19% to $263 million in the second quarter of 2003, benefiting from the change in inventory mix to higher levels of interest-bearing assets.

Client Services Client Services net revenues 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 private equity partnerships.

Client Services net revenues were $229 million in the second quarter of 2003, compared to $209 million in the second quarter of 2002. Customer flow activity in fixed income products reached record levels as investors in search of yield continued to reallocate assets. Private Client net revenues increased 13% to $223 million in the second quarter of 2003 from the second quarter of 2002, representing the second best quarter ever, trailing only first quarter 2000 which included a $73 million asset management fee.

Private Equity net revenues declined by $6 million in the second quarter of 2003 from the second quarter of 2002 primarily due to a decrease in management fees as the commitment periods expired on two of the Company's funds.

Client Services pre-tax earnings of $58 million increased 18% in the second quarter of 2003 from $49 million in the second quarter of 2002 as a 10% increase in net revenues was only partially offset by an increase in non-interest expenses.

The Company reported net income of $738 million for the six months ended May 31, 2003, an increase of 24% as compared to $594 million for the six months ended May 31, 2002. Earnings per common share (diluted) for the six months ended May 31, 2003 were $2.81 as compared to $2.07 for the comparable period in 2002. The Company's pre-tax operating margin for the six months ended May 31, 2003 was 26.6%, and return on common equity was 16.8% compared to 26.8% and 13.7%, respectively for the first six months of 2002. The 2003 results include a $77 million pre-tax real estate charge ($45 million after-tax) associated with the Company's previous decision to dispose of certain excess real estate. The effect of this charge was to decrease diluted earnings per share by $0.18, return on common equity by 1.0% and pre-tax margin by 1.9%. During the six month period, the Company continued its disciplined approach with regard to its core competencies in expense, risk and liquidity management.

Net revenues were $4,002 million for the first six months of 2003 as compared to $3,269 million for the first six months of 2002. Revenues increased 22% compared to the prior year's levels, reflecting improvements in the economic environment, particularly toward the latter part of the period following the resolution of the conflict in Iraq, as well as improvements in the Company's market position.

The Company evaluates the performance of its Capital Markets and Client Services revenues 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 and dividends revenues and Interest expense associated with financing or hedging the Company's positions. Therefore, the Company evaluates its net revenues from Principal transactions, Commissions and Interest revenue, offset by Interest expense, in the aggregate. Caution should be used when analyzing these revenue categories individually, as they may not be indicative of the performance of the Company's overall Capital Markets and Client Services activities.

Principal transactions, Commissions and net interest revenues increased 37% to $3,168 million for the first six months of 2003 as compared to $2,309 million for the first six months of 2002, reflecting robust fixed income customer flow activities, offset by continued weakness in the equities markets. Fixed income products benefited from the rally in U.S. Treasuries and the narrowing of credit spreads, as investors continued to be risk averse. These conditions contributed to strong customer flow activity and improved results, particularly in interest rate products and high grade and high yield bonds. In addition, there was improved performance from mortgage products driven by continued strength in securitization activity as a result of historically low interest rate levels. Revenues from equity products improved due to stronger convertible and derivative activity. The Company also continued to improve its market share in both listed and NASDAQ trading volumes during the first six months of 2003 as compared to the prior year period.

Within these amounts, Principal transactions revenues were $2,043 million for the first six months of 2003 as compared to $1,196 million for the first six months of 2002. Commissions revenues were $561 million for the first six months of 2003 as compared to $621 million for the first six months of 2002. Interest and dividends revenues were $5,132 million for the first six months of 2003 as compared to $5,796 million for the first six months of 2002. Interest expense was $4,568 million for the first six months of 2003 as compared to $5,304 million for the second quarter of 2002.

The increase in Principal transactions revenues reflects improved trading revenue in nearly all fixed income products. The decrease in Commissions revenues is principally a result of lower customer flow activity in equity trading volumes, as investors continued to exit equity products for more defensive asset classes during the first six months of 2003.

Interest and dividends revenues and Interest expense are functions 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 dividends revenues and Interest expense are integral components of the Company's overall customer flow activities. The decline in Interest and dividends revenues and Interest expense from the first six months of the previous year is principally due to a decline in interest rates over the period. The increase in net interest revenue of 15% to $564 million in the first six months of 2003 from $492 million in the first six months of 2002 was due to an increase in inventory levels as well as a change in inventory mix to higher levels of interest bearing assets in response to continued shifts in customer asset preferences.

Investment banking revenues were $803 million for the first six months of 2003 as compared to $935 million for the first six months of 2002. Investment banking revenues result mainly from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, advising clients on M&A activities and other services. Investment banking revenues decreased 14% from the first six months of 2002, reflecting the continued market weakness in equity underwriting, partially offset by improved M&A advisory activities. Debt underwriting levels remained relatively unchanged.

Non-interest expenses were $2,937 million for the first six months of 2003 as compared to $2,393 million for the first six months of 2002. Non interest expenses in the first six months of 2003 included a $77 million real estate charge ($45 million after-tax). This charge represents an adjustment of the real estate charge taken in the fourth quarter of 2002 and reflects the further softening in the sublease market for properties in New York and London since the fourth quarter. Compensation and benefits expense of $2,041 million increased 22% from $1,667 million in the first six months of 2002 commensurate with the 22% increase in net revenues over the same period. Compensation and benefits expense, as a percentage of net revenues, remained at 51% for the first six months of 2003, consistent with the 2002 level. Higher levels of revenues in 2003 resulted in higher variable compensation expenses, which increased by 40% from the first six months of 2002. Fixed compensation, consisting primarily of salaries and benefits, increased 2%, primarily due to an increase in pension expense, which is expected to increase to $49 million for fiscal 2003 from $26 million in fiscal 2002.

Nonpersonnel expenses, excluding the real estate reconfiguration charge, were $819 million for the first six months of 2003, up 13% compared to the first six months of 2002. In addition, the first six months of 2003 include non-personnel expenses of $11 million associated with the acquisition of ALS. (See ALS under the Company's Results of Operations for the Three Months Ended May 31, 2003.) Technology and communication expense increased to $290 million for the first six months of 2003 from $264 million for the first six months of 2002, primarily due to amortization of new technology assets at the Company's new facilities and increased spending associated with the enhancement of the Company's capital markets trading platforms and technology infrastructure. Occupancy expense increased to $155 million during the first six months of 2003 from $140 million during the first six months of 2002, principally attributable to additional space to accommodate the growth in headcount resulting from the Company's expansion during the past

several years, as well as the increased cost of the Company's new corporate headquarters. Brokerage and clearance fees increased 17% in the first six months of 2003 as a result of higher volumes across many fixed income products. Professional fees increased 30% in the first six months of 2003 as compared with the first six months of 2002 as a result of legal and accounting and audit fees. Other expenses increased 37% in the first half of 2003 from the first half of 2002 principally due in part to increased insurance premiums.

The Company recorded a provision for income taxes of $295 million for the first six months of 2003 versus $254 million for the first six months of 2002. This provision resulted in effective tax rates of 28% and 29% respectively. The decrease in the effective tax rate is primarily due to a more favorable mix of geographic earnings.

International net revenues of $1,177 million for the first six months of 2003 increased 9% as compared to $1,081 million in the first six months of 2002. International net revenues as a percentage of total net revenues declined to 29% for the six months ended 2003 from 33% for the six months ended 2002. European net revenues remained flat to last year, while Asia Pacific net revenues increased as a result of increased market share and ranking in M&A completions.

Investment Banking's net revenues decreased 13% during the first half of 2003 to $792 million from $913 million in the first half of 2002 principally due to lower equity underwriting activity. Debt underwriting activity remained relatively unchanged, while M&A advisory net revenues increased 9% to $185 million from $170 million.

	Six Months Ended
(in millions)	May 31 2003		May 31 2002
Debt Underwriting	$	473	$	471
Equity Underwriting		134		272
M&A Advisory		185		170

	$	792	$	913

Debt underwriting revenues were essentially flat in the first six months of 2003 as compared to the first six months 2002. Fixed income origination remained at robust levels as low interest rates and the narrowing of credit spreads caused corporations to accelerate their financing activity. Investment grade underwriting activity was particularly strong, with market volumes increasing 16% from the first six months of 2002, as issuers took advantage of tighter credit spreads. (Statistics according to TFSD.)

Equity underwriting revenues were $134 million in the first six months of 2003, down 51% from the first six months of 2002. The decrease in equity origination was due to the continued weakness in the global equity markets, as industry-wide volumes dropped to their lowest levels in seven years. Industry-wide global equity market volumes decreased 45% during the first six months of fiscal 2003 as compared to the same period in 2002, with particular weakness in the IPO sector as corporations delayed deals amid the slumping equity markets. However, the Company increased its market share to 4.4% from 3.4% for the calendar period ended May 31, 2003 compared to the same period in 2002. (Statistics according to TFSD.)

