Back to GetFilings.com

Use these links to rapidly review the document
LEHMAN BROTHERS HOLDINGS INC. TABLE OF CONTENTS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LEHMAN BROTHERS HOLDINGS INC.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission File Number 1-9466

Lehman Brothers Holdings Inc.
(Exact Name of Registrant as Specified in its Charter)

Securities registered pursuant to Section 12(g) of the Act: None

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the Registrant at May 28, 2004 (the last business day of the Registrant's most recently completed second fiscal quarter) was approximately $20,027,462,000. As of that date, 264,738,433 shares of the Registrant's common stock, $0.10 par value per share, were held by non-affiliates. For purposes of this information, the outstanding shares of common stock that were and that may be deemed to have been beneficially owned by directors and executive officers of the Registrant were deemed to be shares of common stock held by affiliates at that date.

As of January 31, 2005, 276,202,636 shares of the Registrant's common stock, $.10 par value per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of Lehman Brothers Holdings Inc.'s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated in Part III.

LEHMAN BROTHERS HOLDINGS INC.

TABLE OF CONTENTS

1

LEHMAN BROTHERS HOLDINGS INC.

AVAILABLE INFORMATION

Lehman Brothers Holdings Inc. ("Holdings") files annual, quarterly and current reports, proxy statements and other information with the United States 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, U.S.A. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 (or 1-202-942-8090). 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 reports 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 (the "Exchange Act"), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Holdings also makes available through its internet site, via a link to the SEC's internet site, statements of beneficial ownership of Holdings' equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

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 stockholders, although in some cases these documents are not available on that site as soon as they are available on the SEC's site.

Holdings also makes available on http://www.lehman.com (i) its Corporate Governance Guidelines, (ii) its Code of Ethics (including any waivers therefrom granted to executive officers or directors), and (iii) the charters of the Audit, Compensation and Benefits, and Nominating and Corporate Governance Committees of its Board of Directors. These documents are also available in print without charge to any person who requests them by writing or telephoning:

Lehman Brothers Holdings Inc.
Office of the Corporate Secretary
399 Park Avenue
New York, New York 10022, U.S.A.
(212) 526-0858

In order to view and print the documents referred to above on Holdings' internet site, which are in the PDF format, you will need to have installed on your computer the Adobe Acrobat Reader software. 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.

2

PART I

ITEM 1. BUSINESS

        As used herein, "Holdings" or the "Registrant" means Lehman Brothers Holdings Inc., a Delaware corporation, incorporated on December 29, 1983. Holdings and its subsidiaries are collectively referred to as the "Company," "Lehman Brothers," "we," "us" or "our". Our executive offices are located at 745 Seventh Avenue, New York, New York 10019, U.S.A., and our telephone number is (212) 526-7000.

FORWARD-LOOKING STATEMENTS

        Some of the statements contained or incorporated by reference in 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 Exchange Act. These statements are not historical facts but instead represent only management'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, the factors listed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Affecting Results of Operations" in Part II, Item 7, of this Report.

        As a global investment bank, our results of operations have varied significantly in response to global economic and market trends and geopolitical events. The nature of our business makes predicting the future trends of revenues or financial condition difficult. Caution should be used when extrapolating historical results to future periods. Our actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any forward-looking statements and, accordingly, readers are cautioned not to place undue reliance on such statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

LEHMAN BROTHERS

        Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients and individuals worldwide. We provide a full array of equities and fixed income sales, trading and research, investment banking services and investment management and advisory services. Our global 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 Firm, through predecessor entities, was founded in 1850.

        Through our subsidiaries, we are a global market-maker in all major equity and fixed income products. To facilitate our market-making activities, we are a member of all principal securities and commodities exchanges in the United States, as well as NASD, Inc., and we hold memberships or associate memberships on several principal international securities and commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Paris, Milan and Australian stock exchanges.

        Our principal business activities are investment banking, capital markets and investment management. Through our investment banking, trading, research, structuring and distribution capabilities in equity and fixed income products, we continue to build on our customer flow business model, which is based on our principal focus of facilitating client transactions in all major global capital markets products and services. We generate customer flow revenues from institutional, corporate, government and high-net-worth customers by (i) advising on and structuring transactions specifically

3

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; (iii) providing investment management and advisory services; and (iv) acting as an underwriter to clients. As part of our customer flow activities, we maintain inventory positions of varying amounts across a broad range of financial instruments. In addition, we also take proprietary investment positions, the success of which is dependent on our ability to anticipate economic and market trends. The financial services industry is significantly influenced by worldwide economic conditions as well as other factors inherent in the global financial markets. As a result, revenues and earnings may vary from quarter to quarter and from year to year. We believe our customer flow orientation helps to mitigate overall revenue volatility.

        We operate in three business segments (each of which is described below): Investment Banking, Capital Markets and Investment Management. Financial information concerning the Company for the fiscal years ended November 30, 2004, 2003 and 2002, including the amount of net revenues contributed by each segment in such periods, is set forth in the Consolidated Financial Statements and Notes thereto in Part II, Item 8, of this Report. Information with respect to our operations by business segment and net revenues by geographic area is set forth under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Segments" and "—Geographic Diversification" in Part II, Item 7, of this Report, and in Note 21 of the Notes to Consolidated Financial Statements in Part II, Item 8, of this Report.

        We are engaged primarily in providing financial services. Other businesses in which we are engaged represent less than 10 percent of each of consolidated assets, revenues and pre-tax income.

Investment Banking

        The Investment Banking business segment provides advice to corporate, institutional and government clients throughout the world on mergers, acquisitions and other financial matters. Investment Banking also raises capital for clients by underwriting public and private offerings of debt and equity securities. Our Investment Banking professionals are responsible for developing and maintaining relationships with issuer clients, gaining a thorough understanding of their specific needs and bringing together the full resources of Lehman Brothers to accomplish their financial and strategic objectives.

        Investment Banking is made up of Advisory Services and Global Finance and is organized into global industry, product and geographic coverage groups, enabling individual bankers to develop specific expertise in particular industries and markets. Industry coverage groups include Communications, Consumer/Retailing, Financial Institutions, Financial Sponsors, Healthcare, Industrial, Media, Natural Resources, Power, Real Estate and Technology. Specialized product groups within Advisory Services and Global Finance are partnered with relationship managers in the global industry groups to provide comprehensive solutions for clients. Advisory Services consists of Mergers & Acquisitions and Restructuring. Global Finance encompasses Equity Capital Markets (which consists of equity and equity-related securities and derivatives), Debt Capital Markets (which incorporates expertise in syndicate, liability management, derivatives and bank loan syndication), Leveraged Finance and Private Placements. Specialists in product development, foreign exchange and derivatives also are engaged to tailor specific structures for customers.

        Lehman Brothers maintains investment banking offices in North America, Europe, the Middle East, Latin America and the Asia Pacific region.

        The high degree of integration among our industry, product and geographic groups has allowed us to become a leading source of one-stop financial solutions for our global clients.

4

        Mergers & Acquisitions.    Lehman Brothers has a long history of providing strategic advisory services to corporate, institutional and government clients around the world on a wide range of financial matters, including mergers and acquisitions, spin-offs, targeted stock transactions, share repurchase strategies, government privatization programs, takeover defenses and other strategic advice.

        Restructuring.    Our Restructuring group provides full-service restructuring expertise on a global basis. The group provides advisory services to distressed companies, their creditors and potential purchasers, including providing out-of-court options for companies to avoid bankruptcy, helping companies and creditors move efficiently through the bankruptcy process and advising strategic and financial buyers on the unique challenges of buying distressed and bankrupt companies.

        Underwriting.    We are a leading underwriter of initial and other public offerings of equity and fixed income securities, including listed and over-the-counter securities, government and agency securities and mortgage- and asset-backed securities.

        Leveraged Finance.    Our global Leveraged Finance group provides comprehensive financing solutions for below-investment-grade clients across many industries through our high yield bond, leveraged loan, bridge financing and mezzanine debt products.

        Private Placements.    We have a dedicated Private Placement group focused on capital raising in the private equity and debt markets. Clients range from pre-IPO companies to well-established corporations that span many industries. The Private Placement group has experience in identifying sources, establishing structures and placing common stock, convertible preferred stock, subordinated debt and senior debt, as well as utilizing a variety of financing techniques, including mezzanine debt, securitizations, project financings and sale-leasebacks.

Capital Markets

        The Capital Markets business segment includes institutional customer flow activities, prime brokerage, research, secondary-trading and financing activities in fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments and investments. We are a leading 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, real estate, preferred stock, municipal securities, bank loans, foreign exchange, financing and derivative products. We are one of the largest investment banks in terms of U.S. and pan-European listed equities trading volume and maintain a major presence in over-the-counter U.S. stocks, major Asian large capitalization stocks, warrants, convertible debentures and preferred issues. The Capital Markets segment also includes proprietary activities, such as investments in real estate as well as realized and unrealized gains and losses related to private equity investments. Lehman Brothers combines the skills from the sales, trading and research areas of our Equities and Fixed Income Capital Markets businesses to serve the financial needs of our clients and customers. This integrated approach enables us to structure and execute global transactions for clients and to provide worldwide liquidity in marketable securities.

Equities Capital Markets

        The Equities Capital Markets business is responsible for our equities and equity-related operations and products worldwide. These products include listed and over-the-counter securities, American Depositary Receipts, convertibles, options, warrants and derivatives. We make markets in equity and equity-related securities and execute block trades on behalf of clients and customers. We participate in the global equity and equity-related markets in all major currencies through our worldwide presence

5

and membership in major stock exchanges. Equities Capital Markets is composed of Execution Services and Leveraged Businesses.

        Execution Services.    Execution Services consists of our Single Stock cash trading and Program Trading businesses, which also includes Connectivity services. Single Stock trades are executed for clients in a conventional (calls to a sales person) or electronic fashion through external systems as well as our own LINKS platform. These trades can be executed manually or via algorithmic trading strategies based on client needs. Program Trading specializes in execution of trades on baskets of stocks which can be executed on an agency or risk basis, as well as "riskless" arbitrage, in which we seek to benefit from temporary price discrepancies that occur when a security or index is traded in two or more markets. We deliver global electronic Connectivity services to our clients, offering seamless electronic access to our trading desks and sources of liquidity around the world.

        Leveraged Businesses.    Leveraged Businesses include Volatility, Convertibles and Relative Value. Our global Volatility business offers equity derivative capabilities across a wide spectrum of products and currencies, including listed options and over-the-counter derivatives, to assist our customers in managing risk. The Convertibles business trades and makes markets in conventional and highly structured convertible securities. The Relative Value business includes our proprietary "risk" arbitrage activities, which involve the purchase of securities at discounts from the expected values that would be realized if certain proposed or anticipated corporate transactions (such as mergers, acquisitions, recapitalizations, exchange offers, reorganizations, bankruptcies, liquidations or spin-offs) were to occur, as well as facilitation of trades for clients who engage in these type of trading strategies.

Fixed Income Capital Markets

        Lehman Brothers actively participates in key fixed income markets worldwide and maintains a 24-hour trading presence in global fixed income securities. We are a market-maker and participant in the new issue and secondary markets for a broad variety of fixed income securities. Fixed Income businesses include the following:

        Government and Agency Obligations.    Lehman Brothers is one of the leading primary dealers in U.S. government securities, participating in the underwriting of and market-making in U.S. Treasury bills, notes and bonds, and securities of federal agencies. We are also a market-maker in the government securities of all G7 countries, and participate in other major European and Asian government bond markets.

        Corporate Debt Securities and Loans.    We make markets in fixed and floating rate investment grade debt worldwide. We are also a major participant in the preferred stock market, managing numerous offerings of long-term and perpetual preferreds and auction rate securities.

        High Yield Securities and Leveraged Bank Loans.    We also make markets in non-investment grade debt securities and bank loans. Lehman Brothers provides "one-stop" leveraged financing solutions for corporate and financial acquirers and high yield issuers, including multi-tranche, multi-product acquisition financing. We are one of the leading investment banks in the syndication of leveraged loans.

        Money Market Products.    We hold leading market positions in the origination and distribution of medium-term notes and commercial paper. We are an appointed dealer or agent for numerous active commercial paper and medium-term note programs on behalf of companies and government agencies worldwide.

        Mortgage- and Asset-Backed Securities.    We are a leading underwriter of and market-maker in residential and commercial mortgage-and asset-backed securities and are active in all areas of secured lending, structured finance and securitized products. We underwrite and make markets in the full range of U.S. agency-backed mortgage products, mortgage-backed securities, asset-backed securities and

6

whole loan products. We are also a leader in the global market for residential and commercial mortgages (including multi-family financing) and leases. We originate commercial and residential mortgage loans through Lehman Brothers Bank, FSB, and other subsidiaries in the U.S., Europe and Asia. Lehman Brothers Bank offers traditional and online mortgage and banking services nationally to individuals as well as institutions and their customers. The Bank is a major part of the our institutional mortgage business, providing an origination pipeline for mortgages and mortgage-backed securities.

        During 2004, we acquired three mortgage banking businesses. We believe these acquisitions will allow further vertical integration of the mortgage business platform. Mortgage loans originated by the acquired companies are intended to provide a more cost efficient source of loan product for our securitization pipeline. During 2004 we also sold our reverse mortgage provider.

        Real Estate Investment.    In addition to our lending activities, we invest in commercial and residential real estate in the form of joint venture equity investments as well as direct ownership interests. We have interests in several hundred properties throughout the world.

        Municipal and Tax-Exempt Securities.    Lehman Brothers is a major dealer in municipal and tax-exempt securities, including general obligation and revenue bonds, notes issued by states, counties, cities and state and local governmental agencies, municipal leases, tax-exempt commercial paper and put bonds.

        Fixed Income Derivatives.    We offer a broad range of interest rate- and credit-based derivative products and related services. Derivatives professionals are integrated into all of our Fixed Income areas in response to the worldwide convergence of the cash and derivative markets.

        Foreign Exchange.    Our global foreign exchange operations provide market access and liquidity in all currencies for spot, forward and over-the-counter options markets around the clock. We offer our customers execution, market information, analysis and hedging capabilities, utilizing foreign exchange as well as foreign exchange options and other foreign exchange derivatives. We also provide advisory services to central banks, corporations and investors worldwide, structuring innovative products to fit their specific needs. We make extensive use of our global macroeconomics research to advise clients on the appropriate strategies to minimize interest rate and currency risk.

Capital Markets Prime Services

        The Capital Markets Prime Services group includes our Secured Financing, Prime Broker and Futures businesses.

