LEHMAN BROTHERS INC//, 10-K405, 2000-02-28

LEHMAN BROTHERS INC//
10-K405, 2000-02-28
SECURITY BROKERS, DEALERS & FLOTATION COMPANIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999

<TABLE>
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 1-6817

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LEHMAN BROTHERS INC.

(Exact Name of Registrant as Specified in its Charter)

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

3 WORLD FINANCIAL CENTER 10285
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive
offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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7 5/8% Senior Subordinated Notes Due 2006 New York Stock Exchange
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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 /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 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./X/

As the Registrant is a wholly-owned subsidiary of Lehman Brothers
Holdings Inc., none of the Registrant's outstanding common equity is held by
non-affiliates of the Registrant. As of February 15, 2000, 1,006 shares of the
Registrant's Common Stock, $0.10 per share, were issued and outstanding.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a)
AND (b) OF FORM 10-K AND THEREFORE IS FILING THIS FORM WITH A PORTION OF THE
REDUCED DISCLOSURE CONTEMPLATED THEREBY.

DOCUMENTS INCORPORATED BY REFERENCE:
NONE

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PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

As used herein, "LBI" or the "Registrant" means Lehman Brothers Inc., a
Delaware corporation, incorporated on January 21, 1965. LBI and its subsidiaries
are collectively referred to as the "Company" or "Lehman Brothers." LBI is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc., a Delaware
corporation, which (together with its subsidiaries, as appropriate) is referred
to herein as "Holdings."

The Company is one of the leading global investment banks, serving
institutional, corporate, government and high-net-worth individual clients and
customers. Its executive offices are located at 3 World Financial Center, New
York, New York 10285 and its telephone number is (212) 526-7000.

FORWARD-LOOKING STATEMENTS

Some of the statements discussed in this report, including those relating to
the Company's strategy and other statements that are predictive in nature, that
depend 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. The Company also has made,
and from time to time may otherwise make, in its press releases, discussions
with Company management and other public filings additional forward-looking
statements. Forward-looking statements are based on our current expectations and
are subject to risks and uncertainties, including those described under
"Business Environment," "Risk Management" and elsewhere in this report. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.

LEHMAN BROTHERS

Lehman Brothers is one of the leading global investment banks, serving
institutional, corporate, government and high-net-worth individual clients and
customers. The Company's worldwide headquarters in New York and regional
headquarters in London and Tokyo are complemented by offices in additional
locations in North America, Europe, the Middle East, Latin America and the Asia
Pacific region. Holdings provides investment banking and capital markets
services in Europe and Asia. The Company is engaged primarily in providing
financial services. Other businesses in which the Company is engaged represent
less than 10 percent of consolidated assets, revenues or pre-tax income.

The Company's business includes capital raising for clients through
securities underwriting and direct placements; corporate finance and strategic
advisory services; private equity investments; securities sales and trading;
research; and the trading of foreign exchange, derivative products and certain
commodities. The Company and its affiliates act as market-makers in all major
equity and fixed income products in both the domestic and international markets.
Lehman Brothers is a member of all principal securities and commodities
exchanges in the United States, as well as the National Association of
Securities Dealers, Inc. ("NASD"). Holdings holds memberships or associate
memberships on several principal international securities and commodities
exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Paris and Milan
stock exchanges.

Lehman Brothers concentrates on serving the needs of major issuing and
advisory clients and investing customers worldwide to build an increasing flow
of business that leverages the Company's research, underwriting and distribution
capabilities. Customer flow continues to be the primary source of the Company's
net revenues. Developing long-term relationships with issuing clients and
investing customers is a central premise of the Company's client/customer-driven
strategy. Based on management's belief that each client and customer directs a
majority of its financial transactions to a limited number of investment banks,
Lehman Brothers' investment banking and institutional and private client sales
professionals focus on a targeted group of clients and customers worldwide to
identify and develop lead

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relationships. The Company believes that such relationships position Lehman
Brothers to receive a substantial portion of its clients' and customers'
financial business and lessen the volatility of net revenues generally
associated with the financial services industry.