M&A advisory fees increased 9% in first six months 2003 compared to the first six months of 2002. M&A activity continued to be hampered by lackluster economic data and geopolitical concerns, resulting in market volume for completed transactions in the first six months of 2003 being at its lowest level in over five years. M&A completed market volume was down 19% from the first six months of 2002; however, the Company's volume for the same period increased by 22%. (Statistics according to TFSD.)

Investment Banking pre-tax earnings of $141 million in the first six months of 2003 decreased 37% from $225 million in the first six months of 2002, as a 13% decrease in net revenues was only partially offset by a 5% decrease in non-interest expenses. The decrease in non-interest expenses primarily reflected reduced compensation and benefits associated with lower revenue levels and reduced headcount. Nonpersonnel expenses were down slightly as compared to the first six months of 2002 as the Company continued to focus on minimizing discretionary spending in the current market environment.

Capital Markets net revenues were $2,803 million for the first six months of 2003, an increase of 44% from the first six months of 2002, reflecting record performance in fixed income and improved performance in equities.

Net revenues for the fixed income component of Capital Markets in the first six months of 2003 exceeded the first six months of 2002 by 53%. The increase was principally driven by a strong level of institutional customer flow activity, as historically low interest rates and narrowing credit spreads contributed to increased trading activity and revenues from interest rate, high grade, high yield and mortgage products. Revenues from the mortgage business continued to be bolstered by a strong volume of refinancings and heavy investor demand for secondary products. Credit and interest rate derivative products were also strong as investors sought to diversify and hedge their risks.

Net revenues from the equities component of Capital Markets were $726 million in the first six months of 2003, up 23% from the first six months of 2002. U.S. equity indices increased slightly from the end of 2002 while major European and Asian indices have declined. Favorable performance in convertibles contributed to the increase in revenues, driven by improved credit markets and strong customer activity on the heels of increased new issuance activity. Increased revenues in derivatives also contributed to the increase in revenues, driven by OTC activity in Europe as customers utilized structured, customized products (options, warrants, equity-linked notes) as hedging vehicles.

Capital Markets pre-tax earnings of $908 million in the first six months of 2003 increased 63% from pre-tax earnings of $556 million in the first six months of 2002, driven by a 44% increase in net revenues. Capital Markets non-interest expenses increased 36% during the first six months of 2003 to $1,895 million from $1,389 million in the first six months of 2002, primarily due to an increase in compensation and benefits expense associated with the increase in net revenues. In addition, nonpersonnel expenses increased principally due to higher brokerage and clearance costs associated with higher volumes in certain fixed income products, increased professional fees and other expenses.

Interest and dividends revenues for Capital Markets businesses decreased by 11% from the first six months of 2002, while Interest expense decreased by 14% over this same period, reflecting the decline in interest rates from the previous year. Net interest revenue increased 16% to $558 million in the first six months of 2003, due to an increase in inventory levels as well as a change in inventory mix to higher levels of interest bearing assets in response to continued shifts in customer asset preferences.

Client Services net revenues were $407 million in the first six months of 2003, compared to $411 million in the first six months of 2002. Private Client net revenues increased 2% to $395 million in the first six months of 2003 from the $388 in the first six months of 2002. Sales production was relatively flat compared to 2002, as fixed income's record activity was offset by sluggish performance in equity sales.

Private Equity net revenues declined by $11 million in the first six months of 2003 from the first six months of 2002 primarily due to a decrease in management fees as the commitment periods expired on two of the Company's funds.

Client Services pre-tax earnings of $93 million decreased in the first six months of 2003 from $95 million in the first six months of 2002. Client Services net revenue and non-interest expenses of $407 million and $314 million were relatively flat in the first six months of 2003 as compared to $411 million and $316 million in the first six months of 2002.

Liquidity Risk Management Liquidity and liquidity management are of paramount importance to the Company, providing a framework which seeks to ensure that the Company maintains sufficient liquid financial resources to continually fund its balance sheet and meet all of its funding obligations in all market environments. The Company's liquidity management philosophy incorporates the following principles:

The Company's Funding Framework incorporates the above principles and seeks to mitigate liquidity risk by helping to ensure that the Company maintains sufficient funding resources to withstand a severe liquidity event, including:

To provide liquidity to Holdings during periods of adverse market conditions, the Company maintains a portfolio of cash and unencumbered liquid assets, comprised primarily of U.S. Government and agency obligations, investment grade securities and listed equities, which can be sold or pledged to provide liquidity to Holdings, where most of the unsecured debt is issued.

As of May 31, 2003, the estimated pledge value of this portfolio, along with the undrawn portion of Holdings' committed credit facility (see "Credit Facilities" below) amounted to approximately $16.5 billion. Cash and unencumbered liquid assets that are presumed to be "trapped" in a regulated entity or required for operational purposes, and are therefore not seen as a completely reliable source of cash to repay maturing unsecured debt in a liquidity stress event, are not included in this portfolio.

For further discussion of these principles refer to the Liquidity, Funding and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in the Form 10-K.

Total Capital The Company's Total Capital (defined as long-term debt, trust issued securities subject to mandatory redemption and stockholders' equity) increased 12% to $54.2 billion at May 31, 2003, compared to $48.3 billion at November 30, 2002. The Company believes Total Capital is useful to investors as a measure of the Company's financial strength. The increase in Total Capital resulted from a net increase in long-term debt as well as an increase in equity from the retention of earnings.

During the first six months of 2003, the Company issued $8,151 million in long-term debt securities, which was $2,989 million in excess of maturing debt securities. The Company had $4,880 million of senior notes and $282 million of subordinated notes mature during the six months ended May 31, 2003. Long-term debt increased to $43.5 billion at May 31, 2003 from $38.7 billion at November 30, 2002, with a weighted-average maturity of 4.1 years at May 31, 2003 and 4.0 years at November 30, 2002.

Credit Facilities Holdings maintains a Revolving Credit Agreement (the "Credit Agreement") with a syndicate of banks. Under the Credit Agreement, the banks have committed to provide up to $1 billion through April 2005. The Credit Agreement contains covenants that require, among other things, that the Company maintain a specified level of tangible net worth. The Company views the Credit Agreement as one of its many sources of liquidity available through its funding framework, and as such the Company utilizes this liquidity for general business purposes from time to time.

The Company also maintains a backstop $750 million Committed Securities Repurchase Facility (the "Facility") for Lehman Brothers International (Europe) ("LBIE"), the Company's major operating entity in Europe. The Facility provides secured multi-currency financing for a broad range of collateral types. Under the terms of the Facility, the bank group has agreed to provide funding for up to one year on a secured basis. Any loans outstanding on the commitment termination date may be extended for up to an additional year at the option of LBIE. The Facility contains covenants which require, among other things, that LBIE maintain specified levels of tangible net worth. This commitment expires at the end of October 2003.

There were no borrowings outstanding under either the Credit Agreement or the Facility at May 31, 2003. The Company has maintained compliance with the applicable covenants for both the Credit Agreement and the Facility at all times.

Balance Sheet and Financial Leverage The Company's balance sheet consists primarily of cash and cash equivalents, securities and other financial instruments owned, and collateralized financing agreements. The liquid nature of these assets provides the Company with flexibility in financing and managing its business. The majority of these assets are funded on a secured basis through collateralized financing agreements.

The Company's total assets increased to $302 billion at May 31, 2003 from $260 billion at November 30, 2002. Total assets excluding matched book ("net balance sheet") were $190 billion at May 31, 2003, an increase of 14% as compared to $166 billion at November 30, 2002. Matched book represents the lesser of

securities purchased under agreements to resell ("reverse repos") and securities sold under agreements to repurchase ("repos"). The Company believes that the net balance sheet is a more meaningful measure to evaluate balance sheet usage when comparing companies in the securities industry because such assets are considered to have a low risk profile. The Company utilizes its net balance sheet primarily to carry inventory necessary to facilitate customer flow activities. As such, the Company's mix of net assets is subject to change depending principally upon customer demand. In addition, due to the nature of the Company's customer flow activities and based upon the Company's business outlook, the overall size of the Company's balance sheet fluctuates from time to time and, at specific points in time, may be higher than the fiscal year-end or quarter-end amounts.

The $42 billion increase in the Company's gross assets and the $24 billion increase in net assets at May 31, 2003 were primarily due to an increase in fixed income inventory and collateralized lending agreements (reverse repo and securities borrowed) associated with customer flow activity.