        The Secured Financing business within Capital Markets engages in three primary functions: managing our equity and fixed income matched book activities, supplying secured financing to institutional clients and customers and obtaining secured funding for our inventory of equity and fixed income products. Matched book funding involves borrowing and lending cash on a short-term basis to institutional customers collateralized by marketable securities, typically government or government agency securities. We enter into these agreements in various currencies and seek to generate profits from the difference between interest earned and interest paid. Secured Financing works with our institutional sales force to identify customers that have cash to invest and/or securities to pledge to meet the financing and investment objectives of the Company and its customers. Secured Financing also coordinates with our Treasury group to provide collateralized financing for a large portion of our securities and other financial instruments owned. In addition to our activities on behalf of our U.S. clients and customers, we are a major participant in the European and Asian repurchase agreement ("repo") markets, providing secured financing for our customers in those regions. Secured Financing provides margin loans in all markets for customer purchases of securities, as well as securities lending and short-selling facilitation.

7

        The Prime Broker business engages in full operations, clearing and processing services for its hedge fund and other customers. We offer a full suite of prime brokerage products and services, including margin financing and yield enhancement through synthetic and traditional products, global securities lending (including eBorrow, our online securities lending tool), full-service global execution platforms and research teams, customized risk management solutions, introduction of clients to suitable institutional investors, portfolio accounting and reporting solutions and personalized client service.

        Our Futures business executes and clears futures transactions for clients on an agency basis.

Global Distribution

        Our institutional sales organizations encompass distinct global sales forces that have been integrated into the Capital Markets businesses to provide investors with the full array of products offered by Lehman Brothers.

        Equities Sales.    Our Equities Capital Markets sales force provides an extensive range of services to institutional investors, focusing on developing long-term relationships though a comprehensive understanding of customers' investment objectives, while providing proficient execution and consistent liquidity in a wide range of global equity securities and derivatives.

        Fixed Income Sales.    Our Fixed Income Capital Markets sales force is one of the most productive in the industry, serving the investing and liquidity needs of major institutional investors by employing a relationship management approach that provides superior information flow and product opportunities for our customers.

Research

        Research at Lehman Brothers encompasses the full range of research disciplines, including quantitative, economic, strategic, credit, relative value and market-specific analysis. To ensure in-depth expertise within various markets, Equity Research has established regional teams on a worldwide basis that are staffed with industry and strategy specialists. Fixed Income Research provides expertise in U.S., European and Asian government and agency securities, derivatives, sovereign issues, corporate securities, high yield, asset- and mortgage-backed securities, indices, emerging market debt and municipal securities.

Investment Management

        The Investment Management business segment (formerly Client Services) consists of our global Private Investment Management and Asset Management businesses.

Private Investment Management

        Private Investment Management provides comprehensive investment, wealth advisory and capital markets execution services to high-net-worth individuals and businesses, leveraging all the resources of Lehman Brothers.

        Investment Services.    Lehman Brothers investment representatives manage client relationships with high-net-worth individuals and businesses.

        Portfolio Advisory.    Our Portfolio Advisory group supports our investment representatives with asset allocation, portfolio strategy and manager selection advice. The group creates customized portfolio recommendations, monitors client portfolios and analyzes both proprietary and third-party managers to ensure our clients' access to appropriate investment managers.

8

        Wealth Advisory.    Our Wealth Advisory group supports our investment representatives by working with our clients and their advisors to recommend plans for preserving and enhancing wealth across generations.

        The Lehman Brothers Trust Company.    The Lehman Brothers Trust Company offers a full suite of services, including fiduciary, investment planning and financial planning services. For businesses and institutional clients, the Trust Company structures and manages defined benefit and defined contribution plans, master trust/custody arrangements, employee stock ownership plans and nonqualified plans. The Trust Company includes a nationally chartered trust company as well as a Delaware state chartered trust company.

        Capital Advisory.    Our Capital Advisory group works with investment representatives to provide integrated wealth management and corporate finance solutions for executives, small to mid-sized companies, private equity firms and professional sports franchise owners.

        Institutional Client.    The Institutional Client group leverages the Lehman Brothers Capital Markets franchise to provide brokerage and market-making services to small and mid-sized institutional clients in the fixed income and equities capital markets. The group also leads our effort to establish business relationships with minority and women-owned financial firms, through our Partnership Solutions program.

Asset Management

        Asset Management provides proprietary asset management products across traditional and alternative asset classes, through a variety of distribution channels, to individuals and institutions. It includes both the Neuberger Berman and Lehman Brothers Asset Management brands as well as our Private Equity business.

        Neuberger Berman.    Neuberger Berman has provided money management products and services to individuals and families since 1939. We acquired Neuberger Berman in October 2003.

        Neuberger Berman Private Asset Management.    Neuberger Berman's Private Asset Management business provides discretionary, customized portfolio management across equity and fixed income asset classes for high-net-worth clients.

        Neuberger Berman Family of Funds.    The Neuberger Berman family of funds spans asset classes, investment styles and capitalization ranges. Its open-end mutual funds are available directly to investors or through distributors, and its closed-end funds trade on major stock exchanges. Neuberger Berman is also a leading sub-advisor of funds for institutional clients, including insurance companies, banks and other financial services firms. Neuberger Berman also provides mutual fund asset allocation services to individuals and institutions through its Fund Advisory Service business.

        Lehman Brothers Asset Management.    Lehman Brothers Asset Management specializes in investment strategies for institutional and qualified individual investors. While our strategies are numerous and diverse, our managers share a dedication to investment discipline that includes quantitative screening, fundamental analysis and risk management.

        Institutional Asset Management.    Lehman Brothers Institutional Asset Management provides a full range of asset management products for pensions, foundations, endowments and other institutions. It offers strategies across the risk/return spectrum, in cash, fixed income, equity and hybrid asset classes.

        Absolute Return Strategies.    Lehman Brothers' Absolute Return Strategies platform provides a wide range of hedge fund products to institutions and qualified individual clients. It offers proprietary

9

single-manager funds, proprietary multiple-manager funds of funds and third-party single-manager funds.

        Private Equity.    Private Equity provides opportunities in privately negotiated transactions across a variety of asset classes for institutional and high-net-worth individual investors. Our investment partnerships manage a number of private equity portfolios, with a significant amount of the Company's capital invested alongside that of our clients. Lehman Brothers creates funds and invests in asset classes in which we have strong capabilities, proprietary deal flow and an excellent reputation. Areas of specialty include Merchant Banking, Venture Capital, Real Estate, Fixed Income-Related Investments and Private Funds Investments. We occasionally make other non-fund-related direct private equity investments.

Corporate

        Our Corporate division provides support to our businesses through the processing of certain securities and commodities transactions; receipt, identification and delivery of funds and securities; safeguarding of customers' securities; risk management; and compliance with regulatory and legal requirements. In addition, the Corporate Division is responsible for technology infrastructure and systems development, treasury operations, financial control and analysis, tax planning and compliance, internal audit, expense management, career development and recruiting and other support functions.

Risk Management

        A description of our Risk Management infrastructure and procedures is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management" in Part II, Item 7, of this Report. Information regarding our use of derivative financial instruments to hedge interest rate, currency, security and commodity price and other market risks is contained in Notes 1, 3, 9, 10 and 11 to the Consolidated Financial Statements in Part II, Item 8, of this Report.

Competition

        All aspects of our business are highly competitive. Lehman Brothers competes in U.S. and international markets directly with numerous other firms in the areas of securities underwriting and placement, corporate finance and strategic advisory services, securities sales and trading, prime brokerage, research, foreign exchange and derivative products, asset management and private equity, including investment banking firms, traditional and online securities brokerage firms, mutual fund companies and other asset managers, investment advisers, venture capital firms and certain commercial banks and, indirectly for investment funds, with insurance companies and others. Our competitive ability depends on many factors, including our reputation, the quality of our services and advice, product innovation, execution ability, pricing, advertising and sales efforts and the talent of our personnel.

        The financial services industry has become considerably more concentrated as numerous securities firms have been acquired by or merged into other firms. These developments have increased competition from other firms, many of which have significantly greater equity capital than us. Legislative and regulatory changes in the United States allow commercial banks to enter businesses previously limited to investment banks, and several large commercial banks, insurance companies and other broad-based financial services firms have established or acquired broker-dealers or have merged with other financial institutions. Many of these firms have greater capital than us and have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage, asset management and investment banking services, which may enhance their competitive position. They also have the ability to support their investment banking and securities products with commercial banking,

10

insurance and other financial services revenues in an effort to gain market share, which could result in pricing pressure in our businesses. Moreover, we have faced, and expect to continue to face, pressure to retain market share by committing capital to businesses or transactions on terms that offer returns that may not be commensurate with their risks. In addition, the trend towards consolidation and globalization presents infrastructure, technology, risk management and other challenges.

        We have experienced intense price competition in some of our businesses in recent years. For example, equity and debt underwriting discounts, as well as trading spreads, have been under pressure for a number of years, and the ability to execute trades electronically, through the internet and through other alternative trading systems has increased the pressure on trading commissions. It appears that this trend toward alternative trading systems will continue. We may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by reducing prices.

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

Regulation

        The securities industry in the United States is subject to extensive regulation under both federal and state laws. Lehman Brothers Inc. ("LBI"), Neuberger Berman, LLC ("NB LLC") and Neuberger Berman Management Inc. ("NBMI") are registered with the SEC as broker-dealers; Lehman Brothers OTC Derivatives Inc. is registered with the SEC as an OTC derivatives dealer; and LBI, NB LLC, NBMI, Lincoln Capital Fixed Income Management LLC ("Lincoln Capital") and certain other of our subsidiaries are registered with the SEC as investment advisers. As such these entities are subject to regulation by the SEC and by self-regulatory organizations, principally the NASD (which has been designated by the SEC as NBMI's primary regulator), national securities exchanges such as the New York Stock Exchange ("NYSE") (which has been designated by the SEC as LBI's and NB LLC's primary regulator) and the Municipal Securities Rulemaking Board, among others. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. Various of our subsidiaries are registered as broker-dealers in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico.

        Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales practices, market making and trading among broker-dealers, publication of research, margin lending, use and safekeeping of clients' funds and securities, capital structure, recordkeeping and the conduct of directors, officers and employees.

        Registered investment advisers are subject to regulations under the Investment Advisers Act of 1940. Such requirements relate to, among other things, recordkeeping and reporting requirements, disclosure requirements, limitations on agency cross and principal transactions between an adviser and advisory clients, as well as general anti-fraud prohibitions.

        Certain investment funds that we manage are registered investment companies under the Investment Company Act of 1940. Those funds and the Lehman Brothers entities that serve as the funds' investment advisers are subject to that act and the rules thereunder, which, among other things, regulate the relationship between a registered investment company and its investment adviser and prohibit or severely restrict principal transactions and joint transactions.

        Violation of applicable regulations can result in legal and/or administrative proceedings, which may impose censures, fines, cease-and-desist orders or suspension or expulsion of a broker-dealer or an investment adviser, its officers or employees.

11

        LBI and NB LLC are also registered with the Commodity Futures Trading Commission (the "CFTC") as futures commission merchants; and NB LLC, Lincoln Capital and other subsidiaries are registered as commodity pool operators and/or commodity trading advisers. These entities are subject to regulation by the CFTC and various domestic boards of trade and other commodity exchanges. Our U.S. commodity futures and options business is also regulated by the National Futures Association, a not-for-profit membership corporation that has been designated as a registered futures association by the CFTC.

        The Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC and the NYSE thereunder have imposed substantial new or enhanced regulations and disclosure requirements in the areas of corporate governance (including director independence, director selection and audit, corporate governance and compensation committee responsibilities), equity compensation plans, auditor independence, pre-approval of auditor fees and services and disclosure and internal control procedures. We are committed to industry best practices in these areas and believe we are in compliance with the relevant rules and regulations.

        The USA PATRIOT Act of 2001 contains anti-money laundering and anti-terrorism laws that mandate the implementation of various regulations applicable to banks, broker-dealers, futures commission merchants and other financial services companies, including standards for verifying client identity at account opening, standards for conducting enhanced due diligence and obligations to monitor client transactions and report suspicious activities. These new obligations are in addition to the U.S. Department of Treasury's Office of Foreign Assets Control (OFAC) regulations prohibiting dealings with OFAC sanctioned countries, entities and individuals. Through these and other provisions, the PATRIOT Act seeks to promote cooperation among financial institutions, regulators and law enforcement in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside of the U.S. contain similar provisions. The increased obligations of financial institutions to identify and verify their customers, conduct enhanced due diligence on, among others, foreign banks and senior foreign political figures, surveil for and report suspicious transactions, and respond to requests for information by regulatory authorities and law enforcement agencies require the implementation of a Money Laundering Prevention Program consisting of internal policies, procedures and controls, a Money Laundering Prevention Compliance Officer, an annual audit and training.

        We do business in the international fixed income and equity markets and undertake international investment banking activities, principally through our regional headquarters in London and Tokyo. Lehman Brothers International (Europe) ("LBIE") is an authorized investment firm in the United Kingdom and is a member of the London, Frankfurt, Paris and Milan exchanges, among others. The U.K. Financial Services and Markets Act 2000 (the "FSMA") governs all aspects of the United Kingdom investment business, including regulatory capital, sales and trading practices, use and safekeeping of customer funds and securities, record keeping, margin practices and procedures, approval standards for individuals, periodic reporting and settlement procedures. Pursuant to the FSMA, certain of our subsidiaries are subject to regulations promulgated and administered by the Financial Services Authority.

        Lehman Brothers Japan Inc. ("LBJ") is a registered securities company in Japan and a member of the Tokyo Stock Exchange Limited, the Osaka Stock Exchange Limited, the Jasdaq Securities Exchange and the Tokyo Financial Futures Exchange and, as such, is regulated by the Financial Services Agency, the Securities Exchange Surveillance Commission, the Japan Securities Dealers Association, the Financial Futures Association of Japan and those exchanges.

        Lehman Brothers Bank, FSB, our thrift subsidiary, is regulated by the Office of Thrift Supervision. Lehman Brothers Bankhaus A.G. is regulated by the German Federal Banking Authority. Lehman Brothers Trust Company, N.A., which holds a national bank charter, is regulated by the Office of the Comptroller of the Currency of the United States. Lehman Brothers Trust Company of Delaware, a

12

non-depository limited purpose trust company, is subject to oversight by the State Bank Commissioner of the State of Delaware. These bodies regulate such matters as policies and procedures on conflicts of interest, account administration and overall governance and supervisory procedures.

        LBI, LBIE, LBJ and many of our other subsidiaries are also subject to regulation by securities, banking and finance regulatory authorities, securities exchanges and other self-regulatory organizations in numerous other countries in which they do business.

        Additional legislation and regulations, including those relating to the activities of broker-dealers and investment advisers, changes in rules imposed by regulatory authorities, self-regulatory organizations and exchanges or changes in the interpretation or enforcement of existing laws and rules may adversely affect our business and profitability. Our businesses may be materially affected not only by regulations applicable to them as a broker-dealer, futures commission merchant, investment adviser, bank, etc., but also by regulations of general application, including existing and proposed tax legislation and other governmental regulations and policies (including the interest rate and monetary policies of the Federal Reserve Board and other central banks) and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities.

        We believe that we are in material compliance with applicable regulations.

        We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our business. See Part I, Item 3, "Legal Proceedings," in this Report for information about certain pending proceedings.