The Company's business is broken down into three segments: Investment
Banking, Capital Markets and Other. Financial information concerning the Company
for the fiscal years ended November 30, 1999, November 30, 1998 and
November 30, 1997, including the amount of net revenue contributed by each
segment in such periods, is set forth in the Consolidated Financial Statements
and the Notes thereto in pages F-3 - F-30 hereof. Information with respect to
the Company's operations by segment and by geographic area is set forth in
Note 12 to the Notes to Consolidated Financial Statements on pages F-29 - F-30
hereof.

INVESTMENT BANKING

Lehman Brothers' Investment Banking professionals are responsible for
developing and maintaining relationships with issuing clients, gaining a
thorough understanding of their specific needs and bringing together the full
resources of Lehman Brothers and Holdings to accomplish their financial
objectives. Investment is organized into industry, geographic and product
coverage groups, enabling individual bankers to develop specific expertise in
particular industries and markets. Global industry coverage groups include
Financial Institutions, Healthcare, Industrial/Consumer, Internet,
Communications/Media, Natural Resources, Power, Real Estate, Retailing and
Technology. Where appropriate, specialized product groups are partnered with the
global industry and geographic groups to provide tailor-made solutions for
Lehman Brothers' clients. These product groups include Equity Capital Markets,
which includes equity and equity-related securities and derivatives, and Fixed
Income Capital Markets, which incorporates expertise in syndicate, liability
management, derivatives, private placements, high yield debt and bank loan
syndication. Geographically, Lehman Brothers maintains investment banking
offices in six cities in the U.S. and in eighteen cities in Europe, the Middle
East, Asia and Latin America. The high degree of integration between the
Company's industry, product and geographic groups has allowed Lehman Brothers to
become a leading source of one stop financial solutions for its global clients.

MERGERS AND ACQUISITIONS/STRATEGIC ADVISORY. 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, restructurings and spin-offs, targeted stock
transactions, share repurchase strategies, takeover defenses, corporate
governance issues and tax optimization strategies.

UNDERWRITING. The Company is a leading underwriter of initial public and
secondary offerings of equity and fixed income securities, including listed and
over-the-counter securities, government and agency securities and mortgage- and
asset-backed securities.

CAPITAL MARKETS

Lehman Brothers combines professionals from the sales, trading and research
areas of its Equities and Fixed Income Divisions, together with investment
bankers, into teams to serve the financial needs of the Company's clients and
customers. The Company's equity expertise and the integrated nature of the
Company's global operations enable Lehman Brothers to structure and execute
global transactions for clients and to provide worldwide liquidity in marketable
securities.

EQUITIES

The Equities group is responsible for the Company's equity operations and
all dollar and non-dollar equity and equity-related products worldwide. These
products include listed and over-the-counter ("OTC") securities, American
Depositary Receipts, convertibles, options, warrants and derivatives. The
Company also actively participates in assisting governments around the world in
raising equity capital as part of their privatization programs.

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EQUITY CASH PRODUCTS. Lehman Brothers makes markets in equity and equity
related securities, and executes block trades on behalf of clients and
customers. The Company participates in the global equity and equity-related
markets in all major currencies through its worldwide presence and membership in
major stock exchanges, including, among others, those in New York, London,
Tokyo, Hong Kong, Frankfurt, Paris and Milan.

EQUITY DERIVATIVES. Lehman Brothers offers equity derivative capabilities
across a wide spectrum of products and currencies, including domestic and
international program trading, listed options and futures and structured
derivatives. The Firm's equity derivatives business is organized into two major
product areas: a global volatility business, encompassing options-related
products, and a global portfolio trading business that specializes in index
arbitrage, agency/risk baskets and other structured products.