Balance sheet leverage ratios are one measure used to evaluate the capital adequacy of a company. Leverage ratios are calculated as total assets divided by stockholders' equity. The Company considers total stockholders' equity plus trust issued securities subject to mandatory redemption to be a more meaningful measure of the Company's equity for purposes of calculating net leverage because such securities have the characteristics of equity as they are of a long-term nature and are effectively subordinated to the Company's long-term debt obligations. Trust issued securities subject to mandatory redemption includes $710 million of trust preferred securities subject to mandatory redemption and $300 million of debt collateralizing trust preferred securities subject to mandatory redemption. (See Note 7 to the 2002 Consolidated Financial Statements incorporated by reference in the Form 10-K). Accordingly, the Company believes that net leverage (i.e., net balance sheet divided by trust issued securities subject to mandatory redemption and total stockholders' equity) is useful to investors as a more meaningful measure of the Company's leverage and for comparing companies in the securities industry. The Company's gross leverage ratios were 31.4x and 29.1x as of May 31, 2003 and November 30, 2002, respectively. The Company's net leverage ratios for these periods were 17.8x and 17.2x, respectively. Consistent with maintaining a single A credit rating, the Company targets a net leverage ratio of under 20.0x. The Company continues to operate below this level.

The Company, like other companies in the securities industry, relies on external sources to finance a significant portion of its day-to-day operations. The cost and availability of unsecured financing generally are dependent on the Company's short-term and long-term credit ratings. Factors that may be significant to the determination of the Company's credit ratings or otherwise affect the ability of the Company to raise short-term and long-term financing include its profit margin, its earnings trend and volatility, its cash liquidity and liquidity management, its capital structure, its risk level and risk management, its geographic and business diversification, and its relative positions in the markets in which it operates. A deterioration in any of the previously mentioned factors or combination of these factors may lead rating agencies to downgrade the credit ratings of the Company, thereby increasing the cost to the Company of, or possibly limiting the access of the Company to, certain types of unsecured financings. In addition, the Company's debt ratings can impact certain capital markets revenues, particularly in those businesses where longer-term counterparty performance is critical, such as over-the-counter derivative transactions, including credit derivatives and interest rate swaps. As of May 31, 2003, the short- and long-term debt ratings of Holdings and LBI were as follows:

	Holdings	LBI
	Short-term	Long-term	Short-term	Long-term**
Fitch Ratings	F-1	A+	F-1	A+/A
Moody's Investors Service⁽¹⁾	P-1	A2	P-1	A1*/A2
Standard & Poor's Ratings Services⁽²⁾	A-1	A	A-1	A+*/A

The Company underwrites, invests and makes markets in high yield corporate debt securities. The Company also syndicates, trades and invests in loans to below investment grade rated companies. For purposes of this discussion, high yield debt instruments are defined as securities of or loans to companies rated BB+ or lower, or equivalent ratings by recognized credit rating agencies, as well as non-rated securities or loans which, in the opinion of management, are non-investment grade. Non-investment grade securities generally involve greater risks than investment grade securities, due to the issuer's creditworthiness and the lower liquidity of the market for such securities. In addition, these issuers generally have relatively higher levels of indebtedness, resulting in an increased sensitivity to adverse economic conditions. The Company recognizes these risks and aims to reduce market and credit risk through the diversification of its products and counterparties. High yield debt instruments are carried at fair value, with unrealized gains or losses recognized on the Consolidated Statement of Income. Such instruments at May 31, 2003 and November 30, 2002 included long positions with an aggregate market value of approximately $4.1 billion and $4.0 billion, respectively, and short positions with an aggregate market value of approximately $0.8 billion and $1.1 billion, respectively. The Company mitigates its aggregate and single-issuer net exposure through the use of derivatives, non-recourse securitization financing and other financial instruments.

At May 31, 2003 and November 30, 2002, the Company's private equity related investments were $1.0 billion and $965 million, respectively. The Company's policy is to carry its investments, including the appreciation of its general partnership interests, at fair value based upon the Company's assessment of the underlying investments. Additional information about the Company's private equity activities, including related commitments, can be found in Note 9 to the Consolidated Financial Statements included in this Report.

In the normal course of business, the Company enters into various commitments and guarantees, including lending commitments to high grade and high yield borrowers, liquidity commitments and other guarantees. In all instances, the Company marks-to-market these commitments and guarantees, with changes in fair value recognized in Principal transactions revenues.

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. In addition, at May 31, 2003, the Company had commitments to enter into forward starting secured reverse repurchase and repurchase agreements, principally secured by government and government agency collateral of $74.2 billion and $55.2 billion, respectively, as compared to $89.9 billion and $50.3 billion, respectively, at November 30, 2002.

The Company had credit risk associated with lending commitments to investment grade borrowers (after consideration of hedges) of $3.1 billion and $3.2 billion at May 31, 2003 and November 30, 2002, respectively. In addition, the Company had credit risk associated with lending commitments to non-investment grade borrowers (after consideration of hedges) of $1.8 billion and $1.7 billion at May 31, 2003 and November 30, 2002. Before consideration of hedges, the Company had commitments to investment and non-investment grade borrowers of $7.8 billion and $2.0 billion as compared to $7.1 billion and $1.8 billion at May 31, 2003 and November 30, 2002, respectively. The Company had available undrawn borrowing facilities with third parties of approximately $5.3 billion and $5.2 billion at May 31, 2003 and November 30, 2002, respectively, 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.

In addition, the Company provided high yield contingent commitments related to acquisition financing of approximately $1.6 billion and $2.8 billion at May 31, 2003 and November 30, 2002, respectively. The Company's intent is, and its past practice has been, to sell down significantly all the credit risk associated with these loans, if closed, through loan syndications consistent with the Company's credit facilitation framework. These commitments are not indicative of the Company's actual risk, as the borrower's ability to draw is subject to there being no material adverse change in either market conditions or the borrower's financial condition, among other factors. In addition, these commitments contain certain flexible pricing features in order to adjust for changing market conditions prior to closing.

Aggregate lending related commitments as of May 31, 2003 by maturity are as follows:

In accordance with FIN 45, the Company is required to disclose certain guarantees, including derivative contracts that require the Company to make payments to a counterparty based on changes on an underlying instrument or index (e.g., security prices, interest rates, and currency rates). Derivatives that meet the FIN 45 definition of a guarantee include credit default swaps, written put options, written FX options and written interest rate caps and floors. According to FIN 45, derivatives are not considered guarantees if such contracts are cash settled and the Company has no basis to determine that it is probable that the derivative counterparty held the related underlying instrument. Accordingly, if these conditions were met, the Company has not included such derivatives contracts in the following table.

At May 31, 2003, the maximum payout value of derivative contracts deemed to meet the FIN 45 definition of a guarantee was approximately $270 billion. For purposes of determining maximum payout, notional values were utilized; however, the Company believes that the fair value of these contracts is a more relevant measure of these obligations. At May 31, 2003, the fair value of such derivative contracts approximated $9.6 billion. The Company believes that the notional amounts greatly overstate the Company's expected payout. In addition, all amounts included above are before consideration of hedging transactions. These derivative contracts are generally highly liquid and the Company has substantially mitigated its risk on these contracts through hedges, such as other derivative contracts and/or cash instruments. The Company manages risk associated with derivative guarantees consistent with the Company's global risk management policies. The Company records derivative contracts, including those considered to be guarantees under FIN 45, on a fair value basis with related gains/losses recognized in Principal transactions revenues.

At May 31, 2003, the Company had liquidity commitments of approximately $3.6 billion related to trust certificates backed by investment grade municipal securities, as compared to $4.4 billion at November 30, 2002. The Company's obligation under such liquidity commitments is generally less than one year and is further limited by the fact that the Company's obligation ceases if the underlying assets are downgraded below investment grade or default. In addition, the Company had certain other commitments and guarantees associated with special purpose entities of approximately $3.0 billion and $5.0 billion at May 31, 2003 and November 30, 2002, respectively. These commitments consist of liquidity facilities and other default protection to investors, which are principally overcollateralized with investment grade collateral.

At both May 31, 2003 and November 30, 2002, the Company was contingently liable for $0.8 billion of letters of credit, primarily used to provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodity exchanges.

At May 31, 2003 and November 30, 2002, the Company had commitments to invest up to $398 million and $672 million, respectively, directly and through partnerships in private equity related investments. These commitments will be funded, in whole or in part, as required through the end of the respective investment periods, principally expiring in 2004.

In the normal course of business the Company provides guarantees to securities clearinghouses and exchanges. These guarantees are generally required under the standard membership agreements, such that members are required to guarantee the performance of other members. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral. The Company's obligation under such guarantees could exceed the collateral amounts posted; however, the potential for the Company to be required to make payments under such guarantees is deemed remote.

In connection with certain asset sales and securitization transactions, the Company is often required to make representations and warranties about the assets conforming to specified guidelines. If it is later determined

that the underlying assets fail to conform to the specified guidelines, the Company may have an obligation to repurchase the assets or indemnify the purchaser against any losses. To mitigate these risks, to the extent that the assets being securitized may have been originated by third parties, the Company will seek to obtain appropriate representations and warranties from these third parties upon acquisition of such assets.