Capital Requirements

        LBI, NB LLC, NBMI, LBIE, the Tokyo branch of LBJ, Lehman Brothers Bank, our "AAA" rated derivatives subsidiaries (Lehman Brothers Financial Products Inc. and Lehman Brothers Derivative Products Inc.), Neuberger Berman Trust Company, N.A., Neuberger Berman Trust Company of Delaware and other subsidiaries of Holdings are subject to various capital adequacy requirements promulgated by the regulatory, banking and exchange authorities of the countries in which they operate and/or to capital targets established by various ratings 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 commit capital to other businesses, meet obligations or pay dividends to shareholders. Further information about these requirements and restrictions is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources" in Part II, Item 7, of this Report and in Note 14 of the Notes to Consolidated Financial Statements in Part II, Item 8, of this Report.

        In June 2004 the SEC approved a rule establishing a voluntary framework for comprehensive, group-wide risk management procedures and consolidated supervision of certain financial services holding companies, which would, among other things, subject the holding company to capital requirements generally consistent with the standards of the Basel Committee on Banking Supervision. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Accounting and Regulatory Developments" in Part II, Item 7, of this Report for information about the anticipated impact of this rule on us.

Client Protection

        LBI and NB LLC are members of the Securities Investor Protection Corporation ("SIPC"). Clients of LBI and NB LLC are protected by SIPC against some losses. SIPC provides protection against lost, stolen or missing securities (except loss in value due to a rise or fall in market prices) for clients in the event of the failure of the broker-dealer. Accounts are protected up to $500,000 per client with a limit

13

of $100,000 for cash balances. In addition to being members of SIPC, LBI and NB LLC carry excess SIPC protection, which increases each client's protection up to the net equity of the account, subject to terms and conditions similar to SIPC. Like SIPC, the excess coverage does not apply to loss in value due to a rise or fall in market prices. Certain of our non-U.S. broker-dealer subsidiaries participate in programs similar to SIPC in certain jurisdictions.

Insurance

        We maintain insurance coverage in types and amounts and with deductibles that management believes are customary for companies of similar size and engaged in similar businesses. However, the insurance market is volatile, and there can be no assurance that any particular coverages will be available in the future on terms acceptable to us.

Employees

        As of November 30, 2004, we employed approximately 19,600 persons, including 14,100 in North America and 5,500 internationally. We consider our relationship with our employees to be good.

ITEM 2. PROPERTIES

        Our world headquarters is a 1,000,000 square-foot owned office tower at 745 Seventh Avenue in New York City. In addition, we lease approximately 2,100,000 square feet of office space in the New York metropolitan area.

        In addition to our offices in the New York area, we have offices in over 120 locations in the Americas. We also have offices in Europe and Asia.

14

        In Europe, we lease approximately 1,600,000 square feet of office space, including our new European headquarters in the Canary Wharf development, east of the City of London. In addition to our European headquarters, we have an additional 15 offices in Europe.

        Our Asian headquarters are located in approximately 167,000 square feet of leased office space in the Roppongi Hills area of central Tokyo, Japan. We lease office space in eight other locations in Asia.

        All three of our business segments (as described herein) use the occupied facilities described above. We believe that the facilities we occupy are adequate for the purposes for which they are used, and the occupied facilities are well maintained.

        Additional information with respect to facilities, certain charges related thereto and lease commitments is set forth under the caption "Lease Commitments" in Note 11, and in Note 19, of the Notes to Consolidated Financial Statements in Part II, Item 8, of this Report.

ITEM 3. LEGAL PROCEEDINGS

        We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our business. Such proceedings include actions brought against us and others with respect to transactions in which we acted as an underwriter or financial advisor, actions arising out of our 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 us.

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

Research Analyst Independence Litigations

        Since the announcement of the final global regulatory settlement regarding alleged research analyst conflicts of interest at various investment banking firms in the United States, including LBI (the "Final Global Settlement"), and various federal and state regulators and self-regulatory organizations in April 2003, a number of purported class actions were filed, resulting in three consolidated actions, against LBI in federal court, which are specific to LBI's research of particular companies (Razorfish, Inc., RealNetworks, Inc. and RSL Communications, Inc.): Swack, et al. v. Lehman Brothers Inc, in the United States District Court for the District of Massachusetts (Razorfish); DeMarco v. Lehman Brothers Inc., et al., in the United States District Court for the Southern District of New York (the "New York District Court") (RealNetworks); and Fogarazzo v. Lehman Brothers Inc., in the New York District Court (RSL Communications). All the actions allege conflicts of interest between LBI's investment banking business and research activities and seek to assert claims pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. In the purported class action relating to RSL Communications, plaintiffs have filed an amended consolidated complaint, containing essentially the same allegations as the original complaints, but adding two other investment banks as defendants (Fogarazzo, et al. v. Lehman Brothers Inc., et al.).

        In DeMarco, which relates to Real Networks, the New York District Court issued an order on July 6, 2004, denying plaintiffs' motion for class certification. On November 20, 2004, the Court issued an order granting LBI's motion for summary judgment and dismissing the claims. That order has been appealed to the United States Court of Appeals for the Second Circuit (the "Second Circuit").

15

        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 in New York State Supreme Court, New York County. 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 that resulted in the settlement with regulators. In December 2003, plaintiffs filed an amended complaint, reiterating the allegations concerning the alleged failure to detect and prevent conduct resulting in the Final Global Settlement and adding allegations concerning the alleged failure to detect and prevent conduct relating to purportedly improper initial public offering ("IPO") allocation practices, discussed more fully below under the heading IPO Allocation Cases.

        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

        Enron Securities Purchaser Actions.    In April 2002, a Consolidated Complaint for Violation of the Securities Laws was filed in the United States District Court for the Southern District of Texas (the "Texas District Court"), captioned In re Enron Corporation Securities Litigation (the "Enron Litigation"), alleging claims for violation of Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder, and the Texas Securities Act. The case is brought on behalf of a purported class of purchasers of Enron Corporation's publicly traded equity and debt securities between October 19, 1998 and November 27, 2001, against Holdings and eight other commercial or investment banks, 38 current or former Enron officers and directors, Enron's accountants, Arthur Andersen LLP ("Andersen") (and affiliated entities and partners) and two law firms. The complaint seeks unspecified compensatory and injunctive relief based on the theory that defendants engaged or participated in manipulative devices to inflate Enron's reported profits and financial condition, made false or misleading statements and participated in a scheme or course of business to defraud Enron's shareholders. In December 2002, the Texas District Court granted Holdings' motion to dismiss the Section 10(b) claim. In May 2003, plaintiffs filed an amended complaint against Holdings and LBI, among others, re-asserting claims under Section 10(b) and 20(a) of the Exchange Act (the "Exchange Act claims") and asserting a claim for violation of Section 12 of the Securities Act. In January 2004, plaintiffs voluntarily withdrew their opposition to Lehman Brothers' motion to dismiss the Exchange Act claims, and the Texas District Court entered an order dismissing them on February 4, 2004. Holdings and LBI have reached an agreement in principle to settle this case, as well as the Washington State Investment Board action, discussed below, for $222.5 million. On February 4, 2005, the settlement was preliminarily approved by the Texas District Court, and final approval is scheduled for April 11, 2005.

        In May 2002, American National Insurance Company ("ANICO") and certain of its affiliates filed a complaint against LBI, Holdings, Lehman Commercial Paper Inc. ("LCPI") and a broker formerly employed by Lehman. The amended complaint, filed in October 2003, is based on allegations similar to those in the Enron Litigation and asserts that plaintiffs relied on defendants' allegedly false and misleading statements in purchasing and continuing to hold Enron debt and equities in their LBI accounts. The amended complaint alleges violations of the Texas Securities Act, violations of the Texas Business and Commerce Code, fraud, breach of fiduciary duty, negligence and professional malpractice, and seeks unspecified compensatory and punitive damages. This action has been coordinated for pretrial purposes with the Enron Litigation in the Texas District Court.

16

        In August 2002, a complaint was filed against Holdings and four other commercial or investment banks, among other defendants, by the Public Employees Retirement System of Ohio and three other state employee retirement plans, containing allegations similar to those in the Enron Litigation. Against Holdings, the complaint alleges claims for common law fraud and deceit, aiding and abetting common law fraud, conspiracy to commit fraud, negligent misrepresentation and violation of the Texas Securities Act, and seeks unspecified compensatory and punitive damages. This action has been consolidated with the Enron Litigation in the Texas District Court.

        In September 2002, the Washington State Investment Board, which is a named plaintiff in the Enron Litigation, filed a new purported class action. This action mirrors the Enron Litigation but alleges a longer class action period of September 9, 1997 to October 18, 1998. The amended complaint alleges claims against Holdings and LBI for violations of Sections 11 and 15 of the Securities Act. Plaintiffs seek unspecified compensatory damages, an accounting and disgorgement of certain defendants' alleged insider-trading proceeds, restitution and rescission. This action has been consolidated with the Enron Litigation in the Texas District Court. As indicated above, Holdings and LBI have reached an agreement to settle this case that is awaiting final approval by the Texas District Court.

        In October 2002, two actions were filed in Iowa state court (Linn and Polk Counties) against LBI and Holdings, along with several other commercial or investment banks, principally by AUSA Life Insurance Co. and Principal Global Investors, LLC. The complaints allege that defendants gained knowledge of alleged Enron fraudulent schemes by participating in Enron's debt offerings, making disguised loans to Enron and participating in transactions involving Enron's special purpose entities ("SPEs"), which were used to avoid recognizing losses, and that defendants failed to disclose that information. The complaints allege violations of the Iowa Securities Act and claims for fraud and deceit and for civil conspiracy. The complaints seek rescission and an unspecified amount of compensatory and punitive damages. LBI and Holdings, along with other commercial or investment banks, have asserted third-party claims for contribution and indemnification in both Iowa actions against certain Enron officers.

        Also in October 2002, a complaint was filed in Superior Court for Los Angeles County against LBI, Holdings, and other commercial or investment banks by two Oaktree Capital Management investment funds. The complaint, which was amended in June 2003, alleges that Enron systematically falsified its financial statements using improper accounting valuations and false hedges that enabled Enron to boost its reported earnings and that Enron's bankers, including LBI and Holdings, participated in the fraudulent scheme by engaging in certain transactions with Enron. It also alleges that defendants knew and acted on inside information about Enron's true financial condition in connection with its offerings of Enron securities, while misrepresenting or omitting material facts to the public. The amended complaint makes claims under California state law for trading on inside information, for making false and misleading statements and for unfair competition by making material misstatements or omissions in connection with Enron securities offerings, and seeks unspecified compensatory damages, an accounting, restitution and disgorgement of profits. In May 2004, the court dismissed all claims against LBI and Holdings except the claim for making false or misleading statements. LBI and Holdings, along with other commercial or investment banks, have asserted third-party claims for contribution and indemnification against certain Enron officers.

        In April 2003, Westboro Properties LLC and Stonehurst Capital, Inc. filed a complaint against LBI, Holdings and other commercial or investment banks. Plaintiffs allege that defendants engaged in violations of the Texas Securities Act, statutory fraud in stock transactions, fraud, negligence and professional malpractice, and violations Sections 12 and 15 of the Securities Act in inducing plaintiffs to purchase certain certificates, or investments, in two 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. Plaintiffs seek unspecified actual, special

17

and punitive damages and equitable relief. This action has been consolidated with the Enron Litigation in the Texas District Court.

        In September 2003, a purported class action complaint was filed against Holdings and seven other commercial or investment banks, among other defendants, by Sara McMurray on behalf of purchasers of Enron common stock between October 16, 1998 and November 27, 2001, making similar allegations as the Enron Litigation. Plaintiff alleges negligent misrepresentation, common law fraud, breach of fiduciary duty and aiding and abetting breach of fiduciary duty, and seeks unspecified damages for lost investment opportunities and lost benefit of the bargain. This action has been consolidated with the Enron Litigation in the Texas District Court.

        In January 2004, a purported class action complaint was filed against Holdings and other commercial or investment banks, among other defendants, by William Young and Frank Conway on behalf of all persons who held Enron shares from April 13, 1999 through November 8, 2001. Making allegations similar to those in the Enron Litigation, plaintiffs allege claims for negligent misrepresentation and common law fraud and seek unspecified compensatory damages. This action has been coordinated for pretrial purposes with the Enron Litigation in the Texas District Court.

        Third-Party Contribution Actions.    In October 2003, third-party complaints for contribution were filed against LBI, Holdings and other commercial or investment banks by Richard Buy, by Robert Jaedicke and other outside directors, and by Paolo Ferraz Periera, respectively, in connection with an action filed by ANICO, certain of its affiliates and others alleging that Andersen and certain Enron officers and directors are liable for damages incurred through certain Enron-related investments. This action has been coordinated for pretrial purposes with the Enron Litigation in the Texas District Court.

        Other Actions.    In August 2003, Al Rajhi Investment Corporation BV filed a petition against rating agencies, law firms, commercial or investment banks, including LBI and Holdings, and others. Plaintiff claims to have engaged in a commodities trade with Enron and to have "effectively extended over $101 million of credit to Enron" in reliance on misrepresentations. The amended complaint alleges that LBI and Holdings were involved in funding LJM2 and the Osprey Trust transactions, that they were involved in Enron transactions used to inflate Enron's net worth and creditworthiness and that they made false and misleading statements in analysts' reports. The claims against LBI and Holdings are for conspiracy and for participation in a joint or common enterprise and seek actual and exemplary damages. This action has been coordinated for pretrial purposes with the Enron Litigation in the Texas District Court.

        In November 2003, a complaint was filed by Enron in the United States Bankruptcy Court for the Southern District of New York (the "New York Bankruptcy Court") against Lehman Brothers Finance S.A. ("LBF"), LBI, Holdings and LCPI. Among other things, the complaint seeks to avoid as preferential transfers and/or fraudulent conveyances approximately $236 million in payments made by Enron in the year prior to Enron's bankruptcy filing. These payments were made pursuant to transactions under a swap contract between LBF and Enron relating to Enron common stock.

        Also in November 2003, Enron filed two nearly identical lawsuits against LCPI, LBIE and other commercial paper dealers and investors in the New York Bankruptcy Court. The complaints allege that monies paid by Enron in October and November 2002 to repurchase its outstanding commercial paper shortly before its maturity were preferential payments and/or fraudulent conveyances under the Bankruptcy Code. Among other things, the complaints seek to avoid and recover these payments from the defendants. In total, approximately $500 million is sought from LCPI and LBIE, nearly all of which relates to LCPI's role as intermediary between Enron and several co-defendant holders of the commercial paper.