EQUITY FINANCE. Lehman Brothers maintains an integrated Equity Financing
and Prime Broker business to provide liquidity to its clients and customers and
supply a source of secured financing for the Firm. Equity Financing provides
financing in all markets on a margin basis for customer purchases of equities
and other capital markets products as well as securities lending and
short-selling facilitation. The Prime Broker business also engages in full
operations, clearing and processing services for that unit's customers.

ARBITRAGE. Lehman Brothers engages in a variety of arbitrage activities
including "riskless" arbitrage, where the Company seeks to benefit from
temporary price discrepancies that occur when a security is traded in two or
more markets and "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. To the extent that these anticipated
transactions do not materialize in a manner consistent with the Company's
expectations, the Company is subject to the risk that the value of these
investments will decline. Lehman Brothers' arbitrage activities benefit from the
Company's presence in the global capital markets, access to advanced information
technology, in-depth market research, proprietary risk management tools and
general experience in assessing rapidly changing market conditions.

FIXED INCOME

Lehman Brothers actively participates in all key fixed income markets
worldwide and maintains a 24-hour trading presence in global fixed income
securities. The Company combines professionals from the distribution, research
and trading areas of the Fixed Income Division, together with investment
bankers, into teams to serve the financial needs of the Company's clients and
customers. The Company is a preeminent market-maker in new issue and other fixed
income securities. The Company's global presence facilitates client and customer
transactions and provides liquidity in marketable fixed and floating rate debt
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, as designated by the Federal
Reserve Bank of New York, participating in the underwriting and market-making of
U.S. Treasury bills, notes and bonds, and securities of federal agencies. The
Company is also a market-maker in the government securities of all G7 countries,
and participates in other major European and Asian government bond markets.

CORPORATE DEBT SECURITIES. Lehman Brothers makes markets in fixed and
floating rate investment grade debt worldwide. The Company is 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 BANK LOANS. The Company also makes markets in
non-investment grade debt securities and bank loans. The Company provides
"one-stop" leveraged financing solutions for

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corporate and financial acquirers and high yield issuers, including
multi-tranche, multiproduct acquisition financing. The Company remains one of
the leading investment banks in the syndication of leveraged loans.

MONEY MARKET PRODUCTS. Lehman Brothers holds leading market positions in
the origination and distribution of medium-term notes and commercial paper. The
Company is an appointed dealer for over 640 active commercial paper programs on
behalf of companies and government agencies worldwide.

MORTGAGE AND ASSET-BACKED SECURITIES. The Company is a leading underwriter
of and market-maker in residential and commercial mortgage- and asset-backed
securities and is active in all areas of secured lending, structured finance and
securitized products. Lehman Brothers underwrites and makes markets in the full
range of U.S. agency-backed mortgage products, mortgage-backed securities,
asset-backed securities and whole loan products. The Firm has expanded its
global activities in the areas of mortgage and asset-backed securities, leases,
mortgages, multi-family financing and commercial loans.

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.

FINANCING. The Company's Financing unit engages in three primary functions:
managing the Company's matched book activities, supplying secured financing to
customers, and providing funding for the Company's activities. 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. The Company enters into these
agreements in various currencies and seeks to generate profits from the
difference between interest earned and interest paid. The Financing unit works
with the Company's 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. Financing also coordinates with the
Company's Treasury area to provide collateralized financing for a large portion
of the Company's securities and other financial instruments owned. In addition
to its activities on behalf of its U.S. clients and customers, the Company is a
major participant in the European and Asian repurchase agreement markets,
providing secured financing for the Firm's customers in those regions.

FIXED INCOME DERIVATIVES. The Company offers a broad range of derivative
product services in all major currencies on a 24-hour-per-day global basis.
Derivatives professionals are integrated into all of the Company's fixed income
areas in response to the worldwide convergence of the cash and derivative
markets.