For a discussion of the Company's use of derivative instruments and the risks related thereto, see Note 15 to the 2002 Consolidated Financial Statements (Derivative Financial Instruments) and the Off-Balance Sheet Arrangements section of Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in the Form 10-K.

Involvement with SPEs Special purpose entities ("SPEs") are corporations, trusts or partnerships which are established for a limited purpose. SPEs by their nature generally do not provide equity owners with significant voting powers, as the SPE documents govern all material decisions.

The majority of the Company's involvement with SPEs 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 pre-set terms. Based upon the guidance in SFAS 140, the Company is not required to and does not consolidate such QSPEs. Rather, the Company accounts for its involvement with QSPEs 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 with changes in fair value reported in earnings.

The Company is a market leader in mortgage (both residential and commercial), municipal and other asset-backed securitizations which are principally transacted through QSPEs. During the six months ended May 31, 2003 and 2002, the Company securitized approximately $76 billion and $60 billion of financial assets, including: $63.7 billion and $43.4 billion of residential mortgages, $4.2 billion and $4.4 billion of commercial mortgages, and $7.6 billion and $12.2 billion of other asset-backed financial instruments, respectively. As of May 31, 2003 and November 30, 2002, the Company had approximately $0.7 billion and $1.1 billion, respectively, of non-investment grade retained interests from its securitization activities. The Company records its trading assets, including retained interests, on a mark-to-market basis, with related gains or losses recognized in Principal transactions on the Consolidated Statement of Income. (See Note 6 to the Consolidated Financial Statements included in this Report.)

As a leading global investment banking company, risk is an inherent part of the Company's businesses. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. The Company has developed policies and procedures to identify, measure and monitor each of the risks involved in its trading, brokerage and investment banking activities on a global basis. The principal risks to the Company are market, credit, liquidity, legal and operational risks. Risk management is considered to be of paramount importance in the Company's day-to-day operations. Consequently, the Company devotes significant resources (including investments in personnel and technology) across all of its worldwide trading operations to the measurement, management and analysis of risk.

The Company seeks to reduce risk through the diversification of its businesses, counterparties and activities in geographic regions. The Company accomplishes this objective by allocating the usage of capital to each of its businesses, establishing trading limits and setting credit limits for individual counterparties, including regional concentrations. The Company seeks to achieve adequate returns from each of its businesses commensurate with the risks that they assume. Nonetheless, the effectiveness of the Company's 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 an adverse effect on the Company's 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 the Company's earnings, increases in the Company's credit exposure to customers and counterparties and increases in general systemic risk.

Overall risk management policy is established at the Office of the Chairman's level and begins with the Capital Markets Committee, which consists of the Chief Executive Officer, other members of the Company's Executive Committee, the Global Head of Risk, the Chief Economist and Strategist as well as various other business heads. The Capital Markets Committee serves to frame the Company's risk opinion in the context of the global market environment. The Company's Risk Committee, which consists of the Chief Executive Officer, members of the Executive Committee and the Global Head of Risk, meets weekly and reviews all risk exposures, position concentrations and risk taking activities.

The Global Risk Management Group (the "Group") is independent of the trading areas and reports directly to the Office of the Chairman. The Group includes credit risk management, market risk management and operational risk management. Combining these disciplines facilitates the analysis of risk exposures, while leveraging personnel and information technology resources in a cost-efficient manner. The Group maintains staff in each of the Company's regional trading centers and has daily contact with trading staff and senior management at all levels within the Company. These discussions include a review of trading positions and risk exposures.

Credit Risk Credit risk represents the possibility that a counterparty will be unable to honor its contractual obligations to the Company. Credit risk management is therefore an integral component of the Company's overall risk management framework. The Credit Risk Management Department ("CRM Department") has global responsibility for implementing the Company's overall credit risk management framework.

The CRM Department manages the credit exposure related to trading activities by giving initial credit approval for counterparties, establishing credit limits by counterparty, country and industry group and by requiring collateral in appropriate circumstances. In addition, the CRM Department strives to ensure that master netting agreements are obtained whenever possible. The CRM Department also considers the duration of transactions in making its credit decisions, along with the potential credit exposure for complex derivative transactions. The CRM Department is responsible for the continuous monitoring and review of counterparty credit exposure and creditworthiness and recommending valuation adjustments, where appropriate. Credit limits are reviewed periodically to ensure that they remain appropriate in light of market

events or the counterparty's financial condition. (For more information regarding the Company's counterparty credit risk with respect to derivative instruments, see Note 5 to the Consolidated Financial Statements included in this Report.)

Market Risk Market risk represents the potential change in value of a portfolio of financial instruments due to changes in market rates, prices and volatilities. Market risk management also is an essential component of the Company's overall risk management framework. The Market Risk Management Department ("MRM Department") has global responsibility for implementing the Company's overall market risk management framework. It is responsible for the preparation and dissemination of risk reports, developing and implementing the firm-wide Risk Management Guidelines, and evaluating adherence to these guidelines. These guidelines provide a clear framework for risk management decision making. To that end, the MRM Department identifies and quantifies risk exposures, develops limits and reports and monitors these risks with respect to the approved limits. The identification of material market risks inherent in positions includes, but is not limited to, interest rate, equity and foreign exchange risk exposures. In addition to these risks, the MRM Department also evaluates liquidity risks, credit and sovereign concentrations.

The MRM Department utilizes qualitative as well as quantitative information in managing trading risk, believing that a combination of the two approaches results in a more robust and complete approach to the management of trading risk. Quantitative information is developed from a variety of risk methodologies based upon established statistical principles. To ensure high standards of analysis, the MRM Department has retained seasoned risk managers with the requisite experience and academic and professional credentials.

Market risk is present in cash products, derivatives and contingent claim structures that exhibit linear as well as non-linear profit and loss sensitivity. The Company's exposure to market risk varies in accordance with the volume of client-driven market-making transactions, the size of the Company's proprietary positions, and the volatility of financial instruments traded. The Company seeks to mitigate, whenever possible, excess market risk exposures through the use of futures and option contracts and offsetting cash market instruments.

The Company participates globally in interest rate, equity and foreign exchange markets. The Company's Fixed Income division has a broadly diversified market presence in U.S. and foreign government bond trading, emerging market securities, corporate debt (investment and non-investment grade), money market instruments, mortgages and mortgage-backed securities, asset-backed securities, municipal bonds and interest rate derivatives. The Company's Equities division facilitates domestic and foreign trading in equity instruments, indices and related derivatives. The Company's foreign exchange businesses are involved in trading currencies on a spot and forward basis as well as through derivative products and contracts.

The Company incurs short-term interest rate risk in the course of facilitating the orderly flow of customer transactions through the maintenance of government and high grade corporate bond inventories. Market-making in high yield instruments exposes the Company to additional risk due to potential variations in credit spreads. Trading in international markets exposes the Company to spread risk between the term structure of interest rates in different countries. Mortgages and mortgage-related securities are subject to prepayment risk and changes in the level of interest rates. Trading in derivatives and structured products exposes the Company to changes in the level and volatility of interest rates. The Company actively manages interest rate risk through the use of interest rate futures, options, swaps, forwards and offsetting cash market instruments. Inventory holdings, concentrations and agings are monitored closely and used by management to selectively hedge or liquidate undesirable exposures.

The Company is a significant intermediary in the global equity markets through its market-making in U.S. and non-U.S. equity securities, including common stock, convertible debt, exchange-traded and OTC equity options, equity swaps and warrants. These activities expose the Company to market risk as a result of price and volatility changes in its equity inventory. Inventory holdings are also subject to market risk resulting

from concentrations and changes in liquidity conditions that may adversely impact market valuation. Equity market risk is actively managed through the use of index futures, exchange-traded and OTC options, swaps and cash instruments.

The Company enters into foreign exchange transactions in order to facilitate the purchase and sale of non-dollar instruments, including equity and interest rate securities. The Company is exposed to foreign exchange risk on its holdings of non-dollar assets and liabilities. The Company is active in many foreign exchange markets and has exposure to the Euro, Japanese yen, British pound, Swiss franc and Canadian dollar, as well as a variety of developed and emerging market currencies. The Company hedges its risk exposures primarily through the use of currency forwards, swaps, futures and options.

If any of the strategies utilized to hedge or otherwise mitigate exposures to the various types of risks described above are not effective, the Company could incur losses.

Operational Risk Operational Risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational Risk Management is responsible for implementing and maintaining the Company's overall global operational risk management framework, which seeks to minimize these risks through assessing, reporting, monitoring and tracking operational risks.