        In March 2004, LJM2 Liquidation Statutory Trust B and its managing trustee filed a complaint against the limited partners in LJM2 Co-Investment L.P., including LB I Group Inc., alleging that the

18

limited partners improperly rescinded a capital call. The complaint asserts claims against the LB I Group Inc. for violations of the Delaware Revised Uniform Limited Partnership Act, for breach of the partnership and subscription agreements, for breach of the credit agreement, for tortious interference, for aiding and abetting a breach of fiduciary duty, for avoidable transfer, for breach of the covenant of good faith and fair dealing, for unjust enrichment, for breach of the partnership agreement and for conspiracy to engage in fraudulent transfer. Plaintiffs seek monetary damages of approximately $75 million in the aggregate from the limited partners, plus interest and costs, as well as specific enforcement of the obligation to make capital contributions. The action is currently pending in Delaware Chancery Court.

        In April 2004, LJM2 Liquidation Statutory Trust B and its managing trustee filed an amended complaint against the limited partners of LJM2 Co-Investment, L.P., including LB I Group Inc., alleging that the distributions to the limited partners were fraudulent transfers and violated the Delaware Revised Uniform Limited Partnership Act. Plaintiffs seek monetary damages of approximately $75 million in the aggregate from the limited partners, plus interest and costs. The action is currently pending in the United States Bankruptcy Court for the Northern District of Texas.

First Alliance Mortgage Company Matters

        During 1999 and the first quarter of 2000, LCPI provided a warehouse line of credit to First Alliance Mortgage Company ("FAMCO"), a subprime mortgage lender, and LBI underwrote the securitizations of mortgages originated by FAMCO. In March 2000, FAMCO filed for bankruptcy protection in the United States Bankruptcy Court for the Central District of California (the "California Bankruptcy Court"). In August 2001, a purported adversary class action (the "Class Action") was filed in the California Bankruptcy Court, allegedly on behalf of a class of FAMCO borrowers seeking equitable subordination of LCPI's (among other creditors') liens and claims. In October 2001, the complaint was amended to add LBI as a defendant and to add claims for aiding and abetting alleged fraudulent lending activities by FAMCO and for unfair competition under the California Business and Professions Code. In August 2002, a Second Amended Complaint was filed, which added a claim for punitive damages and extended the class period from May 1, 1996, until FAMCO's bankruptcy filing. The complaint sought actual and punitive damages, the imposition of a constructive trust on all proceeds paid by FAMCO to LCPI and LBI, disgorgement of profits and attorneys' fees and costs.

        In November 2001, the Official Joint Borrowers Committee (the "Committee") initiated an adversary proceeding, allegedly on behalf of the FAMCO-related debtors, in the California Bankruptcy Court by filing a complaint against LCPI, LBI, Holdings and several individual officers and directors of FAMCO and its affiliates. As to the Lehman defendants, the Committee asserted various bankruptcy claims for avoidance of liens, aiding and abetting and breach of fiduciary duty. In December 2001, the Committee amended its complaint, dropping Holdings as a defendant.

        The United States District Court for the Central District of California (the "California District Court") withdrew the reference to the California Bankruptcy Court in both of these cases and in February 2002 consolidated them before the California District Court. In November 2002, the California District Court entered an order defining the class in the Class Action as all persons who acquired mortgage loans from FAMCO from May 1, 1996 through March 31, 2000, which were used as collateral for FAMCO's warehouse credit line with LCPI or were securitized in transactions underwritten by LBI. The class claims were subsequently limited to the period 1999 forward. Trial began in February 2003.

        In June 2003, the California District Court dismissed plaintiffs' claim for punitive damages. Also in June 2003, the jury rendered its verdict, finding LBI and LCPI liable for aiding and abetting FAMCO's fraud. The jury found damages of $50.9 million and held the Lehman defendants responsible for 10% of those damages. In July 2003, the California District Court entered findings of fact and conclusions of

19

law relating to all claims still pending and holding that any transfers to LCPI were not fraudulent and its liens were not avoidable, nor was equitable subordination of amounts owed by FAMCO to LCPI at the time of the Chapter 11 filing warranted. Judgment was entered in November 2003 on the jury verdict. LBI and LCPI are appealing the jury verdict to the United States Court of Appeals for the Ninth Circuit and both sets of plaintiffs are appealing various rulings of the California District Court.

        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 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 re Fleming Securities Litigation

        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. The action was brought on behalf of a purported class of investors who purchased in two simultaneous Fleming securities offerings in June 2002 that raised approximately $378 million. LBI's share of these offerings as underwriter was 27.5%. 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 and costs. In addition to Fleming, the suit named as defendants ten 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. The underwriters are contractually entitled to customary indemnification from Fleming, but in April 2003, Fleming filed for bankruptcy protection. Also in April 2003, plaintiffs filed a virtually identical second lawsuit in the United States District Court for the Eastern District of Texas.

        In June 2003, the Judicial Panel on Multidistrict Litigation consolidated certain securities litigations concerning Fleming, to which LBI is not a party, in the United States District Court for the Eastern District of Texas. Subsequently, in September 2003, plaintiffs in the two Massachusetts State Carpenters Pension Fund cases to which LBI is a party, and plaintiffs in the consolidated actions, jointly filed a Third Consolidated Amended Class Action Complaint, which, as to LBI, in substance re-alleges the claims set forth in the original Massachusetts State Carpenters Pension Fund cases. Thereafter, in June 2004, plaintiffs filed a Fourth Consolidated Amended Class Action Complaint adding details to the allegations in the prior complaint concerning lead plaintiffs' purchases in the offerings, and a Fifth Complaint was filed in December 2004, which added no new allegations or claims against LBI.

IPO Allocation Cases

        LBI was named as a defendant in approximately 192 purported securities class actions that were filed between March and December 2001 in the New York District Court. The actions, which allege improper IPO allocation practices, were brought by persons who, either directly or in the aftermarket, purchased IPO securities during the period between March 1997 and December 2000. The plaintiffs allege that Lehman and other IPO underwriters required persons receiving allocations of IPO shares to pay excessive commissions on unrelated trades and to purchase shares in the aftermarket at specified escalating prices. The plaintiffs, who seek unspecified compensatory damages, claim that these alleged

20

practices violated various provisions of the federal securities laws, specifically sections 11, 12(a)(2) and 15 of the Securities Act, sections 10(b) and 20(a) of the Exchange Act. The 192 actions in which LBI was named a defendant have been consolidated into 83 cases, each involving a distinct offering. Those 83 consolidated cases, and approximately 226 others in which LBI is not named as a defendant, have been coordinated for pretrial purposes before a single judge.

        In January 2002, a separate consolidated class action, entitled In re Initial Public Offering Antitrust Litigation, was filed in the New York District Court against LBI, among other underwriters, alleging violations of federal and state antitrust laws. The complaint alleges that the underwriter defendants conspired to require customers who wanted IPO allocations to pay the underwriters a percentage of their IPO profits in the form of commissions on unrelated trades to purchase other, less attractive securities and to buy shares in the aftermarket at predetermined escalating prices. In November 2003, the court dismissed the antitrust action on the grounds that the conduct alleged was impliedly immune from the antitrust laws. Plaintiffs appealed that decision to the Second Circuit.

        In April 2002, a suit was filed in Delaware Chancery Court by Breakaway Solutions Inc., which names LBI and two other underwriters as defendants. The complaint purports to be brought on behalf of a class of issuers who issued securities in IPOs through at least one of the defendants during the period January 1998 through October 2000 and whose securities increased in value 15% or more above the original price within 30 days after the IPO. It alleges that defendants underpriced IPO securities and allocated those underpriced securities to certain favored customers in return for alleged arrangements with the customers for increased commissions on other transactions and alleged tie-in arrangements. The complaint asserts claims for breaches of contract, of the implied covenant of good faith and fair dealing and of fiduciary duty, and for indemnification or contribution and unjust enrichment or restitution. Breakaway seeks, among other relief, class certification, injunctive relief, an accounting, declarations requiring defendants to indemnify Breakaway in the pending consolidated IPO securities class actions and determining that Breakaway has no indemnification obligation to defendants in those actions, and compensatory damages.

IPO Fee Litigation

        Harold Gillet, et al. v. Goldman Sachs & Co., et al.; Yakov Prager, et al. v. Goldman, Sachs & Co., et al.; David Holzman, et al. v. Goldman, Sachs & Co., et al. Beginning in November 1998, four purported class actions were filed in the New York District Court against in excess of 25 underwriters of IPO securities, including LBI. The cases were subsequently consolidated into In re Public Offering Antitrust Litigation. Plaintiffs, alleged purchasers of securities issued in certain IPOs, seek compensatory and injunctive relief for alleged violations of the antitrust laws based on the theory that the defendants fixed and maintained fees for underwriting certain IPO securities at supra-competitive levels. In February 2001, the New York District Court granted defendants' motion to dismiss the Consolidated Amended Complaint, concluding that the purchaser plaintiffs lacked standing under the antitrust laws to assert the claims. On appeal, the Second Circuit reversed and remanded the case to the New York District Court for further proceedings, including potential dismissal of the claims based on additional arguments raised in the motion to dismiss. The New York District Court, in an order dated February 24, 2004, dismissed plaintiffs' claims for monetary damages allowing only their claims for injunctive relief to proceed.

        In Re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation.    In April 2001, the New York District Court consolidated four actions pending before the court brought by bankrupt issuers of IPO securities against more than 20 underwriter defendants (including LBI). In July 2001, the plaintiffs filed a consolidated class action complaint seeking unspecified compensatory damages and injunctive relief for alleged violations of the antitrust laws based on the theory that the defendant underwriters fixed and maintained fees for underwriting certain IPO securities at supra-competitive levels. Two of the four original plaintiffs subsequently withdrew their claims.

21

Juan Pablo Rodriguez, et al v. Lehman Brothers Inc.

        In October 2003, LBI was served with a Statement of Claim in arbitration before the NASD, in which the claimants allege that unsuitable trades recommended by Lehman Brothers led to investment losses of approximately $60 million in the claimants' account. Additional causes of action set forth in the Statement of Claim include churning, SEC rule and federal and state statute violations, breach of contract, breach of fiduciary duty, common law fraud, negligent supervision, negligence and gross negligence. In February 2005, the parties agreed to a settlement of this matter.

Metricom Securities Litigation

        In August 2002, an amended complaint was filed in the United States District Court for the Northern District of California captioned In re Metricom Securities Litigation. The action is brought on behalf of a purported class of investors who purchased the common stock of Metricom, Inc., during the period from June 21, 1999, to July 2, 2001. Plaintiffs name various officers, directors and selling shareholders of Metricom, along with LBI as lead underwriter and the four other co-managing underwriters of an offering of Metricom common stock in February 2000. The underwriters are contractually entitled to customary indemnification from Metricom in connection with the offering, but prior to the commencement of this action, Metricom filed for bankruptcy protection. The February 2000 offering raised approximately $500 million, of which Lehman's underwriting share was 28.5%. Against the underwriters, plaintiffs allege violations of Sections 11 and 12(2) of the Securities Act and of Section 10(b) of the Exchange Act. The complaint alleges that the prospectus and registration statement for the offering failed to disclose material facts concerning, among other things, Metricom's flawed business plan and marketing strategy. The complaint seeks class action status, unspecified damages and costs.

        In May 2003 the court dismissed that complaint. In July 2003, plaintiffs filed a second amended complaint that drops claims against the underwriters under the Exchange Act but realleges claims against them under the Securities Act. On April 29, 2004, the United States District Court for the Northern District of California dismissed the second amended complaint with prejudice, and the plaintiffs are appealing that decision to the United States Court of Appeals for the Ninth Circuit.

Mirant Securities Litigation

        In November 2002, an amended complaint was filed in the United States District Court for the Northern District of Georgia, Atlanta Division, captioned In re Mirant Corporation Securities Litigation. The action is brought on behalf of a purported class of investors who purchased the securities of Mirant Corporation during the period from September 26, 2000 and September 5, 2002. Plaintiffs name Mirant, various officers and directors, Mirant's former parent, The Southern Company, along with its officers and directors, LBI, as a member of the underwriting syndicate, and eleven other underwriters of Mirant's IPO of common stock in September 2000. The underwriters are contractually entitled to customary indemnification from Mirant, but Mirant filed for bankruptcy protection in July 2003. The IPO raised approximately $1.467 billion, of which Lehman's underwriting share was 9%. Against the underwriters, plaintiffs allege violations of Section 11 of the Securities Act. The complaint alleges that the prospectus and registration statement for the offering contained false and misleading statements or failed to disclose material facts concerning, among other things, Mirant's alleged misconduct in energy markets in the State of California, the accounting for Mirant's interest in a United Kingdom-based company, Western Power Distribution, and other accounting issues. The complaint seeks class action certification, unspecified damages and costs. In November 2003, the Court overseeing the Mirant bankruptcy stayed the litigation.

22

Mutual Fund Related Litigation

        In re Mutual Funds Investment Litigation.    In September 2004, LBI and two LBI employees were added as defendants to a consolidated class action pending in the United States District Court for the District of Maryland (the "Maryland District Court") purportedly brought by a class of investors against Federated Investors, Inc. ("Federated") and numerous of its subsidiaries, directors, trustees and employees, together with certain traders and broker-dealers, and others. The action had been consolidated before the United States District Court for the Western District of Pennsylvania and transferred to the Maryland District Court in March 2004 pursuant to an order of the Judicial Panel on Multidistrict Litigation. The consolidated amended class action complaint alleges that LBI and two LBI employees violated the securities laws, including Section 10 of the Exchange Act and Section 36 (b) and 48(a) of the Investment Company Act of 1940, aided and abetted a breach of fiduciary duty, and were unjustly enriched as a result of trading in the Federated family of mutual funds allegedly conducted by LBI customers through LBI. The consolidated amended class action complaint seeks unspecified damages.

        In re Excelsior, Federated and Scudder.    In September 2004, Holdings and LBI were added as defendants to a consolidated shareholder derivative action pending in the Maryland District Court against Federated and numerous of its subsidiaries and directors, together with certain financial institutions and individuals. The action had been consolidated before the United States District Court for the Western District of Pennsylvania and transferred to the Maryland District Court in March 2004 pursuant to an order of the Judicial Panel on Multidistrict Litigation. The consolidated amended complaint contains allegations that LBI aided and abetted a breach of fiduciary duty, interfered with contracts, engaged in a civil conspiracy, and were unjustly enriched, in connection with trading of the Federated family of mutual funds allegedly conducted by LBI customers through LBI. The consolidated amended complaint seeks unspecified damages.

WorldCom Litigation

        LBI, Holdings and other underwriters of WorldCom, Inc. bonds in several offerings issued in 1997, 1998, 2000 and 2001 (the "Offerings") have been named as defendants in multiple lawsuits alleging that the offering materials were false and misleading. Most of these actions also name as defendants WorldCom's present or former officers and/or directors and/or WorldCom's outside accounting firm. LBI underwrote $915 million principal amount of bonds in the 1998 Offering of a total of $6.1 billion and $375 million principal amount of bonds in the 2000 Offering of a total of $5 billion. (LBI did not participate in the 1997 and 2001 Offerings nor in a December 2000 private placement which is also at issue in certain lawsuits.) The underwriters are contractually entitled to customary indemnification from WorldCom in connection with the various offerings, but once WorldCom filed for bankruptcy protection that indemnification became unenforceable.