FOREIGN EXCHANGE. Lehman Brothers' global foreign exchange operations
provide market access and liquidity in all currencies for spot, forward and
over-the-counter options markets on a 24-hour-per-day basis. Lehman Brothers
offers its customers superior execution, market intelligence, analysis and
hedging capabilities, utilizing foreign exchange as well as foreign exchange
options and derivatives. Lehman Brothers also provides advisory services to
central banks, corporations, and investors worldwide, structuring innovative
products to fit their specific needs. The Firm makes extensive use of its
worldwide macroeconomics research to advise clients on the appropriate
strategies to minimize interest rate and currency risk.

GLOBAL DISTRIBUTION

Lehman Brothers' institutional sales organizations encompass distinct global
sales forces that have been integrated into the Fixed Income and Equities
businesses to provide investors with the full array of products and research
offered by the Firm. In addition, during 1999 Lehman Brothers entered into a
strategic alliance with Fidelity Investments that provides access to its retail
brokerage customers and will provide the Firm a distribution channel for new
issue and secondary product to individual investors on-line.

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EQUITY SALES. Lehman Brothers' institutional Equity sales force of over 320
professionals provides an extensive range of services to institutional investors
through locations in the U.S., Europe and Asia. The Equity sales organization
focuses on developing long-term relationships through 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. The Firm's Fixed Income sales force is one of the most
productive in the industry, with approximately 260 professionals in 11 locations
worldwide, serving the investing and liquidity needs of major institutional
investors. Employing a relationship management approach that provides superior
information flow and product opportunities for the Firm's customers, the Fixed
Income sales organization covers the major share of the buying power in the
global fixed income markets.

PRIVATE CLIENT SERVICES

The Company's Private Client Services group of over 320 professionals serves
the investment needs of private investors with substantial assets as well as
over 1,200 mid-sized institutional accounts worldwide. The group has a global
presence with investment representatives located in 12 offices worldwide. Among
other services, investment professionals provide their clients with direct
access to fixed income, equity, foreign exchange and derivative products, as
well as the Firm's research and execution capabilities, thereby serving as a
valuable extension of the Firm's institutional sales force.

RESEARCH

EQUITY RESEARCH. The Equity Research department, comprised of 280
professionals, is integrated with and supports the Company's investment banking,
sales and trading activities. 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. The department follows
more than 1,400 companies in 50 industries worldwide.

FIXED INCOME RESEARCH. Fixed Income research at Lehman Brothers encompasses
the full range of research disciplines: quantitative, economic, strategic,
credit, portfolio, relative value and market-specific analysis. Fixed Income
research is integrated with the Company's investment banking, sales and trading
activities. The department's 300 specialists provide expertise in U.S., European
and Asian government and agency securities, derivatives, sovereign issues,
corporate securities, high yield, asset- and mortgage-backed securities, real
estate, emerging market debt and municipal securities.

OTHER

Other includes the Company's asset management and private equity businesses.

ASSET MANAGEMENT

Asset Management includes Investment Consulting Services, a wrap-fee series
of third party managed product, management of multiple manager funds onshore and
offshore and a managed futures advisory business. The Firm also has dealer
agreements with a large number of mutual fund families.

PRIVATE EQUITY

The Company currently has approximately $1.0 billion in funds under
management.

MERCHANT BANKING. Lehman Brothers' and its affiliates' merchant banking
activities include making principal investments in partnership with clients of
the Firm, and raising capital from institutional and high-net-worth investors
and managing these investments until they are realized. The Firm's Merchant
Banking group has more than 20 dedicated professionals based in New York and
London. Through its merchant banking funds, the Company invests in established
companies worldwide.

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VENTURE CAPITAL. In 1999, the Company continued its venture capital
activities, launching Lehman Brothers Venture Partners L.P. in the second
quarter of 1999, with total capital commitments of $350 million. In addition to
the Firm investing directly in this fund, other investors include third party
clients of Lehman Brothers and key employees of the Firm. The primary investment
objective of Lehman Brothers Venture Capital Partners is to make growth-oriented
equity or equity-related investments in privately held companies. Specifically,
the Venture fund focuses on investing in companies capable of turning innovative
technology and management solutions into successful businesses. Accordingly,
investment preference is not confined to particular industries, but instead to
any industry capable of rapid growth through the provision of innovative
technology and/or services. The Venture Capital Group currently has invested
approximately $130 million in companies across a broad range of industries.
Further information is contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Private Equity" on page 23
hereof.