Value-At-Risk For purposes of SEC risk disclosure requirements, the Company discloses an entity-wide value-at-risk for virtually all of its trading activities. In general, the Company's value-at-risk measures potential loss of trading revenues at a given confidence level over a specified time horizon. Value-at-risk over a one-day holding period measured at a 95% confidence level implies that the potential loss of daily trading revenue will be at least as large as the value-at-risk amount on one out of every 20 trading days.

The Company's methodology estimates a reporting day value-at-risk using actual daily trading revenues over the previous 250 trading days. This estimate is measured as the loss, relative to the median daily trading revenue. The Company also estimates an average of daily value-at-risk measures over the reporting period.

Value-at-risk is one measurement of potential loss in trading revenues that may result from adverse market movements over a specified period of time with a selected likelihood of occurrence. As with all measures of value-at-risk, the Company's estimate has substantial limitations due to its reliance on historical performance, which is not necessarily a predictor of the future. Consequently, this value-at-risk estimate is only one of a number of tools the Company utilizes in its daily risk management activities.

Distribution of Weekly Net Revenues Substantially all of the Company's inventory positions are marked-to-market on a daily basis as part of the Company's Capital Markets business segment with changes recorded in net revenues. The following chart sets forth the frequency distribution for weekly net revenues for the Company's Capital Markets and Client Services segments (excluding asset management fees) for the three months ended May 31, 2003:

As discussed throughout Management's Discussion and Analysis, the Company seeks to reduce risk through the diversification of its businesses and a focus on customer flow activities. This diversification and focus, combined with the Company's risk management controls and processes, helps mitigate the net revenue volatility inherent in the Company's trading activities. Although historical performance is not necessarily indicative of future performance, the Company believes its focus on business diversification and customer flow activities should continue to reduce the volatility of future net trading revenues.

The SEC has proposed rules to require disclosures associated with critical accounting polices which are most important in gaining an understanding of an entity's financial statements. The following is a summary of the Company's critical accounting policies. For a full description of these and other accounting policies, see Note 1 to the 2002 Consolidated Financial Statements (Summary of Significant Accounting Policies) incorporated by reference in the Form 10-K.

Use of Estimates The Company's financial statements are prepared in conformity with generally accepted accounting principles, many of which require the use of 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, particularly in light of the industry in which the Company operates.

Fair Value The determination of fair value is a critical accounting policy which is fundamental to the Company's financial condition and results of operations. The Company records its inventory positions including Securities and other financial instruments owned and Securities sold but not yet purchased at market or fair value with unrealized gains and losses reflected in Principal transactions on the Consolidated Statement of Income. In all instances, the Company believes that it has established rigorous internal control processes to ensure that the Company utilizes reasonable and prudent measurements of fair value.

When evaluating the extent to which management estimates may be required to be utilized in preparing the Company's financial statements, the Company believes it is useful to analyze the balance sheet as follows:

A significant majority of the Company's assets and liabilities are recorded at amounts for which significant management estimates are not utilized. The following balance sheet categories, comprising 57% of total assets and 75% of liabilities and equity, are valued at either historical cost or at contract value (including accrued interest), which, by their nature, do not require the use of significant estimates: Secured financings, Receivables/Payables and Other assets/liabilities and Total capital. The remaining balance sheet categories, comprised of Securities and other financial instruments owned and Securities and other financial instruments sold but not yet purchased (long and short inventory positions, respectively), are recorded at market or fair value, the components of which may require, to varying degrees, the use of estimates in determining fair value.

The majority of the Company's long and short inventory is recorded at market value based upon listed market prices or utilizing third party broker quotes and, therefore, does not incorporate significant estimates. Examples of inventory valued in this manner include government securities, agency mortgage-backed securities, listed equities, money markets, municipal securities, corporate bonds and listed futures.

If listed market prices or broker quotes are not available, fair value is determined based on pricing models or other valuation techniques, including the use of implied pricing from similar instruments. Pricing models are typically utilized to derive fair value based upon the net present value of estimated future cash flows including adjustments, where appropriate, for liquidity, credit and/or other factors. For the vast majority of instruments valued through pricing models, significant estimates are not required, as the market inputs into such models are readily observable and liquid trading markets provide clear evidence to support the valuations derived from such pricing models. Examples of inventory valued utilizing pricing models or other valuation techniques include: OTC derivatives, private equity investments, certain high yield positions, certain mortgage loans and direct real estate investments and non-investment grade retained interests.

OTC Derivatives The fair value of the Company's OTC derivative assets and liabilities at May 31, 2003 were $19.2 billion and $12.8 billion, respectively. OTC derivative assets represent the Company's unrealized gains, net of unrealized losses for situations in which the Company has a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties.

The majority of the Company's OTC derivatives are transacted in liquid trading markets for which fair value is determined utilizing pricing models with readily observable market inputs. Examples of such derivatives include: interest rate swaps contracts, TBAs, foreign exchange forward and option contracts in G-7

currencies, and equity swap and option contracts on listed securities. However, the determination of fair value for certain less liquid derivatives requires the use of significant estimates and include: certain credit derivatives, equity option contracts greater than 5 years, and certain other complex derivatives utilized by the Company in providing clients with hedging alternatives to unique exposures. The Company strives to limit the use of significant judgment by using consistent pricing assumptions between reporting periods and utilizing observed market data for model inputs whenever possible. As the market for complex products develops, the Company refines its pricing models based upon market experience in order to utilize the most current indicators of fair value.

Private Equity Investments The Company's private equity investments of $1.0 billion at May 31, 2003 include both public and private equity positions. The determination of fair value for these investments may require the use of estimates and assumptions as these investments are generally less liquid and often contain trading restrictions. The determination of fair value for private equity investments is based on estimates incorporating valuations which take into account expected cash flows, earnings multiples and/or comparison to similar market transactions. Valuation adjustments are an integral part of pricing these instruments, reflecting consideration of credit quality, concentration risk, sale restrictions and other liquidity factors.

High Yield At May 31, 2003, the Company had high yield long and short positions of $4.1 billion and $0.8 billion, respectively. The majority of these positions are valued utilizing broker quotes or listed market prices. In certain instances, when broker quotes or listed prices are not available the Company utilizes prudent judgment in determining fair value which may involve the utilization of analysis of credit spreads associated with pricing of similar instruments, or other valuation techniques.

Mortgage Loans and Real Estate The Company is a market leader in mortgage-backed securities trading and mortgage securitizations (both residential and commercial). The Company's inventory of mortgage loans principally represents loans held prior to securitization. In this activity, the Company purchases mortgage loans from loan originators or in the secondary markets and then aggregates pools of mortgages for securitization. The Company records mortgage loans and direct real estate investments at fair value, with related mark-to-market gains and losses recognized in Principal transactions revenues.

As the Company's inventory of residential loans turns over through sale to securitization trusts rather frequently, such loans are generally valued without the use of significant estimates.

The Company is also a market leader in the commercial lending and securitization markets. Commercial real estate loans are generally valued based upon an analysis of the loans' carrying value relative to the value of the underlying real estate, known as loan-to-value ratios. As the loan-to-value ratio increases, the fair value of such loan is influenced to a greater extent by a combination of cash flow projections and underlying property values. Approximately $6.6 billion of the Company's commercial real estate loans and direct real estate investments are valued using both cash flow projections as well as underlying property values. The Company utilizes independent appraisals to support management's assessment of the property in determining fair value for these positions.

In addition, the Company held approximately $0.7 billion of non-investment grade retained interests at May 31, 2003, down from $1.1 billion at November 30, 2002. As these interests primarily represent the junior interests in commercial and residential mortgage securitizations, for which there are not active trading markets, estimates are generally required to be utilized in determining fair value. The Company values these instruments using prudent estimates of expected cash flows, and considers the valuation of similar transactions in the market.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses accounting and reporting for costs associated with exit or disposal activities including the accounting for certain employee termination benefits, contract termination costs and costs to consolidate facilities or relocate employees. This statement is effective for exit and disposal activities initiated after December 31, 2002. The Company adopted this standard during the first quarter of 2003 and such adoption did not have a material impact on the Company's financial condition or results of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also provides additional guidance on the disclosure of guarantees. The recognition and measurement provisions are effective for guarantees made or modified after December 31, 2002. The disclosure provisions are effective for fiscal periods ending after December 15, 2002. The Company adopted FIN 45 during the first quarter of 2003, and the adoption did not have a material impact on the Company's financial condition or results of operations.