        In re WorldCom Inc. Securities Litigation is the result of the consolidation of cases commenced in and/or transferred to the New York District Court. In October 2003 it was certified as a class action, on behalf of investors who allegedly purchased or acquired WorldCom securities between April 29, 1999 and June 25, 2002, including notes issued in the 2000 Offering and 2001 Offering. The deadline for opting out of the class has passed. The consolidated action alleges violations of Section 11 and Section 12(a)(2) of the Securities Act against the underwriters. The parties have completed discovery, other than with respect to certain witnesses involved in the Bernard Ebbers criminal trial. A trial date has been set for February 28, 2005. Plaintiffs seek unspecified compensatory damages, among other things.

        On May 10, 2004, Citigroup, Inc., Salomon Smith Barney and Jack Grubman announced that they had reached a settlement with the class, agreeing to pay $2.65 billion to settle the claims against them. On November 10, 2004, the Court approved the settlement.

23

        Individual actions.    In addition to the class action, individual actions asserting federal securities claims and/or state and common law claims based on the Offerings have also been filed naming, among others, LBI and/or Holdings as a defendant. Plaintiffs in these actions seek, among other things, rescission, compensatory and/or punitive damages and generally assert claims under Section 11 of the Securities Act, and in some instances, state common law. Most of these actions were filed in state courts but were removed to federal court as "related to" WorldCom's bankruptcy. With the exception of the remanded actions listed below, each of these actions has been or is expected to be transferred to the New York District Court by the Judicial Panel for Multidistrict Litigation for consolidated pre-trial proceedings with the class action discussed above.

        In November 2003, the New York District Court issued an order in one of the individual actions (State of Alaska Dep't of Revenue v. Citigroup, Inc.) dismissing as time-barred Securities Act claims brought after June 2003 (one year after WorldCom announced its need for a restatement of its financials) and before the October 24, 2003 decision certifying the class; Securities Act claims based on the 1998 Offering and a December 2000 private placement; and dismissing all claims against underwriter and director defendants added by amendment after June 2003. The New York District Court requested that defendants file motions to dismiss other claims and/or actions pursuant to the November order, and they have done so in each case described below where such motion would be appropriate. The New York District Court granted these motions.

        In October 2003, certain holding company defendants, including Holdings, moved to dismiss certain claims asserted against them. Ultimately, in May 2004, the New York District Court dismissed the holding company claims with prejudice in one of the cases, and in June 2004, counsel in similar actions agreed by stipulation, which was endorsed by the New York District Court, to dismiss with prejudice their Securities Act claims against the holding company defendants.

        The following individual actions, which asserted Securities Act claims and/or state and common law claims, have been commenced against LBI and/or Holdings (all of which claims against Holdings have now been dismissed) in state court, removed and transferred to the New York District Court:

        An action was commenced in October 2002 and amended in July 2003 in the Supreme Court of the State of New York, New York County, by municipal pension funds which allegedly purchased WorldCom common stock and WorldCom bonds in the principal amount of $383 million, an unspecified amount of which are alleged to be traceable to the 2000 Offering and 2001 Offering.

        Two actions were commenced in the Washington Superior Court, Kings County by a state pension fund which allegedly purchased WorldCom bonds issued in the 1998 and 2001 Offerings and the 2000 Private Placement in the principal amount of approximately $162 million.

        Three lawsuits were filed in November 2002 and January 2003, and were amended in July 2003, in the Superior Court of California, Los Angeles County, by county, municipal and private pension and retirement funds that allegedly purchased, respectively, approximately $157 million, $102 million and $135 million principal amount of WorldCom bonds issued in the 1998, 2000 and 2001 public offerings and a December 2000 private offering. The action asserting $102 million in purchases has been voluntarily dismissed with plaintiffs remaining in the class. Certain plaintiffs in the other actions have dismissed their claims to remain in the class.

24

        Two suits were filed in December 2002 in the Wisconsin Circuit Court, Dane County, and in the State of Minnesota District Court, Second Judicial District, by state and municipal pension funds, which allegedly purchased a total of approximately $133 million and $161 million, respectively, of WorldCom bonds issued in the 1998, 2000 and 2001 public offerings.

        An action commenced in April 2003 and amended in September 2003 in the Superior Court of Alaska, First Judicial District at Juneau, was brought by a state agency that allegedly purchased WorldCom bonds issued in the 1998 Offering, 2000 Offering, 2000 Private Placement and 2001 Offering in the principal amount of $62.6 million. On November 21, the New York District Court granted defendants' motions to dismiss in part (as explained above). An action commenced in April 2003 in the Superior Court of California, Orange County was brought by two financial institutions which allegedly purchased or retained artificially inflated WorldCom bonds issued in the 2000 Offering, 2001 Offering and other bond offerings. Plaintiffs allege purchases in the principal amount of $34.2 million.

        An action commenced in April 2003 and amended in September 2003 in the Circuit Court of Michigan, Wayne County was brought by municipal retirement systems that allegedly purchased WorldCom bonds issued in the 2000 Offering and 2001 Offering in the principal amount of $45.8 million.

        An action commenced in May 2003 and amended in September 2003 in the Superior Court of Maine, Kennebec County was brought by a state retirement system which allegedly purchased WorldCom bonds issued in the 1998 Offering, 2000 Offering and 2001 Offering in the principal amount of $103 million.

        An action commenced in May 2003 in the Circuit Court of Wisconsin, Milwaukee County was brought by an insurance company which allegedly purchased WorldCom bonds issued in the 1998 Offering, 2000 Offering and 2001 Offering in the principal amount of $508.5 million.

        An action was commenced in November 2003 in the Southern District of Mississippi was transferred to the New York District Court by the Judicial Panel on Multidistrict Litigation. This action was brought by a non-profit corporation that allegedly purchased WorldCom bonds issued in the 1997 Offering, 1998 Offering, 2000 Offering and 2001 Offering. It alleges losses of $65 million for debt and equity claims.

        An action commenced in April 2004 in New Mexico state court and removed to federal court was transferred to the New York District Court by the Judicial Panel on Multidistrict Litigation in June 2004. The action was brought by state retirement funds that allegedly purchased WorldCom bonds issued in the 1998 Offering, 2000 Offering and 2001 Offering in the principal amount of approximately $150 million.

        An action was commenced in May 2004 in the New York District Court by a state retirement system in Utah that allegedly purchased WorldCom bonds in the 2000 Offering, 2000 Private Placement and 2001 Offering in the principal amount of $20 million.

        An action commenced in July 2004 in state court in North Carolina. This action, which asserts various state and common law claims against the underwriters and others based on plaintiff's purchases of WorldCom stock, has been removed and transferred to the New York District Court. Plaintiff seeks compensatory damages in excess of $10,000 and punitive damages in excess of $10,000, among other things.

        An action commenced in September 2004 in federal court in the state of Washington and transferred to the New York District Court by the Judicial Panel on Multidistrict Litigation. The action was brought by a union pension fund that allegedly purchased WorldCom bonds in the 2000 Offering and the 2001 Offering in the principal amount of $56 million.

25

        An action commenced in October 2004 in federal court in the District of Columbia and transferred to the New York District Court by the Judicial Panel on Multidistrict Litigation. The action was brought by an employee pension fund that allegedly purchased WorldCom bonds in the 2000 Offering and the 2001 Offering in the principal amount of $15 million.

        In addition, actions have been filed in federal court in Mississippi by a bank and trust company, in New York by investment funds and by state or union pension funds in state courts (which were subsequently removed) in Ohio (2), Montana, Maryland (2), New Jersey, California (2), District of Columbia (2), Idaho, Alaska (2) and Illinois (3) and in actions originally commenced by state pension funds in Illinois state court which have been amended in July 2003 while pending before the New York District Court to include LBI and Holdings as defendants; each, insofar as LBI is concerned, assert damages of less than $15 million.

        Remanded Actions. A lawsuit was filed in January 2003 in the Chancery Court of Davidson County in Tennessee on behalf of the Tennessee Consolidated Retirement System, which allegedly purchased $60 million principal amount of WorldCom bonds issued in the 1998 and 2000 offerings (as well as $102 million in the 2001 offerings in which Lehman did not participate). The complaint alleges violations of Section 11 of the Securities Act against LBI and Holdings.

        An action brought in Illinois Circuit Court, Madison County, by a municipal retirement system that purchased approximately $62,000,000 principal amount of WorldCom bonds issued in 1998, 2000 and 2001 offerings and a December 2000 private placement. This action was recently transferred from Madison County to Cook County where it is now captioned Illinois Municipal Ret. Fund v. Citigroup, Inc., No. 04-L-14577. Plaintiff seeks rescission or unspecified compensatory damages, among other things.

        An action commenced by union pension funds has been remanded to state court in Alabama, and, insofar as LBI is concerned, alleges violations of disclosure requirements and assert damages of less than $15 million.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Holdings' common stock, par value $0.10 per share, is listed on the New York Stock Exchange and on the Pacific Exchange. As of January 31, 2005, there were 276,422,563 shares of our common stock outstanding and approximately 22,300 holders of record. On February 11, 2005, the last reported sales price of our common stock was $94.32. The table below shows the high and low sales prices for the common stock for each fiscal quarter within the two most recent fiscal years:

Price Range of Common Stock

26

        In January 2005, our Board of Directors increased the fiscal 2005 annual common stock dividend rate to $0.80 per share from an annual dividend rate of $0.64 per share in fiscal 2004 and $0.48 per share in fiscal 2003. Dividends on the common stock are generally payable, following declaration by the Board of Directors, in February, May, August and November.

        The table below sets forth information with respect to purchases made by or on behalf of Holdings or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended), of our common stock during the quarter ended November 30, 2004.

(1)

The information in this column includes shares of common stock withheld in satisfaction of the exercise price of stock options and tax withholding obligations upon option exercises and conversion of restricted stock units (collectively, "Offset Shares") as follows: 71,841 in September 2004, 77,079 in October 2004 and 3,678,934 in November 2004.

(2)

We have an ongoing common stock repurchase program, pursuant to which we repurchase shares in the open market on a regular basis. As previously announced, on January 27, 2004 our Board of Directors authorized the repurchase of up to approximately 62 million shares of our common stock in fiscal 2004. Of this amount, up to approximately 27 million shares were authorized for repurchase to offset dilution due to employee stock plans in 2004, and up to an additional 35 million shares were authorized for repurchase in fiscal 2004, subject to market conditions, primarily for the possible acceleration of 2005 requirements to offset dilution due to employee stock plans, as well as to manage our equity position.

(3)

There were a total of 22,896,240 shares repurchased and received as Offset Shares during the nine months ended August 31, 2004, leaving 38,903,760 shares that could yet be purchased under the repurchase program at September 1, 2004.

        As previously announced, in January 2005 our Board of Directors authorized the repurchase of up to approximately 65 million shares of our common stock in fiscal 2005. Of this amount, approximately 35 million shares were authorized for repurchase to offset dilution due to employee stock plans in 2005, and up to an additional 30 million shares were authorized for repurchase in fiscal 2005, subject to market conditions, for the possible acceleration of 2006 requirements to offset dilution due to employee stock plans. The number of shares authorized to be repurchased in the open market is reduced by the actual number of Offset Shares received. For more information about the repurchase program and employee stock plans, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources—Stock Repurchase Program" in Part II, Item 7, Notes 13 and 16 of the Notes to Consolidated Financial Statements in Part II, Item 8, and "Security Ownership of Certain Beneficial Owners and Management" in Part III, Item 12, in this Report.

27

LEHMAN BROTHERS HOLDINGS INC.

ITEM 6.    SELECTED FINANCIAL DATA

The following table summarizes certain consolidated financial information included in the audited Consolidated Financial Statements.

Selected Financial Data

In millions, except per common share and selected data and financial ratios

(1)

Reclassified to conform to the 2004 presentation.

(2)

We adopted FIN 46R effective February 29, 2004, which required us to deconsolidate the trusts that issued the preferred securities. Accordingly, at and subsequent to February 29, 2004, Preferred securities subject to mandatory redemption were reclassified to Subordinated indebtedness. Dividends on Preferred securities subject to mandatory redemption, which were presented as Dividends on trust preferred securities in the Consolidated Statement of Income through February 29, 2004, are included in Interest expense in periods subsequent to February 29, 2004.

(3)

Net assets represents total assets excluding cash and securities segregated and on deposit for regulatory and other purposes, securities received as collateral, securities purchased under agreements to resell, securities borrowed and identifiable intangible assets and goodwill. We believe net assets is a more useful measure than total assets to investors when comparing

28

companies in the securities industry because it excludes certain assets considered to have a low risk profile and identifiable intangible assets and goodwill. Net assets as presented is not necessarily comparable to similarly-titled measures provided by other companies because of different methods of calculation.

(4)

Long-term debt includes senior notes and subordinated indebtedness.

(5)

Total capital includes long-term debt (including junior subordinated debentures) and total stockholders' equity and, at November 30, 2003 and prior year ends, Preferred securities subject to mandatory redemption. We believe total capital is useful to investors as a measure of our financial strength.

(6)

The book value per common share calculation includes amortized restricted stock units granted under stock award programs, which have been included in total stockholders' equity.

(7)

Gross leverage ratio is defined as total assets divided by total stockholders' equity.

(8)

Net leverage ratio is defined as net assets (total assets excluding cash and securities segregated and on deposit for regulatory and other purposes, securities received as collateral, securities purchased under agreements to resell, securities borrowed and identifiable intangible assets and goodwill) divided by tangible equity capital (stockholders' equity plus junior subordinated debentures less identifiable intangible assets and goodwill). See Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources—Balance Sheet and Financial Leverage for the calculations of net assets and tangible equity capital. We believe net assets is a more useful measure than total assets to investors when comparing companies in the securities industry because it excludes certain assets considered to have a low risk profile and identifiable intangible assets and goodwill. We believe tangible equity capital to be a more representative measure of our equity for purposes of calculating net leverage because the junior subordinated debentures are subordinated and have a maturity at issuance of 49 years and we can defer interest payments for up to 20 consecutive quarters if the junior subordinated debentures are not in default. In addition, a leading rating agency views these securities as equity capital for purposes of calculating net leverage. Further, we do not view the amount of equity used to support identifiable intangible assets and goodwill as available to support our remaining net assets. Accordingly, we believe net leverage, based on net assets divided by tangible equity capital, both as defined above, to be a more meaningful measure of leverage to evaluate companies in the securities industry. These definitions of net assets, tangible equity capital and net leverage are used by many of our creditors and a leading rating agency. These measures are not necessarily comparable to similarly-titled measures provided by other companies because of different methods of calculation.

(9)

Assets under management at November 30, 2003 have been restated to include $3.9 billion of discretionary brokerage cash management assets.