TECHNOLOGY AND E-COMMERCE

During 1999, considerable technology resources were devoted to addressing
the Year 2000 issue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000" on page 28 hereof.

The Firm has also been committed to developing a technology platform to
deliver a full range of capital markets information and services to its
institutional client base. The Firm-wide E-Commerce Committee, which brings
together senior management from all of the Firm's global business areas, has
developed the Firm's overall e-commerce strategy, approve all e-commerce
investments and provide a forum to share e-commerce knowledge and new
developments across the Firm's businesses and geographies. Lehman Brothers is
implementing a three-part strategy through active investments, joint ventures
and in-house development efforts. Lehman Brothers has made strategic investments
and is a participant in a number of institutional Internet-related securities
dealers and trading networks in the U.S. and Europe, including Redibook, Strike
and NYFIX/Millennium in equity trading and TradeWeb, BrokerTec, EBS and CoreDeal
in fixed income. The Firm has also made strategic acquisitions of and
investments in a number of e-commerce businesses closely related to its own core
businesses.

CORPORATE

The Company's Corporate division provides support to its 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, this staff 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

As a leading global investment banking company, risk is an inherent part of
all of Lehman Brothers' businesses and activities. Lehman Brothers has developed
policies and procedures to identify, measure and monitor each of the various
types of risks involved in its trading, brokerage and investment banking
activities on a global basis. The principal risks involved in Lehman Brothers'
activities are market risk, credit or counterparty risk, liquidity, legal and
operational risks. As part of the Company's customer-flow activities, Lehman
Brothers takes positions in interest rates, foreign exchange, various
securities, derivatives and commodities. Although the Company seeks to mitigate
risk associated with such positions through hedging activities, consistent with
its expectations of future events, it is subject to the risk that actual market
events may differ from the Company's expectations, which may result in
significant losses associated with such positions.

Lehman Brothers has developed a control infrastructure to monitor and manage
each type of risk on a global basis throughout the Company. A full description
of the Firm's Risk Management procedures is contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Management" on pages 25-28 hereof, and is incorporated herein by reference.

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COMPETITION

All aspects of the Company's business are highly competitive. The Company
competes in domestic and international markets directly with numerous other
brokers and dealers in securities and commodities, including online internet,
securities brokerage firms, investment banking firms, investment advisors and
certain commercial banks and, indirectly for investment funds, with insurance
companies and others.

The financial services industry has become considerably more concentrated as
numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. In addition, several small and specialized
securities firms have been successful in raising significant amounts of capital
for their merger and acquisition activities and merchant banking investment
vehicles and for their own accounts. These developments have increased
competition from other firms, many of whom have significantly greater equity
capital than the Company. Recent legislative and regulatory changes in the
United States allow commercial banks to enter businesses previously limited to
investment banks, which may further increase competition.

REGULATION

The securities industry in the United States is subject to extensive
regulation under both federal and state laws. LBI and certain other subsidiaries
of Holdings are registered as broker-dealers and investment advisors with the
Commission and as such are subject to regulation by the Securities and Exchange
Commission (the "SEC") and by self-regulatory organizations, principally the
NASD and national securities exchanges such as the New York Stock Exchange,
which has been designated by the SEC as LBI's primary regulator, and the
Municipal Securities Rulemaking Board. Securities firms are also subject to
regulation by state securities administrators in those states in which they
conduct business. LBI is a registered broker-dealer in all 50 states, the
District of Columbia and the Commonwealth of Puerto Rico. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings, which may result in censure, fine, the issuance of
cease-and-desist orders or suspension or expulsion of a broker-dealer or an
investment advisor, its officers or employees.