In January 2003 the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51" ("FIN 46"). This interpretation provides new consolidation accounting guidance for entities involved with special purpose entities. This guidance does not impact the accounting for securitizations transacted through QSPEs. This interpretation will require a primary beneficiary, defined as an entity which participates in either a majority of the risks or rewards of such SPE, to consolidate the SPE. An SPE would not be subject to this interpretation if such entity had sufficient voting equity capital, such that the entity is able to finance its activities without the additional subordinated financial support from other parties. FIN 46 also requires additional disclosures related to involvement with SPEs. The accounting provisions of this interpretation are effective for new transactions executed after January 31, 2003. The interpretation will be effective for all existing transactions with SPEs beginning in the Company's fourth quarter of 2003. While the Company has not yet completed its analysis of the impact of the new interpretation, the Company does not anticipate that the adoption of this interpretation will have a material impact on the Company's financial condition or its results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies the financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement generally is effective for contracts entered into or modified after June 30, 2003. The Company does not anticipate that the adoption of this statement will have a material impact on the Company's financial condition or its results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement specifies how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective beginning in the Company's fourth quarter. Restatement of prior period financial statements is not permitted. When the Company adopts the statement in its fiscal fourth quarter, it will reclassify Trust issued securities subject to mandatory redemption in the Consolidated Statement of Financial Condition within Long-term debt and will begin to present the pretax amount of Dividends on trust securities in the Consolidated Statement of Income within Interest expense.

The information under the caption "Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management" above in this Report is incorporated herein by reference.

The Chairman and Chief Executive Officer and the Chief Financial Officer of Holdings (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by Holdings in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by Holdings in such reports is accumulated and communicated to the Company's management, including the Chairman and Chief Executive Officer and the Chief Financial Officer of Holdings, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.

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 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.

Reference is made to Part I, Item 3, Legal Proceedings, in the Form 10-K for a complete description of the proceedings reported therein and to the Company's Form 10-Q for the quarter ended February 28, 2003 for certain subsequent developments in certain of the proceedings reported therein; only additional significant subsequent developments in such proceedings, if any, are given below.

As previously reported, on December 20, 2002, LBI, reached an agreement in principle with the SEC, the New York State Attorney General's Office, the New York Stock Exchange ("NYSE"), the National Association of Securities Dealers ("NASD") and the North American Securities Administrators Association (on behalf of state and territory securities regulators) to resolve their industry-wide investigations relating to allegations of research analyst conflicts of interest at various investment banking firms, including LBI.

On April 28, 2003, a final global regulatory settlement based on the agreement in principle (the "Final Global Settlement") was announced, involving several of the leading securities firms in the United States, including LBI, and various federal and state regulators and self-regulatory organizations. Without admitting or denying any of the allegations of violations of certain NASD and NYSE rules relating to investment research activities, LBI entered into consents and agreements with the SEC, the NYSE, the NASD and the Alabama Securities Commission (which acted as LBI's lead state regulator in connection with the Final Global Settlement) to resolve their investigations of LBI relating to those matters.

Pursuant to the Final Global Settlement, LBI agreed to (i) pay $25 million as a penalty, (ii) pay $25 million as disgorgement of commissions and other monies, (iii) contribute a total of $25 million over five years to provide third-party independent research to clients, (iv) contribute a total of $5 million over five years towards investor education, (v) adopt internal structural and operational reforms that will further augment the steps it has already taken to promote research analyst independence and (vi) be enjoined from the alleged violations of NASD and NYSE rules. In connection with the Final Global Settlement,

LBI also voluntarily agreed to adopt restrictions on the allocation of shares in initial public offerings to executives and directors of public companies. LBI expects to reach similar arrangements with most or all of the other states, the District of Columbia and the Commonwealth of Puerto Rico. Any monetary penalties and other payments required by these individual arrangements are expected to be included within the aggregate amounts discussed above.

In April 2003, to effectuate the Final Global Settlement, the SEC filed a Complaint and Final Judgment in the United States District Court for the Southern District of New York. The Final Judgment has not yet been entered by the court, and the court has asked for certain additional information. Also in April, the NASD accepted the Letter of Acceptance, Waiver and Consent entered into with LBI in connection with the Final Global Settlement; and in May 2003, the NYSE advised LBI that the Hearing Panel's Decision, in which it accepted the Final Global Settlement, had become final. Payment will be made in conformance with the payment provisions of the Final Judgment, once the Final Judgment is entered.

The Company recorded a pre-tax charge of $80 million in the fourth quarter of 2002 relating to the settlement. (For additional information, see Note 4 to the Consolidated Financial Statements incorporated in the Form 10-K.)

Since the announcement of the Final Global Settlement, six purported class actions have been filed against LBI in three federal courts, five of which are specific to LBI's research of particular companies (Razorfish, Inc., RealNetworks, Inc. and RSL Communications, Inc.) and one of which purports to relate to all research coverage by LBI and nine other defendants (other firms which settled with the regulators) for the 1999 through 2001 time period. (Swack v. Lehman Brothers Inc., in the United States District Court for the District of Massachusetts (Razorfish); DeMarco v. Lehman Brothers Inc., et al., Sved v. Lehman Brothers Inc., et al. and Gravino v. Lehman Brothers Inc., et al., all in the United States District Court for the Southern District of New York (RealNetworks); Sved v. Lehman Brothers Inc., in the United States District Court for the Southern District of New York (RSL Communications); and Cannon v. Citigroup Global Markets Inc., et al., in the United States District Court for the District of Colorado.) All the actions allege conflicts of interest between LBI's investment banking business and research activities.

In June 2003, a purported derivative action, Bader and Yakaitis P.S.P. and Trust, et al. v. Michael L. Ainslie, et al., relating to the Final Global Settlement was filed (but has not yet been served) in New York State Supreme Court. The suit names Holdings and its Board of Directors as defendants and contends that the Board should have been aware of and prevented the alleged misconduct which resulted in the settlement with regulators.

Also in June 2003, in the Circuit Court of Marshall County, West Virginia, the Attorney General of West Virginia filed a civil action on behalf of the State of West Virginia against LBI and nine other investment banks. The Complaint alleges multiple violations of the West Virginia Consumer Credit and Protection Act ("CCPA") from July 1, 1999 through the present. The Complaint seeks $5,000 in money damages per violation for each and every violation of the CCPA. The specific allegations against LBI are identical to those in the Complaint and Final Judgment that the SEC filed against LBI and the other investment banking firms.

Actions Regarding Enron Corporation (reported in the Form 10-K and the Form 10-Q for the quarter ended February 28, 2003)

In April 2003, Westboro Properties LLC and Stonehurst Capital, Inc. filed a complaint against LBI, Holdings and other commercial or investment banks in the United States District Court for the Southern District of Texas. Plaintiffs allege that defendants engaged in fraud, negligence and conspiracy under the

federal securities laws and Texas common and statutory law in inducing plaintiffs to purchase certain certificates, or investments, in two special purpose entities ("SPEs"), Osprey I and Osprey II. Plaintiffs also allege that defendants aided and abetted Enron's fraud in setting up SPEs, allegedly falsifying Enron's books and records and in continuing to recommend Enron's stock.

In June 2003, the United States Court for the Central District of California issued an order granting defendants' motion to dismiss plaintiffs' claim for punitive damages. On the same date, the jury rendered its verdict finding LBI and Lehman Commercial Paper, Inc. ("LCPI") liable for aiding and abetting First Alliance Mortgage Company's fraud. The jury found damages of $50,913,928 and held the Lehman Brothers defendants responsible for 10% of those damages. The court has not yet issued a decision on the claims for equitable subordination of amounts owed to LCPI at the time of First Alliance Mortgage Company's ("FAMCO") Chapter 11 filing and for avoidance of LCPI's liens and on other bankruptcy-related claims.

Also in June 2003, the Attorney General of the State of Florida filed a civil complaint against LCPI in the Circuit Court of the 17^th Judicial Circuit in and for Broward County Florida, alleging violations of the Florida Unfair and Deceptive Trade Practices Act and common law fraud. The allegations arise out of LCPI's relationship with FAMCO insofar as FAMCO did business with Florida borrowers. The Office of the Florida Attorney General alleges in the complaint that, among other things, LCPI provided financing to FAMCO, despite LCPI's purported knowledge that FAMCO was engaged in "predatory lending" practices. The Complaint seeks a permanent injunction, compensatory and punitive damages, civil penalties, attorney's fees and costs.

In February 2003, a lawsuit captioned Massachusetts State Carpenters Pension Fund v. Fleming Companies, Inc., et al. was filed in the 160^th District Court of Dallas County, Texas, asserting claims arising under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. The action was brought on behalf of a purported class of investors who purchased in two simultaneous Fleming securities offerings in June 2002. The offerings raised approximately $378 million. The complaint alleges that the prospectus and registration statement for the offerings contained false and misleading statements or omitted material facts concerning, among other things, deductions Fleming took on vendor invoices, its accounting for recognition of income, amortization of long term assets and use of capitalized interest, and the performance of Fleming's retail operations. The complaint seeks unspecified damages, interest, attorneys' fees, costs and expenses. In addition to Fleming, the suit named ten individual defendants (officers and/or directors of Fleming), Fleming's auditor, and the underwriters of the offerings, including LBI.