(10)

Average common stockholders' equity in 2003 was appropriately weighted for the effect of the equity issued in connection with the Neuberger acquisition on October 31, 2003. Return on average common stockholders' equity is computed by dividing net income applicable to common stock for the period by average common stockholders' equity. Average common stockholders' equity for the years ended November 2004, 2003, 2002, 2001 and 2000 was $12.8 billion, $9.1 billion, $8.1 billion, $7.3 billion and $6.3 billion, respectively.

(11)

Average tangible common stockholders' equity in 2003 was appropriately weighted for the effect of the equity issued in connection with the Neuberger acquisition on October 31, 2003. Return on average tangible common stockholders' equity is computed by dividing net income applicable to common stock for the period by average tangible common stockholders' equity. Tangible common stockholders' equity equals total common stockholders' equity less identifiable intangible assets and goodwill. Average identifiable intangible assets and goodwill for the years ended November 2004, 2003, 2002, 2001 and 2000 was $3.5 billion, $471 million, $191 million, $174 million, and $142 million, respectively. Management believes tangible common stockholders' equity is a meaningful measure because it reflects the common stockholders' equity deployed in our businesses.

29

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Contents

30

LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

        Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company," "Lehman Brothers," "we," "us" or "our") is one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individual clients and customers. Our 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. Through our subsidiaries, we are a global market-maker in all major equity and fixed income products. To facilitate our market-making activities, we are a member of all principal securities and commodities exchanges in the U.S., and we hold memberships or associate memberships on several principal international securities and commodities exchanges including the London, Tokyo, Hong Kong, Frankfurt, Milan, Australian and Paris stock exchanges.

        Our principal businesses are investment banking, capital markets and investment management which, by their nature, are subject to volatility primarily due to changes in interest and foreign exchange rates, valuation of financial instruments and real estate, global economic and political trends and industry competition. Through our investment banking, trading, research, structuring and distribution capabilities in equity and fixed income products we continue to build on our customer flow business model, which focuses on customer flow activities. The customer flow model is based on our principal focus of facilitating client transactions in all major global capital markets products and services. We generate customer flow revenues from institutional, corporate, government and high-net-worth 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; (iii) providing investment management and advisory services; and (iv) acting as an underwriter to clients. As part of our customer flow activities, we maintain inventory positions of varying amounts across a broad range of financial instruments that are marked to market daily and, along with proprietary trading positions, give rise to Principal transactions and net interest revenue. The financial services industry is significantly influenced by worldwide economic conditions as well as other factors inherent in the global financial markets. As a result, revenues and earnings may vary from quarter to quarter and from year to year.

        All references to the years 2004, 2003 and 2002 in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") refer to our fiscal years ended November 30, 2004, 2003 and 2002, or the last day of such fiscal years, as the context requires, unless specifically stated otherwise.

Forward-Looking Statements

        Some of the statements contained in this MD&A, including those relating to our strategy and other statements that are predictive in nature, that depend on 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, as amended. These statements are not historical facts but instead represent only management's expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve uncertainties that are difficult to predict, which may include, but are not limited to, the factors discussed under "Certain Factors Affecting Results of Operations" below. As a global investment bank, our results of operations have varied significantly in response to global economic and market trends and geopolitical events. The nature of our business makes predicting the future trends of revenues or financial condition difficult. Caution should be used when extrapolating historical results or conditions to future periods.

        Our 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. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

31

Certain Factors Affecting Results of Operations

        Our financial condition and results of operations may be affected by uncertain or unfavorable economic, market, legal and other conditions. These conditions include but are not limited to:

Market Risk

        Changes in interest and foreign exchange rates, financial instruments and real estate valuations and increases in volatility can increase credit and market risks and may also affect customer-flow-related revenues and proprietary trading revenues as well as affect the volume of debt and equity underwritings and merger and acquisition transactions. We use derivatives and other financial contracts to hedge many of these market risks.

Competitive Environment

        All aspects of our business are highly competitive. Our competitive ability depends on many factors, including our reputation, the quality of our services and advice, intellectual capital, product innovation, execution ability, pricing, and sales efforts and the talent of our personnel. See Part I, Item 1—Business—Competition in this 2004 Annual Report on Form 10-K (the "Form 10-K") for more information about competitive matters.

Investor Sentiment

        Accounting and corporate governance scandals in recent years have had a significant effect on investor confidence. In addition, concerns about geopolitical developments and oil prices, among other things, can affect the global financial markets. See Executive Overview—Business Environment and—Economic Outlook in this MD&A for additional information.

Liquidity

        Liquidity and liquidity management are of critical importance in our industry. Liquidity could be affected by the inability to access the long-term or short-term debt, repurchase or securities-lending markets or to draw under credit facilities, whether due to factors specific to us or to general market conditions. In addition, the amount and timing of uncertain events, such as unfunded commitments and contingencies, could adversely affect cash requirements and liquidity. To mitigate these risks, our liquidity and funding policies have been conservatively designed to maintain sufficient liquid financial resources to continually fund our balance sheet and to meet all expected cash outflows, for one year in a stressed liquidity environment. See Liquidity, Funding and Capital Resources—Liquidity Risk Management in this MD&A for more information.

Credit Ratings

        Our access to the unsecured funding markets is dependent on our credit ratings. A reduction in our credit ratings could adversely affect our access to liquidity alternatives and our competitive position, and could increase the cost of funding or trigger additional collateral requirements. See Liquidity, Funding and Capital Resources—Credit Ratings in this MD&A for more information.

Credit Exposure

        Credit exposure represents the possibility a counterparty will be unable to honor its contractual obligations. Although we actively manage credit exposure daily as part of our risk management framework, counterparty default risk may arise from unforeseen events or circumstances.

Operational Risk

        Operational risk is the risk of loss resulting from inadequate or failed internal or outsourced processes, people, infrastructure and technology, or from external events. We minimize these risks through our strong internal control environment.

32

Legal and Regulatory

        The securities and financial services industries are subject to extensive regulation under both federal and state laws in the U.S. and under the laws of the many other jurisdictions in which we do business. We also are regulated by a number of self-regulatory organizations such as the National Association of Securities Dealers, the Municipal Securities Rulemaking Board and the National Futures Association, and by national securities and commodities exchanges, including the New York Stock Exchange. Violation of applicable regulations could result in legal and/or administrative proceedings, which may impose censures, fines, cease-and-desist orders or suspension of a firm, its officers or employees. The scrutiny of the financial services industry has increased, which has led to increased regulatory investigations and litigation against financial services firms.

        Legislation and rules adopted both in the U.S. and around the world have imposed substantial new or more stringent regulations, internal practices, procedures and controls and disclosure requirements in such areas as financial reporting, corporate governance, auditor independence, equity compensation plans, restrictions on the interaction between equity research analysts and investment banking personnel and money laundering. The trend and scope of increased compliance requirements may require us to invest in additional resources to ensure compliance.

        We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our business, including actions brought against us and others with respect to transactions in which we acted as an underwriter or financial advisor, actions arising out of our activities as a broker or dealer in securities and actions brought on behalf of various classes of claimants against many securities firms and lending institutions, including us. See Part I, Item 1—Business—Regulation and Part 1, Item 3—Legal Proceedings in this Form 10-K for more information about legal and regulatory matters.

Executive Overview

Summary of Results

        Net income totaled $2.4 billion, $1.7 billion and $975 million in 2004, 2003 and 2002, respectively, up 39% and 74% from the corresponding 2003 and 2002 periods. The 2004 results represent the highest net revenues, net income and earnings per share ever reported, with improved revenues in each of our three business segments and in each geographic region. Diluted earnings per share were $7.90, $6.35 and $3.47 in 2004, 2003 and 2002, respectively, up 24% and 83% from the corresponding 2003 and 2002 periods.

        During 2004, we continued to strengthen our franchise. In Investment Banking we gained significant market share in key activities such as mergers and acquisitions ("M&A") and equity origination, while maintaining our considerable share in fixed income origination. In Capital Markets we continued to broaden our client base, offer best-in-class research services to our clients and invest in technology to bring superior execution to our clients. We also expanded our Capital Markets mortgage origination platform through several business acquisitions. In Investment Management we continued to grow our various platforms by broadening our product offerings, enhancing performance and service levels and increasing our scale. In addition, we have successfully integrated our 2003 acquisitions of Neuberger, The Crossroads Group ("Crossroads") and Lincoln Capital Management ("Lincoln"). As a firm, we continue to invest in our infrastructure and facilities while maintaining our strict discipline around expenses, risk, and capital and liquidity management.

Business Environment

        As a global investment bank, our results of operations have varied significantly in response to global economic and market trends and geopolitical events. A favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, low inflation, low interest rates, low unemployment, strong business profitability, and high business and investor confidence. These factors influence levels of debt and equity security issuance and merger and acquisition activity, which affect our Investment Banking business; trading volumes and valuations in secondary financial markets, which affect our Capital Markets businesses; and workforce wealth creation, which affects both our Capital Markets and Investment Management businesses.

33

        The global business environment in 2004 was mixed but generally favorable compared with recent years due to a combination of factors including positive economic growth, improved corporate profitability, stronger equity markets and low interest rates. The European and Japanese economies cooled as the year progressed, while activity in the U.S. remained vibrant. The market environment in the second half of 2004 became challenging, extending beyond the seasonal summer slowdown to incorporate a series of headline and event-risk items that elevated the level of market uncertainty and held equity trading volumes and volatility down. The Federal Reserve ("Fed") raised interest rates 25 basis points in each of June, August, September and November (and again in December), matching the markets' expectations of a "measured" approach to monetary policy. The Bank of England also raised rates during the year, while the European Central Bank held rates unchanged. While these developments were consistent with expectations, a host of uncertainties weighed on the market for much of the year. Continued turmoil in the Middle East elevated geopolitical risk, and the possibility of terrorism hung over the Athens Olympic games and the political conventions and elections in the U.S. Increased oil demand and constrained supply elevated the price of oil to all-time highs, fueled in part by supply disruptions in the Middle East, events in Russia, the Venezuelan referendum and speculative activity. Election year politics in the U.S. further raised market uncertainty, particularly with respect to future U.S. foreign, tax and fiscal policy. However, the quick resolution of the U.S. presidential election, coupled with stronger payroll data and declining oil prices touched off rallies in both the equity and fixed income markets.

        The S&P 500, Dow Jones Industrial and NASDAQ indices rose 11%, 7% and 7%, respectively, in the year ended November 30, 2004, with much of this growth occurring in the first and fourth quarters. The European recovery, evident in 2003, continued modestly through 2004. In the European equity markets, the FTSE 100 and the DAX composite rose 8% and 10%, respectively, from November 30, 2003. The economies in Asia (excluding Japan) performed strongly in 2004, underpinned by the synchronized global economic recovery and accommodative domestic macroeconomic policies. Japan's economy continues to recover, although deflation remains a persistent threat, which could result in yen depreciation. Against this backdrop, the Nikkei and Hang Seng indices rose 8% and 14%, respectively, compared with November 30, 2003.

        Equity markets.    The U.S. equity markets in 2004 reflected lower volumes and volatility compared with 2003. Monthly average trading volumes on the NASDAQ declined 21% while volumes on the New York Stock Exchange rose 3% compared with 2003. In Europe volumes were broadly comparable to 2003, while in Asia volumes increased significantly. Equity offerings improved significantly compared with 2003, reflecting improved market dynamics and higher valuations. The overall volume of initial public offerings ("IPOs") nearly tripled compared with 2003 as the global economy continued to grow and companies required more capital for expansion. The improvement in IPO and secondary activity helped to offset a significant decline in convertible offerings.

        Fixed income markets.    Despite the Fed's shift in February from maintaining a low interest rate environment for a "considerable period" to a "measured" approach of raising rates beginning in June, interest rates remained low in both absolute and relative terms, and the fixed income markets overall remained strong. Certain credit asset classes experienced lower volatility and trading volumes during the year. Total global debt origination rose 6% in fiscal 2004 compared with 2003 as growth in investment grade and high yield origination totaling 10% and 12%, respectively, was partially offset by declines in mortgage-backed and agency origination of 13% and 10%, respectively.

        Mergers and acquisitions.    The improvement in equity valuations during 2004 coupled with strengthening cash flows enabled companies to consider strategic acquisitions. Completed and announced M&A volumes improved significantly compared with 2003, reflecting strong liquidity, continued interest from financial sponsors and the cautious return of the strategic buyer. During 2004, global M&A announcements rose 27% compared with 2003 and completed M&A transactions rose 34% compared with 2003.

Economic Outlook

        The financial services industry is significantly influenced by worldwide economic conditions in both banking and capital markets. In calendar 2005, we expect the U.S. and Asian (excluding Japan) economies to grow at 3.5% and 6.7% rates, respectively, while we expect more moderate growth rates of 1.5% and 0.6% in Europe and Japan, respectively. We believe the Fed will raise rates an additional 125 basis points, to 3.50% by mid-year—enough to slow growth and quell inflation pressures without creating the risk of a hard landing. Inflation remains a top concern of the Fed, even though price and wage pressures remain fairly muted.

34

Measured Fed tightening amid solid gross domestic product growth and low inflation should help to create a benign interest rate environment in calendar 2005, as the capital markets have largely factored in expected rate increases. We also anticipate the European Central Bank and Bank of Japan will remain on hold. Corporate profitability remains resilient, even though expectations have moderated compared with 2004. Although we remain somewhat wary about geopolitical risk, the growing deficits in the U.S., and China's efforts to rein in growth, we see resiliency in the global economy as a whole.

        Equity markets.    The equity markets became more constructive in late 2004 after many of the uncertainties of the 2004 third and early fourth quarters played themselves out. After a round of postponements and cancellations during the summer of 2004, offering pipelines stabilized, and companies continue to seek to fund growth. We expect the equity offering calendar to remain robust into 2005. Furthermore, reasonably strong corporate profitability and a benign inflation outlook would increase confidence in the marketplace.

        Fixed income markets.    We see continued signs of resiliency in the fixed income markets attributable to the expected measured pace of interest rate increases, stable credit spreads, the amount of debt maturing in 2005, and the expected increase in M&A-related financings. Fixed income activity is driven in part by absolute interest rates but also is highly correlated with the degree of volatility, the shape of the yield curve and the general improvement in credit quality which, in the aggregate, is contributing to a relatively healthy business environment. The investor base has changed dramatically from the long-only investors of a few years ago to a rapidly-growing hedge fund, and an expanding international investor base. Investors now employ far more developed risk mitigation tools to manage their portfolios. Unlike in 1994, the Fed has been far more transparent in communicating its intentions, and the market successfully absorbed five rate hikes in calendar 2004 and rallied in the process. In addition, the size and diversity of the global fixed income marketplace is significantly larger and broader than ever before and we expect approximately $8.6 trillion of global fixed income origination in calendar 2005, a slight decrease from $8.8 trillion in calendar 2004.

        Mergers and acquisitions.    Companies remain interested in growth, and many have reduced their cost structures as far as possible. During 2004, we saw increased activity from strategic buyers, and we expect the M&A fee pool in 2005 to grow compared with 2004. At the same time, as companies seek to streamline operations or reduce debt, many are divesting non-core businesses, which is helping to drive M&A opportunities.