LBI is registered with the Commodity Futures Trading Commission (the "CFTC")
as a futures commission merchant and is subject to regulation as such by the
CFTC and various domestic boards of trade and other commodity exchanges. The
Company's U.S. commodity futures and options business is also regulated by the
National Futures Association, a not-for-profit membership corporation which has
been designated as a registered futures association by the CFTC.

The Company believes that it is in material compliance with the regulations
described herein.

CAPITAL REQUIREMENTS

LBI is subject to various securities, commodities and banking regulations
and capital adequacy requirements promulgated by the regulatory and exchange
authorities of the countries in which it operates. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Funding, Capital Resources and Liquidity--Regulatory Capital" on
pages 21-22 hereof, and Note 5 of Notes to Consolidated Financial Statements on
pages F-16 - F-17 hereof.

EMPLOYEES

As of November 30, 1999 LBI employed approximately 7,000 persons. The
Company considers its relationship with its employees to be good.

ITEM 2. PROPERTIES

The Company's headquarters occupy approximately 1.1 million square feet of
space at 3 World Financial Center in New York, New York, which is owned by
Holdings and the Company as

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tenants-in-common with American Express and various other American Express
subsidiaries, and approximately 78,000 square feet of which has been subleased.

Holdings leases approximately 400,000 square feet for offices located at 101
Hudson Street in Jersey City, New Jersey (the "Operations Center"), of which
approximately 67,000 square feet has been subleased. The Operations Center is
used by systems, operations, and certain administrative personnel and contains
certain back-up trading systems. The lease expires in January 2011.

Facilities owned or occupied by the Company and its subsidiaries are
believed to be adequate for the purposes for which they are currently used and
are well maintained.

ITEM 3. LEGAL PROCEEDINGS

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

Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has a meritorious defense and will deny, liability in
all significant cases pending against it including the matters described below,
and intends to defend vigorously each such case. Although there can be no
assurance as to the ultimate outcome, based on information currently available
and established reserves, the Company believes that the eventual outcome of the
actions against it, including the matters described below, will not, in the
aggregate, have a material adverse effect on the consolidated financial
condition of the Company.

BAMAODAH V. E.F. HUTTON & COMPANY INC.

In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc., ("EFH") to recover all losses the Bamaodahs had incurred
since May 1981 in the trading of commodity futures contracts in a
nondiscretionary EFH trading account. The Dubai Civil Court ruled that the
trading of commodity futures contracts constituted illegal gambling under
Islamic law and that therefore the brokerage contract was void. In
January 1987, a judgment was rendered against EFH in the amount of $48,656,000.
On January 5, 1991, the Dubai Court of Appeals affirmed the judgment. On
March 22, 1992, the Court of Cassation, Dubai's highest court, revoked and
quashed the decision of the Court of Appeals and ordered that the case be
remanded to the Court of Appeals for a further review. On April 26, 1994, the
Dubai Court of Appeals again affirmed the judgment of the Dubai Civil Court. The
Company appealed the judgment to the Court of Cassation, which reversed the
Court of Appeals on November 27, 1994 and ordered that a new expert be appointed
to review the case. A new expert was appointed, who returned a report favorable
to EFH. The case has been adjourned to April 23, 2000 for judgment.

ACTIONS RELATING TO FIRST CAPITAL HOLDINGS INC.

Concurrent with the bankruptcy filing of First Capital Holdings ("FCH") in
May, 1991 and the conservatorship and receivership of its two life insurance
subsidiaries, First Capital Life Insurance Company and Fidelity Bankers Life
Insurance Company ("Fidelity Bankers Life"), a number of lawsuits were
commenced, naming one or more of Holdings, LBI and American Express as
defendants. Most of these actions have been subsequently settled and/or
dismissed. The only material matter still pending is described below.