The case was removed to the United States District Court for the Northern District of Texas. Subsequent to that removal, on April 1, 2003, Fleming filed for protection under the federal bankruptcy code. Also in April 2003, plaintiffs filed a virtually identical second lawsuit in the United States District Court for the Eastern District of Texas.

Actions Regarding Frank Gruttadauria (reported in the Form 10-K and the Form 10-Q for the quarter ended February 28, 2003)

Two more cases have been settled: one of the cases on appeal from the United States District Court for the Northern District of Ohio, and one of the cases in the United States District Court for the Northern District of Illinois. The two remaining cases in the Northern District of Illinois have been submitted for arbitration before the New York Stock Exchange by agreement of the parties. Another case has been

filed against Lehman Brothers and SG Cowen in the United States District Court for the Northern District of Ohio alleging generally the same claims and seeking generally the same relief as in the pending cases. Lehman Brothers intends to file a motion to stay the suit pending arbitration, based on the plaintiff's contractual agreement to arbitrate claims against the defendants.

In May 2003, the court issued an opinion and order dismissing the action without prejudice.

Lehman Brothers has received requests from the NYSE, acting in coordination with the SEC and the NASD, for information, documents and testimony relating to "spinning" (the alleged allocation by underwriters of shares of "hot" IPOs to directors and officers of existing or potential investment banking clients in return for their firms' investment banking business). The Company is in the process of responding to these requests.

WorldCom Bondholders Litigation (reported in the Form 10-K and the Form 10-Q for the quarter ended February 28, 2003)

Additional individual institutional plaintiffs have filed actions in various state courts asserting the same claims as those filed earlier. These actions have been, or are in the process of being, transferred to the multi-districted action in New York.

On July 14, 2003, Holdings issued the following joint press release with Neuberger Berman Inc., and filed a Current Report on Form 8-K on the same date containing the text of the release:

Lehman Brothers Holdings Inc. and Neuberger Berman Inc. announced today that they are continuing positive discussions with a view towards achieving a business combination between the two firms. While there is no assurance that an agreement will be reached, the parties expect that final terms will be worked out over the near term.

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

The following Current Reports on Form 8-K were filed during the fiscal quarter for which this Report is filed:

Financial Statements:
	Exhibit 99.1	Press Release Relating to Earnings
	Exhibit 99.2	Selected Statistical Information (Preliminary and Unaudited)
	Exhibit 99.3	Consolidated Statement of Income (Preliminary and Unaudited)
	Exhibit 99.4	Segment Net Revenue Information (Preliminary and Unaudited)

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.

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Delaware (State or other jurisdiction of incorporation or organization)		13-3216325 (I.R.S. Employer Identification No.)
745 Seventh Avenue New York, New York (Address of principal executive offices)		10019 (Zip Code)
(212) 526-7000 (Registrant's telephone number, including area code)

				Page Number
Available Information				3
Part I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements—(unaudited)
			Consolidated Statement of Income— Three and Six Months Ended May 31, 2003 and May 31, 2002	4
			Consolidated Statement of Financial Condition— May 31, 2003 and November 30, 2002	6
			Consolidated Statement of Cash Flows — Six Months Ended May 31, 2003 and May 31, 2002	8
			Notes to Consolidated Financial Statements	9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		52
	Item 4.	Controls and Procedures		52
Part II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		53
	Item 6.	Exhibits and Reports on Form 8-K		57
Signature				59
Certifications				60
Exhibit Index				62
Exhibits

		May 31 2003		November 30 2002
ASSETS
Cash and cash equivalents		$	4,998	$	3,699
Cash and securities segregated and on deposit for regulatory and other purposes			3,692		2,803
Securities and other financial instruments owned (includes $30,564 at May 31, 2003 and $22,211 at November 30, 2002 pledged as collateral)			131,091		119,278
Collateralized agreements:
	Securities purchased under agreements to resell		112,824		94,341
	Securities borrowed		23,702		20,497
Receivables:
	Brokers, dealers and clearing organizations		6,994		3,775
	Customers		11,554		8,279
	Others		1,601		1,910
Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $773 in 2003 and $590 in 2002)			2,190		2,075
Other assets			3,529		3,466
Excess of cost over fair value of net assets acquired (net of accumulated amortization of $158 in 2003 and $155 in 2002)			235		213

	Total assets	$	302,410	$	260,336


LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt			$	2,499		$	2,369
Securities and other financial instruments sold but not yet purchased				74,104			69,034
Collateralized financing:
	Securities sold under agreements to repurchase			112,458			94,725
	Securities loaned			10,257			8,137
	Other secured borrowings			8,134			11,844
Payables:
	Brokers, dealers and clearing organizations			6,340			1,787
	Customers			27,508			17,477
Accrued liabilities and other payables				6,935			6,633
Long-term debt:
	Senior notes			41,225			36,283
	Subordinated indebtedness			2,305			2,395

		Total liabilities		291,765			250,684

Commitments and contingencies
Trust issued securities subject to mandatory redemption				1,010			710
STOCKHOLDERS' EQUITY
Preferred stock				700			700
Common stock, $0.10 par value; Shares authorized: 600,000,000 in 2003 and 2002; Shares issued: 260,633,589 in 2003 and 258,791,416 in 2002; Shares outstanding: 242,422,322 in 2003 and 231,131,043 in 2002				26			25
Additional paid-in capital				3,412			3,628
Accumulated other comprehensive income (net of tax)				(2	)		(13	)
Retained earnings				6,262			5,608
Other stockholders' equity, net				607			949
Common stock in treasury, at cost: 18,211,267 shares in 2003 and 27,660,373 shares in 2002				(1,370	)		(1,955	)

		Total stockholders' equity		9,635			8,942

		Total liabilities and stockholders' equity	$	302,410		$	260,336

			Three months ended
			May 31 2003		May 31 2002
Revenues
	Principal transactions		$	1,275	$	627
	Investment banking			432		465
	Commissions			299		332
	Interest and dividends			2,445		2,910
	Other			19		13

		Total revenues		4,470		4,347
	Interest expense			2,179		2,684

		Net revenues		2,291		1,663

Non-interest expenses
	Compensation and benefits			1,168		848
	Technology and communications			147		142
	Brokerage and clearance fees			90		76
	Occupancy			73		71
	Professional fees			41		34
	Business development			37		40
	Other			30		16
	Real estate reconfiguration			77		—

		Total non-interest expenses		1,663		1,227

Income before taxes and dividends on trust securities				628		436
	Provision for income taxes			173		126
	Dividends on trust securities			18		14

Net income			$	437	$	296

Net income applicable to common stock			$	426	$	285

Earnings per common share
	Basic		$	1.76	$	1.16

	Diluted		$	1.67	$	1.08

			Six months ended
			May 31 2003		May 31 2002
Revenues
	Principal transactions		$	2,043	$	1,196
	Investment banking			803		935
	Commissions			561		621
	Interest and dividends			5,132		5,796
	Other			31		25

		Total revenues		8,570		8,573
	Interest expense			4,568		5,304

		Net revenues		4,002		3,269

Non-interest expenses
	Compensation and benefits			2,041		1,667
	Technology and communications			290		264
	Brokerage and clearance fees			176		151
	Occupancy			155		140
	Professional fees			70		54
	Business development			69		74
	Other			59		43
	Real estate reconfiguration			77		—

		Total non-interest expenses		2,937		2,393

Income before taxes and dividends on trust securities				1,065		876
	Provision for income taxes			295		254
	Dividends on trust securities			32		28

Net income			$	738	$	594

Net income applicable to common stock			$	716	$	547

Earnings per common share
	Basic		$	2.96	$	2.23

	Diluted		$	2.81	$	2.07

			Six Months Ended
			May 31 2003			May 31 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income			$	738		$	594
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Depreciation and amortization			153			119
	Tax benefit from issuance of stock-based awards			147			96
	Amortization of deferred stock compensation			238			256
	Real estate reconfiguration charge			77			—
	Other adjustments			(8	)		26
Net change in:
	Cash and securities segregated and on deposit			(889	)		1,353
	Securities and other financial instruments owned			(9,941	)		(6,280	)
	Securities borrowed			(3,205	)		(10,615	)
	Other secured borrowings			(3,710	)		(694	)
	Receivables from brokers, dealers and clearing organizations			(3,219	)		1,758
	Receivables from customers			(3,275	)		4,755
	Securities and other financial instruments sold but not yet purchased			5,070			12,844
	Securities loaned			2,120			(1,048	)
	Payables to brokers, dealers and clearing organizations			4,553			(543	)
	Payables to customers			10,031			187
	Accrued liabilities and other payables			280			(526	)
	Other operating assets and liabilities, net			167			(222	)

		Net cash provided by (used in) operating activities		(673	)		2,060

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes				8,019			3,133
Principal payments of senior notes				(4,880	)		(4,706	)
Proceeds from issuance of subordinated indebtedness				132			—
Principal payments of subordinated indebtedness				(282	)		(267	)
Proceeds from the issuance of trust issued securities				300			—
Net payments for commercial paper and short-term debt				130			(1,410	)
Resale agreements net of repurchase agreements				(750	)		1,627
Payments for treasury stock purchases				(548	)		(536	)
Issuance of treasury stock				154			111
Dividends paid or accrued				(80	)		(91	)
Issuances of common stock				38			30

		Net cash provided by (used in) financing activities		2,233			(2,109	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements, net				(235	)		(311	)
Acquisition, net of cash acquired				(26	)		(31	)

		Net cash used in investing activities		(261	)		(342	)

		Net change in cash and cash equivalents		1,299			(391	)

Cash and cash equivalents, beginning of period				3,699			2,561

		Cash and cash equivalents, end of period	$	4,998		$	2,170

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions) Interest paid totaled $4,563 and $5,367 for the six months ended May 31, 2003 and May 31, 2002, respectively. Income taxes paid totaled $357 and $199 for the six months ended May 31, 2003 and May 31, 2002, respectively.