        Asset management and high net worth.    Our outlook for asset management and services to high-net-worth individuals is also positive, given favorable demographics and the trends toward pension reform, higher savings rates globally and intergenerational wealth transfer. The high-net-worth client increasingly seeks multiple providers and greater asset diversification along with a high service component. We believe the significant expansion of our asset management business, and the generally strong investment-return performance of our asset managers in 2004 positions us well for growth in 2005.

Consolidated Results of Operations(1)

Overview

        Net revenues were $11.6 billion, $8.6 billion and $6.2 billion in 2004, 2003 and 2002, respectively, up 34% and 40% from the corresponding 2003 and 2002 periods. Net income totaled $2.4 billion, $1.7 billion and $975 million in 2004, 2003 and 2002, respectively, up 39% and 74% from the corresponding 2003 and 2002 periods. Diluted earnings per share were $7.90, $6.35 and $3.47 in 2004, 2003 and 2002, respectively, up 24% and 83% from the corresponding 2003 and 2002 periods. The 2004 results represent the highest revenue, net income and earnings per share we have ever reported. The results reflect the enhanced scale we have built—in part by acquisitions—and the diversification we have achieved, coupled with continuing strict discipline in our core competencies around managing expenses, risk and capital. The results also reflect the benefits of the increased scale of our asset management business and the growth of our mortgage origination platform through several business acquisitions. See Consolidated Results of Operations—Business Acquisitions and Dispositions in this MD&A for more information.

        Compensation and benefits expense as a percentage of net revenues was 49.5%, 49.9% and 51.0% in 2004, 2003 and 2002, respectively. Non-personnel expenses as a percentage of net revenues were 20.1%,

35

20.7% and 26.3% in 2004, 2003 and 2002, respectively. Consequently, pre-tax margin was 30.4%, 29.3% and 22.7% in 2004, 2003 and 2002, respectively.

        Return on average common stockholders' equity was 17.9%, 18.2% and 11.2% in 2004, 2003 and 2002, respectively. Return on average tangible common stockholders' equity⁽²⁾ was 24.7%, 19.2% and 11.5% in 2004, 2003 and 2002, respectively. Return on average common stockholders' equity and return on average tangible common stockholders' equity are computed by dividing net income applicable to common stock for the period by average common stockholders' equity and average tangible common stockholders' equity, respectively. Management believes average tangible common stockholders' equity is a meaningful measure because it reflects the common stockholders' equity deployed in our businesses.

(1)

Market share, volume and ranking statistics in this MD&A were obtained from Thomson Financial.

(2)

Average tangible common stockholders' equity equals average common stockholders' equity less average identifiable intangible assets and goodwill and is computed as follows:

Net Revenues

(1)

Reclassified to conform to the 2004 presentation.

        Net revenues totaled $11.6 billion, $8.6 billion and $6.2 billion in 2004, 2003 and 2002, respectively. Net revenues in 2004 and 2003 each represented records. Net revenues grew 34% in 2004 compared with 2003, reflecting increases in each of our three business segments and in each geographic region. Investment Banking business segment revenues rose 27% in 2004 compared with 2003 propelled by improvements in Merger and Acquisition Advisory and Equity Underwriting. Capital Markets business segment net revenues rose 28% in 2004 compared with 2003, reflecting record Fixed Income revenues and stronger Equities revenues, leading to record results for the segment. Investment Management business segment net revenues rose 87% in 2004 compared with 2003, primarily due to increased Asset Management revenues associated with business acquisitions, complemented by improved results in the Private Investment Management (formerly Private Client) component of this business segment. Net revenues grew 40% in 2003 compared with 2002, primarily attributable to improved Capital Markets results, which rose 66% compared with 2002, driven by then-record Fixed Income net revenues. Investment Management net revenues rose 13% in 2003 compared with 2002, while Investment Banking net revenues were essentially unchanged in 2003 compared with 2002. See Business Segments in this MD&A for a detailed discussion of net revenues by business segment.

36

Principal Transactions, Commissions and Net Interest Revenues

        In both the Capital Markets and Investment Management business segments we evaluate revenue performance based on the aggregate of Principal transactions, Commissions and Interest and dividends revenue net of Interest expense ("Net interest revenue"), which includes realized and unrealized gains and losses, commissions associated with transactions and the interest and dividend revenue or expense associated with financing or hedging positions. Caution should be used when analyzing these revenue categories individually because they may not be indicative of the overall performance of the Capital Markets and Investment Management business segments. Principal transactions, Commissions and Net interest revenues rose 27% in 2004 compared with 2003 and 56% in 2003 compared with 2002, totaling $8.6 billion, $6.8 billion and $4.3 billion in 2004, 2003 and 2002, respectively.

        Principal transactions revenue improved 33% in 2004 compared with 2003. Record fixed income revenues in 2004, with notable improvements in mortgage and interest rate products, contributed to the increase together with stronger equity net revenues, particularly in equity derivatives and prime broker activities. Principal transactions revenue rose 119% in 2003 compared with 2002, primarily reflecting then current record revenues from fixed income products. Revenues from equity products also improved in 2003 compared with 2002 as a result of rising global equity indices and improved performance in private equity.

        Commission revenue increased 27% in 2004 compared with 2003, reflecting commission revenue attributable to the acquisition of Neuberger complemented by growth in our trading volumes, despite lower market volumes generally, attributable to both our institutional and high-net-worth clients. Commission revenue declined 6% in 2003 compared with 2002, primarily reflecting lower trading volumes.

        Interest and dividends revenue and Interest expense are a function of the level and mix of total assets and liabilities (primarily financial instruments owned and secured financing activities), the prevailing level of interest rates, and the term structure of our financings. Net interest revenue in 2004 rose 4% compared with 2003 principally due to an increase in interest earning assets. Interest and dividends revenue and Interest expense rose 11% and 12%, respectively, in 2004 compared with 2003 attributable to higher levels of interest- and dividend-earning assets and interest-bearing liabilities coupled with a modest upward shift in interest rates. Net interest revenue rose 18% in 2003 compared with 2002, primarily due to an increase in interest earning assets, including higher levels of secured financing activities, and a steeper yield curve in 2003 that reduced interest expense on secured short-term funding. Interest and dividends revenue and Interest expense declined 15% and 19%, respectively, in 2003 compared with 2002, primarily due to substantial declines in interest rates.

Investment Banking

        Investment banking revenues totaled $2.2 billion in 2004 and $1.7 billion in both 2003 and 2002. Investment banking revenues result primarily from fees and related revenues earned for underwriting public and private offerings of fixed income and equity securities, advising clients on M&A activities and corporate financing activities. Investment banking revenues increased 27% in 2004 compared with 2003, reflecting substantial improvements in M&A advisory and equity underwriting and continued strength in debt underwriting. Investment banking revenues in 2003 were essentially unchanged compared with 2002, as lower equity underwriting and M&A revenues were mostly offset by improved fixed income underwriting revenues. See Business Segments—Investment Banking in this MD&A for a discussion of our Investment Banking business segment.

Asset Management and Other

        Asset management and other revenues primarily result from asset management fees. Asset management and other revenues totaled $794 million, $141 million and $85 million in 2004, 2003 and 2002, respectively. The significant increase in 2004 compared with 2003 is attributable primarily to the October 31, 2003 acquisition of Neuberger, complemented by higher private equity management and incentive fees. The growth in Asset management and other revenues in 2003 compared with 2002 is attributable primarily to the acquisition of Neuberger in October 2003 and the acquisition of Lincoln in January 2003.

37

Non-Interest Expenses

        Non-interest expenses were $8.1 billion, $6.1 billion and $4.8 billion in 2004, 2003 and 2002, respectively, and include a number of Special Items discussed below. We continue to maintain a strict discipline in our core competency of managing expenses. Compensation and benefits expense as a percentage of net revenues was 49.5%, 49.9% and 51.0% in 2004, 2003 and 2002, respectively. Non-personnel expenses as a percentage of net revenues were 20.1%, 20.7% and 26.3% in 2004, 2003 and 2002, respectively. A significant portion of our expense base is variable, including compensation and benefits, brokerage and clearance, and business development. We expect our variable expenses as a percentage of net revenues to remain in approximately the same proportions in future periods.

        Compensation and benefits expense was $5.7 billion, $4.3 billion and $3.1 billion in 2004, 2003 and 2002, respectively. Headcount totaled approximately 19,600, 16,200 and 12,300 at November 30, 2004, 2003 and 2002, respectively, reflecting a combination of business acquisitions and organic growth. Compensation and benefits expense includes both fixed and variable components. Fixed compensation, consisting primarily of salaries, benefits and amortization of previous years' deferred equity awards, totaled $2.6 billion, $2.0 billion and $1.9 billion in 2004, 2003 and 2002, respectively. The growth of fixed compensation expense in 2004 compared with 2003 was due primarily to the increase in headcount attributable to business acquisitions (see Consolidated Results of Operations—Business Acquisitions and Dispositions in this MD&A) coupled with organic growth related to certain business activity. The growth in fixed compensation expense in 2003 compared with 2002 primarily resulted from the acquisitions as well as an increase in pension expense. Variable compensation, consisting primarily of incentive compensation, commissions and severance, totaled $3.1 billion, $2.3 billion and $1.2 billion in 2004, 2003 and 2002, respectively, as higher revenues resulted in higher incentive compensation. Amortization of deferred stock compensation awards was $800 million, $625 million and $570 million in 2004, 2003 and 2002, respectively.

        Non-personnel expenses totaled $2.3 billion, $1.8 billion and $1.6 billion in 2004, 2003 and 2002, respectively. The increase in non-personnel expenses in 2004 compared with 2003 is attributable to business acquisitions coupled with increased technology initiatives, higher occupancy costs and higher levels of business activity. The increase in non-personnel expenses in 2003 compared with 2002 is attributable primarily to increases in occupancy, technology and communications, and brokerage and clearance expenses, as well as the effect of business acquisitions.

        Technology and communications expenses rose 28% in 2004 compared with 2003 reflecting the business acquisitions, the depreciation of technology assets at new facilities, and increased costs associated with the continued build-out of Capital Markets platforms and infrastructure. Brokerage and clearance expenses rose 23% in 2004 compared with 2003, due primarily to higher volumes in Capital Markets products and expansion in equities-related businesses. Occupancy expenses increased 32% in 2004 compared with 2003 primarily attributable to the business acquisitions and the increased cost of our new facilities in London and Tokyo. Professional fees increased 59% in 2004 compared with 2003 due to the business acquisitions and higher recruiting and legal fees. Business development expenses increased 42% in 2004 compared with 2003 due to the higher level of business activity and the business acquisitions. Other expenses increased 66% in 2004 compared with 2003 attributable primarily to the business acquisitions, including mutual fund distribution costs and the amortization of intangible assets.

38

        Technology and communications expenses rose 8% in 2003 compared with 2002 reflecting depreciation of technology assets at new facilities and higher spending associated with the enhancement of Capital Markets trading platforms and technology infrastructure. Brokerage and clearance expenses rose 12% in 2003 compared with 2002 primarily attributable to increased volumes in fixed income products and our expansion in equities-related businesses in 2003. Occupancy expenses increased 11% in 2003 compared with 2002 primarily attributable to the increased cost of our new headquarters in New York and additional space needed to accommodate the growth in headcount. Professional fees increased 22% in 2003 compared with 2002, primarily due to higher legal, accounting and audit fees.

        During 2004, we entered into a settlement with our insurance carriers relating to certain legal proceedings noticed to the carriers and initially occurring prior to January 2003. Under the terms of the insurance settlement, the insurance carriers will pay us $280 million. The proceeds of the insurance settlement will be used in resolving these legal proceedings as and if they occur. During 2004, we entered into a Memorandum of Understanding to settle the In re Enron Corporation Securities Litigation class action lawsuit. This $223 million settlement is subject to final court approval. The settlement with our insurance carriers and the settlement under the Memorandum of Understanding did not result in a net gain or loss in our Consolidated Statement of Income. See Part 1, Item 3—Legal Proceedings in this Form 10-K for additional information about the Enron securities class action and related matters.

        Special Items.    Non-interest expenses in 2004 and 2003 include pre-tax real estate charges of $19 million and $77 million, respectively ($11 million and $45 million after-tax, respectively), associated with our 2002 decision to dispose of certain excess real estate. In March 2004, we reached an agreement to exit virtually all of our remaining leased space at our downtown New York City location, which clarified the loss on this location and resulted in the $19 million charge. Non-interest expenses in 2002 include a pre-tax net gain of $108 million ($60 million after-tax) associated with September 11th related costs and insurance settlement proceeds, a $128 million pre-tax charge ($82 million after-tax) associated with decisions to reconfigure certain global real estate facilities and an $80 million pre-tax charge ($56 million after-tax) related to the settlement of allegations of research analyst conflicts of interest. The 2004, 2003 and 2002 real estate reconfiguration charges were recognized in accordance with Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." These charges represent estimated sublease losses expected to be incurred upon exiting certain of our facilities, primarily in London and New York. Substantially all of such facilities were subleased at November 30, 2004. The net pre-tax effect of the 2002 Special Items is a charge of $100 million. Additional information about the Special Items can be found in Notes 19 and 20 to the Consolidated Financial Statements.

39

Income Taxes

        The provisions for income taxes totaled $1.1 billion, $765 million and $368 million in 2004, 2003 and 2002, respectively. These provisions resulted in effective tax rates of 32.0%, 30.2% and 26.3% for 2004, 2003 and 2002, respectively. The increases in the effective tax rates in 2004 and 2003 compared with the respective prior years were primarily due to higher levels of pre-tax income, which reduced the effect of permanent differences. See Note 18 to the Consolidated Financial Statements for additional information about income taxes.

Business Acquisitions and Dispositions

        Capital Markets.    During 2004, we acquired three mortgage banking platforms for an aggregate cost of approximately $184 million. In addition, we sold our reverse mortgage originator for approximately $42 million. The gain on the sale was not significant. We believe the acquisitions add long-term value to our mortgage franchise by allowing further vertical integration of the business platform. Mortgage loans originated by the acquired companies are intended to provide a more cost efficient source of loan product for our securitization pipeline. During 2003, we acquired controlling interests in two mortgage loan originators for an aggregate cost of approximately $35 million. Headcount associated with these acquisitions were approximately 1,300 and 2,000 for 2004 and 2003, respectively.

        Investment Management.    In October 2003, we purchased Neuberger as part of our strategic plan to build out our Investment Management business segment. The Neuberger acquisition increased our revenues from fee-based activities, allowing for reduced cross-cycle earnings volatility. The acquisition is providing revenue synergies by making Neuberger products available to our network of institutional and high-net-worth individual clients in all three geographic regions and offering Neuberger clients an expanded range of investment and risk management products, including structured capital markets products, private equity, and other alternative asset management products.

        We purchased Neuberger for a net purchase price of approximately $2.5 billion, including cash consideration and incidental costs of $682 million, equity consideration of approximately $2.1 billion (including 32.3 million shares of common stock, 0.3 million shares of restricted common stock and 3.5 million vested stock options) and excluding cash and short-term investments acquired of $276 million. We also issued approximately 0.5 million shares of restricted common stock valued at $42 million, which is subject to future service requirements and is being amortized over the applicable service periods. The integration continues to proceed well and revenue and cost synergy targets have been substantially achieved.

        In October 2003, we also acquired substantially all of the operating assets of Crossroads, a diversified private equity fund manager, which expanded our global private equity franchise. In January 2003, we acquired the fixed income asset management business of Lincoln. The cost of these acquisitions aggregated $137 million.

        These acquisitions were made as part of our strategic plan to build out our Investment Management business segment. On the dates of acquisition, headcounts associated with these entities aggregated approximately 1,400. See Note 6 to the Consolidated Financial Statements for additional information about these acquisitions.

Business Segments

        We operate in three business segments (each of which is described below): Investment Banking, Capital Markets and Investment Management. These business segments generate revenues from institutional, corporate, government and high-net-worth individual clients and customers, which are recognized in all revenue categories in the Consolidated Statement of Income. Net revenues also

40

contain certain internal allocations, including funding costs, which are centrally managed. In both the Capital Markets and Investment Management business segments we evaluate revenue performance based on the aggregate of Principal transactions, Commissions and Net interest revenues, which includes realized and unrealized gains and losses, commissions associated with transactions and the interest and dividend revenue or expense associated with financing or hedging positions. Caution should be used when analyzing these revenue categories individually because they may not be indicative of the overall performance of the Capital Markets and Investment Management business segments.

        The following table summarizes the net revenues of our business segments:

Business Segments

(1)

Non-personnel expenses include the Special Items. Additional information about these Special Items can be found in Results of Operations—Non-Interest Expenses in this MD&A and in Notes 19 and 20 to the Consolidated Financial Statements. The following business segment discussions exclude the Special Items.

Investment Banking

(1)

Excludes the Special Items.

        The Investment Banking business segment is made up of Advisory Services and Global Finance activities that serve our corporate and government clients. The segment is organized into global industry groups—Communications, Consumer/Retailing, Financial Institutions, Financial Sponsors, Healthcare, Industrial, Media, Natural Resources, Power, Real Estate and Technology—that include bankers who deliver industry knowledge and expertise to meet clients' objectives. Specialized product groups within Advisory Services, including M&A and restructuring, and within Global Finance, including Equity Capital Markets, Debt Capital Markets, Leveraged Finance, Private Placements,

41

Derivatives and Product Development, are partnered with relationship managers in the global industry groups to provide comprehensive financial solutions for clients.

Investment Banking Revenues

        Revenues totaled $2.2 billion in 2004 and $1.7 billion in both 2003 and 2002. Revenues increased 27% in 2004 compared with 2003, reflecting significant improvements in M&A advisory and global equity underwriting activities. Our increased market share in these areas, together with industry-wide market volume increases, provided the basis for the revenue increases. Industry-wide debt origination volumes remained robust in 2004, up 6% from 2003. Investment banking revenues in 2003 were essentially unchanged compared with 2002, as lower equity underwriting and M&A advisory revenues were largely offset by higher debt underwriting revenues.

        Debt underwriting revenues were a record in 2004 for the third consecutive year, rising 2% compared with 2003, despite challenging market conditions including rising interest rates, corporate pre-funding in late 2003 and the rally of the global equity markets. Our global debt origination volumes in 2004 rose 6% compared with 2003, while industry-wide global debt origination volumes rose 6% in the same period, as clients continued to take advantage of low interest rates and tight credit spreads. Improved leveraged finance revenues in 2004 essentially offset a decline in high grade revenues. Our global debt origination ranking improved to number four for calendar 2004, up from number five for calendar 2003, while our market share declined slightly to 6.7% in calendar 2004 compared with 7.0% in calendar 2003. Our debt origination fee backlog at November 30, 2004 of approximately $148 million rose 68% compared with November 30, 2003. However, debt origination fee backlog is generally less indicative of the level of future business due to the increased use of the shelf registration process. Debt underwriting revenues increased 11% in 2003 compared with 2002, as the tightening of credit spreads and a full year of historically low interest rates resulted in near record debt underwriting volumes. Industry-wide fixed income origination volume rose 25% in 2003 compared with 2002, while our fixed income origination volume was up 26%. Investment grade and high yield market underwriting volumes were particularly strong as credit spreads tightened in 2003 compared with 2002. The market volume growth in 2003 was largely in high grade debt, which generally has lower fee spreads. Our market share of global debt underwriting volumes in calendar 2003 of 7.0% was up slightly from 6.9% in calendar 2002.

        Equity underwriting revenues grew 54% in 2004 compared with 2003 as improved investor confidence and corporate profitability drove improved equity origination volumes. Industry-wide equity origination volumes rose 48% in 2004 compared with 2003, while our equity origination volumes rose 51% in the same period. The 2004 results reflect strong growth in our volumes of IPOs and secondary issuances while convertible underwritings were essentially unchanged compared with 2003. We substantially increased our global equity origination market share to 4.3% in calendar 2004 compared with 3.3% in calendar 2003. Our equity-related fee backlog (for both filed and unfiled transactions) at November 30, 2004 of approximately $279 million rose 64% compared with November 30, 2003. Equity underwriting revenues declined 14% in 2003 compared with 2002 primarily due to change in the mix of equity underwriting, with IPOs, which generally are more lucrative, contributing only 14% of market

42

volume in 2003, down from 23% in 2002. Industry-wide global equity market volumes declined 2% in 2003 compared with 2002. Our global equity-related market share increased slightly to 3.3% in calendar 2003 from 3.2% in calendar 2002.

        M&A advisory fees rose 65% in 2004 compared with 2003, as we substantially improved our M&A market position for completed transactions in calendar 2004 with a 15.8% market share, up from a 9.0% market share for calendar 2003. M&A completed market transaction volumes increased 34% in fiscal 2004 to their highest levels since 2000, driven by an improving economy and higher stock market valuations. Activity from strategic buyers improved and sponsor activity, which accounts for a growing percentage of volumes, remained strong. While our M&A fee backlog at November 30, 2004 of approximately $135 million declined 11% compared with November 30, 2003, we believe this decrease to be driven by timing issues and expect a further strengthening of M&A market activities in 2005. M&A advisory fees declined 11% in 2003 compared with 2002, as M&A activity was extremely weak with the market volume for completed transactions in 2003 reaching its lowest level since 1996. M&A activities were negatively affected by lackluster global growth rates in the first half of 2003, weak investor confidence amid geopolitical concerns and uncertainty regarding the global economic recovery. M&A global market volume for completed transactions was down 17% in 2003 compared with 2002 while our completed transaction volume was down only 5%. Our market share for completed transactions in calendar 2003 was 9.0%, down from 10.3% in calendar 2002.

        Non-interest expenses rose 21% in 2004 compared with 2003, attributable to an increase in compensation and benefits expense related to improved performance coupled with higher non-personnel expenses—principally business development expenses. Non-interest expenses were unchanged in 2003 compared with 2002 reflecting an increase in compensation and benefits expense related to the improved environment at the end of 2003, offset by lower business development expense as spending was curtailed in early 2003 when the market environment was subdued.

        Income before taxes rose 46% to $587 million in 2004, up from $401 million in 2003. Income before taxes declined 2% in 2003 compared with 2002. Pre-tax margin was 27%, 23% and 24% in 2004, 2003 and 2002, respectively.

Capital Markets

(1)

Reclassified to conform to the 2004 presentation.

(2)

Excludes the Special Items.

43

        The Capital Markets business segment includes institutional customer flow activities, prime brokerage, research, and secondary-trading and financing activities in fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments and investments. We are a leading 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, preferred stock, municipal securities, bank loans, foreign exchange, financing and derivative products. We are one of the largest investment banks in terms of U.S. and pan-European listed equities trading volume, and we maintain a major presence in over-the-counter ("OTC") U.S. stocks, major Asian large capitalization stocks, warrants, convertible debentures and preferred issues. In addition, the secured financing business manages our equity and fixed income matched book activities, supplies secured financing to institutional clients and customers, and provides secured funding for our inventory of equity and fixed income products. The Capital Markets segment also includes proprietary activities including investments in real estate and private equity.

        See Consolidated Results of Operations—Business Acquisitions and Dispositions in this MD&A and Note 6 to the Consolidated Financial Statements for information about Capital Markets-related business acquisitions and dispositions completed during 2004 and 2003.

Capital Markets Net Revenues

        Net revenues totaled $7.7 billion, $6.0 billion and $3.6 billion in 2004, 2003 and 2002, respectively. Net revenues rose 28% in 2004 compared with 2003 on higher customer flow levels and reflect strong contributions from both Fixed Income and Equities. Fixed Income revenues improved in 2004 compared with 2003 as a favorable interest rate environment helped drive strength in mortgage originations and securitizations as well as interest rate products, and the declining dollar drove higher foreign exchange activity. Equities delivered improved revenues in 2004 compared with 2003 on higher customer flow levels, particularly in equity derivatives products and our prime broker business, as equity market valuations improved compared with 2003. Capital Markets net revenues in 2004 represent the fifth consecutive year of record performance in Fixed Income and the second highest revenue level in Equities. Net revenues rose 66% in 2003 compared with 2002, reflecting strong growth in both Fixed Income and Equities.

        Fixed Income net revenues were a record $5.7 billion, increasing 31% in 2004 compared with 2003. Market conditions were generally favorable in 2004 as evidenced by continued low interest rates, tightening credit spreads and volatile currency markets. Our diverse set of fixed income asset classes experienced improved results across a broad range of asset classes reflecting the increased scale and regional diversity of our business. The mortgage securitization business was notably strong, with revenues in mortgage products benefiting from the low rate environment as well as the continued vertical integration of our mortgage origination platforms. Interest rate products benefited from robust customer flow activity as investors sought derivative hedging solutions amid an environment of increased interest rate volatility in the first half of 2004. Foreign exchange revenues also rose as the U.S. dollar weakened in the latter half of 2004. Partially offsetting these increases were reduced contributions from credit products in 2004 compared with 2003. High grade credit products saw

44

reduced customer flow activity as investors sought additional yield amid the further tightening of credit spreads. High yield credit products benefited from the continued tightening of credit spreads in 2004, although at a reduced level compared with 2003 record results. Fixed Income net revenues increased 68% in 2003 compared with 2002 as historically low interest rates, significant credit spread tightening, and volatile currency markets all contributed to a highly favorable environment for fixed income products and strong customer flow activities. Results improved across a broad range of asset classes in 2003 compared with 2002 including high yield, mortgage, interest rate, and municipal products. High yield products had record results, driven by strong customer trading activities and improved proprietary position revenues. Mortgage-related products were bolstered by robust refinancings driven by the historically low interest rate environment, slightly offset by a softening of certain sectors within the commercial real estate market.

        Equities net revenues grew 20% in 2004 compared with 2003 on higher customer flow levels, particularly in equity derivative products and our prime broker activities, as equity market valuations improved compared with 2003. Derivative revenues were particularly strong, as customers increasingly used customized derivative products to hedge risk and reduce concentrations. Prime broker activity continued to benefit from growth in customer financing balances and an expanding client base, as total balances increased 72% compared with November 30, 2003. The 2004 results also reflect higher private equity gains compared with 2003. These improvements were partially offset by lower revenues from our convertibles business due to a sharp drop in market volatility globally resulting in lower valuations on convertible debt coupled with a lower level of origination activity, which also affected secondary activity. Equities net revenues rose 63% in 2003 compared with 2002 as improvements in the global economy and stronger corporate earnings fueled a steady improvement in global equity indices that began in March 2003 and continued through year end. The rise in global equity indices contributed to improved performance in a number of asset classes including derivatives, convertibles, and private equity investments. While U.S. equity trading volumes declined slightly, European and Asian markets experienced a rise in trading volumes contributing to improved performance in these regions. Derivatives benefited from improved customer flow activity, as customers increasingly used customized derivative products to hedge risk and reduce concentrations. Convertibles revenues were bolstered by improved credit markets and strong customer activity on the heels of increased new issuance activity.

        Interest and dividends revenue and Interest expense are a function of the level and mix of total assets and liabilities (primarily financial instruments owned and secured financing activities), the prevailing level of interest rates, and the term structure of our financings. Net interest revenue in 2004 rose 5% compared with 2003 primarily due to an increase in interest earning assets. Interest and dividends revenue and Interest expense rose 11% and 12%, respectively, in 2004 compared with 2003 attributable to higher levels of interest- and dividend-earning assets and interest-bearing liabilities coupled with a modest upward shift in interest rates. Net interest revenue rose 19% in 2003 compared with 2002, primarily due to an increase in total assets, including higher levels of secured financing activities, and a steeper yield curve in 2003 that reduced interest expense on secured short-term funding. Interest and dividends revenue and Interest expense declined 15% and 19%, respectively, in 2003 compared with 2002, primarily due to substantial declines in interest rates.

        Non-interest expenses increased to $5.2 billion in 2004 from $4.0 billion in 2003 and $2.7 billion in 2002. The growth in non-interest expenses in both comparisons reflects higher Compensation and benefits expense related to improved revenue performance coupled with higher non-personnel expenses. Non-personnel expenses grew primarily due to increased technology and communications expenses associated with the business acquisitions and the continued investments in our trading platforms, higher brokerage and clearance costs associated with higher trading volumes, as well as higher professional fees incurred in the current industry environment. Occupancy expenses also increased attributable to our new facilities in London and Tokyo.

        Income before taxes rose 26% to $2.5 billion in 2004 compared with $2.0 billion in 2003. Income before taxes increased 123% in 2003 compared with 2002. Pre-tax margin was 33%, 33% and 25% in 2004, 2003 and 2002, respectively.

45

Investment Management

(1)

Reclassified to conform to the 2004 presentation.

(2)

Excludes the Special Items.

        The Investment Management business segment (formerly Client Services) consists of the Private Investment Management and Asset Management business lines. Private Investment Management generates customer-flow transactional revenues from high-net-worth clients and Asset Management generates primarily fee-based revenues from customized investment management services for high-net-worth clients as well as asset management fees from mutual fund and other institutional investors. Asset Management also generates management and incentive fees from our role as general partner for private equity and other alternative investment partnerships.

        See Consolidated Results of Operations—Business Acquisitions and Dispositions in this MD&A and Note 6 to the Consolidated Financial Statements for information about Investment Management-related business acquisitions completed during 2003.

Investment Management Net Revenues

46

Assets Under Management

(1)

Assets under management at November 30, 2003 have been restated to include $3.9 billion of discretionary brokerage cash management assets.

(2)

Includes approximately $101.3 billion attributable to the Lincoln and Neuberger acquisitions and $3.9 billion of discretionary brokerage cash management assets.

Composition of Assets Under Management