		Fair Value* May 31, 2003				Fair Value* November 30, 2002
(in millions)		Fair Value* May 31, 2003				Fair Value* November 30, 2002
(in millions)		Assets		Liabilities		Assets		Liabilities
Interest rate, currency and credit default swaps and options (including caps, collars and floors)		$	13,054	$	8,695	$	9,046	$	7,087
Foreign exchange forward contracts and options			2,120		2,064		814		1,157
Other fixed income securities contracts (including futures contracts, options and TBAs)			1,565		860		602		215
Equity contracts (including equity swaps, warrants and options)			3,265		1,821		3,400		1,667

	Total	$	20,004	$	13,440	$	13,862	$	10,126

		At May 31, 2003						At November 30, 2002
(in millions)		Residential Mortgages		Other Asset- Backed		Commercial Mortgages		Residential Mortgages		Other Asset- Backed		Commercial Mortgages
Prepayment speed:
	Impact of 10% adverse change	$	2	$	—	$	—	$	4	$	1	$	—
	Impact of 20% adverse change	$	6	$	—	$	—	$	8	$	2	$	—

Assumed credit losses:
	Impact of 10% adverse change	$	15	$	11	$	8	$	17	$	12	$	—
	Impact of 20% adverse change	$	31	$	21	$	9	$	33	$	24	$	12

Discount rate:
	Impact of 10% adverse change	$	15	$	13	$	—	$	17	$	12	$	—
	Impact of 20% adverse change	$	30	$	26	$	—	$	34	$	24	$	—

(in millions)	Investment Banking		Capital Markets		Client Services		Total
May 31, 2003
Gross Revenues	$	426	$	3,808	$	236	$	4,470
Interest Expense		—		2,172		7		2,179

Net Revenue		426		1,636		229		2,291

Depreciation and Amortization Expense		12		55		8		75
Other Expenses ⁽¹⁾		333		1,015		163		1,511

Income Before Taxes ⁽¹⁾⁽²⁾	$	81	$	566	$	58	$	705

Segment Assets (billions)	$	1.6	$	294.9	$	5.9	$	302.4

(in millions)	Investment Banking		Capital Markets		Client Services		Total
May 31, 2002
Gross Revenues	$	454	$	3,680	$	213	$	4,347
Interest Expense		—		2,680		4		2,684

Net Revenue		454		1,000		209		1,663

Depreciation and Amortization Expense		10		52		5		67
Other Expenses		337		668		155		1,160

Income Before Taxes ⁽¹⁾	$	107	$	280	$	49	$	436

Segment Assets (billions)	$	1.6	$	261.9	$	4.3	$	267.8

(in millions)	Investment Banking		Capital Markets		Client Services		Total
May 31, 2003
Gross Revenues	$	792	$	7,360	$	418	$	8,570
Interest Expense		—		4,557		11		4,568

Net Revenue		792		2,803		407		4,002

Depreciation and Amortization Expense		28		107		18		153
Other Expenses ⁽¹⁾		623		1,788		296		2,707

Income Before Taxes ⁽¹⁾⁽²⁾	$	141	$	908	$	93	$	1,142

Segment Assets (billions)	$	1.6	$	294.9	$	5.9	$	302.4

(in millions)	Investment Banking		Capital Markets		Client Services		Total
May 31, 2002
Gross Revenues	$	913	$	7,239	$	421	$	8,573
Interest Expense		—		5,294		10		5,304

Net Revenue		913		1,945		411		3,269

Depreciation and Amortization Expense		18		91		10		119
Other Expenses		670		1,298		306		2,274

Income Before Taxes ⁽¹⁾	$	225	$	556	$	95	$	876

Segment Assets (billions)	$	1.6	$	261.9	$	4.3	$	267.8

			Three Months Ended						Six Months Ended
(in millions, except for per share data)			May 31 2003			May 31 2002			May 31 2003			May 31 2002
Numerator:
	Net income		$	437		$	296		$	738		$	594
	Preferred stock dividends			(11	)		(11	)		(22	)		(47	)

	Numerator for basic and diluted earnings per share-income available to common stockholders		$	426		$	285		$	716		$	547

Denominator:
	Denominator for basic earnings per share-weighted-average shares			242.3			245.8			242.1			245.5
	Effect of dilutive securities:
		Employee stock options		11.4			13.7			10.5			14.4
		Employee restricted stock units		2.1			4.0			1.8			4.5

	Dilutive potential common shares			13.5			17.7			12.3			18.9

	Denominator for diluted earnings per share-adjusted weighted-average shares			255.8			263.5			254.4			264.4

Basic earnings per share			$	1.76		$	1.16		$	2.96		$	2.23

Diluted earnings per share			$	1.67		$	1.08		$	2.81		$	2.07

				Amount of Commitment Expiration Per Period
(in millions)		Total Contractual Amount		Remaining 2003		2004-2006		2007-2008		2009 & Thereafter
Lending commitments:
	High grade	$	7,795	$	2,519	$	4,099	$	1,177	$	—
	High yield		2,041		309		951		480		301
	Contingent acquisition facilities		1,616		1,616		—		—		—
	Secured lending transactions, including forward-starting resale and repurchase agreements		133,609		112,015		21,135		330		129

CAPITAL MARKETS NET REVENUES
	Three Months Ended May 31, 2003							Three Months Ended May 31, 2002
(in millions)	Gross Revenues		Interest Expense			Net Revenues		Gross Revenues		Interest Expense			Net Revenues
Fixed Income	$	2,801	$	(1,615	)	$	1,186	$	2,489	$	(1,813	)	$	676
Equities		1,007		(557	)		450		1,191		(867	)		324

	$	3,808	$	(2,172	)	$	1,636	$	3,680	$	(2,680	)	$	1,000

(in millions)		May 31 2003		November 30 2002
Long-Term Debt
	Senior Notes	$	41,225	$	36,283
	Subordinated Indebtedness		2,305		2,395

			43,530		38,678
Trust Issued Securities Subject to Mandatory Redemption			1,010		710
Stockholders' Equity
	Preferred Equity		700		700
	Common Equity		8,935		8,242

			9,635		8,942

Total Capital		$	54,175	$	48,330

			Expiration Period
(in millions)	Notional/ Maximum Payout		Remaining 2003		2004-2006		2007-2008		2009 & Thereafter
Derivative contracts	$	269,686	$	29,448	$	93,343	$	34,007	$	112,888
Municipal securities related liquidity commitments		3,569		1,520		290		80		1,679
Other commitments and guarantees associated with special purpose entities		3,026		1,135		349		797		745
Standby letters of credit		802		542		260		—		—
Private equity investments		398		163		235		—		—
Long-term debt maturities		43,530		3,323		20,549		10,590		9,068

	As of						Three Months Ended May 31, 2003
(in millions)	May 31 2003			Nov. 30 2002			Three Months Ended May 31, 2003
(in millions)	May 31 2003			Nov. 30 2002			Average			High		Low
Interest rate risk	$	19.4		$	15.8		$	18.7		$	20.0	$	16.8
Equity price risk		8.0			8.0			7.5			8.1		6.8
Foreign exchange risk		2.9			2.2			2.8			2.9		2.4
Diversification benefit		(6.6	)		(5.2	)		(6.0	)

Total Company	$	23.7		$	20.8		$	23.0		$	24.5	$	20.7

		LEHMAN BROTHERS HOLDINGS INC. (REGISTRANT)
Date: July 15, 2003		By:	/s/ DAVID GOLDFARB Chief Financial Officer and Executive Vice President (principal financial and accounting officer)

Exhibit No.		Exhibit
Exhibit 12.01		Computation of Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends
Exhibit 99.01		Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.02		Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002