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THE VIRGINIA COMMISSIONER OF INSURANCE ACTION. On December 9, 1992, a
complaint was filed in the United States District Court for the Eastern District
of Virginia (the "Virginia Court") by Steven Foster, the Virginia Commissioner
of Insurance (the "Commissioner") as Deputy Receiver of Fidelity Bankers Life.
The Complaint named Holdings and Robert I. Weingarten, Gerry R. Ginsberg and
Leonard Gubar, former directors of FCH and Fidelity Bankers Life, as defendants.
The Complaint alleged that Holdings acquiesced in and approved the continued
mismanagement of Fidelity Bankers Life and that it participated in directing the
investment of Fidelity Bankers Life assets. The complaint asserted claims
against Holdings under the federal securities laws and common law claims
including fraud, negligence and breach of fiduciary duty and alleged violations
of the Virginia Securities Act. It sought no less than $220 million in damages
to Fidelity Bankers Life and its present and former policyholders and creditors
and punitive damages. On May 21, 1998, after trial, the Court entered a Judgment
Order in accord with the jury verdict, ordering that the plaintiffs recover
nothing and dismissing the complaint. On July 7, 1998, the Commissioner filed a
Notice of Appeal to the United States Court of Appeals for the Fourth Circuit
from the Judgment Order. The appeal was argued in January, 2000.

ACTIONS RELATING TO THE SALES AND MARKETING OF LIMITED PARTNERSHIPS

Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify Holdings for liabilities which it may
incur in connection with any action relating to any business conducted by The
Balcor Company, a former Lehman Brothers subsidiary ("Balcor"), in which
Holdings is named as a parent company or control person of Balcor. Holdings
believes that some of the allegations in the action described below are covered
by this indemnity.

BRUSS, ET AL. V. LEHMAN BROTHERS INC., ET AL. On January 25, 1999 a
purported class action complaint was filed in the Superior Court of New Jersey,
Law Division: Essex County on behalf of investors in certain specified limited
partnerships sponsored by Balcor and sold by various entities, including, among
others, Shearson and certain of its affiliates. After dismissal of Plaintiffs'
original complaint in September, 1999, Plaintiffs filed an amended complaint on
November 30, 1999. That complaint names as defendants LBI, various affiliates of
LBI, Smith Barney Holdings, Inc., Balcor, a number of Balcor-originated limited
partnerships and an individual and entities affiliated with Balcor. The
complaint alleges claims in connection with the marketing, sale and operation of
the limited partnerships for common law fraud and deceit, equitable fraud,
negligent misrepresentation, and violation of certain New Jersey statutes
relating to the sale of securities. The complaint seeks compensatory damages for
lost principal and interest, general damages and punitive damages, and costs and
attorneys' fees. LBI has moved to dismiss the amended complaint.

LEHMAN BROTHERS COMMERCIAL CORPORATION AND LEHMAN BROTHERS SPECIAL
FINANCING INC. V. MINMETALS INTERNATIONAL NON-FERROUS METALS TRADING COMPANY

On November 15, 1994, two Lehman Brothers subsidiaries, Lehman Brothers
Commercial Corporation ("LBCC") and Lehman Brothers Special Financing Inc.
("LBSF"), commenced an action against Minmetals International Non-Ferrous Metals
Trading Company ("Minmetals") and China National Metals and Minerals Import and
Export Company ("CNM") in the United States District Court for the Southern
District of New York alleging breach of contract against Minmetals and breach of
guarantee against CNM. The litigation arose from the refusal by Minmetals and
CNM to honor their obligations with respect to certain foreign exchange and swap
transactions. LBCC and LBSF seek to recover approximately $52.5 million from
Minmetals and/or CNM. On June 26, 1995, the court granted CNM's motion to
dismiss the claims against it, but also granted LBCC and LBSF leave to replead.
Minmetals filed fourteen counterclaims against Lehman entities based on
violations of federal securities and commodities laws and rules, and theories of
fraud, breach of fiduciary duty and conversion. On June 24, 1996, the court
granted the motion of LBCC and LBSF to file an amended complaint naming CNM as
an additional defendant. Discovery is complete, and summary judgment motions are
pending before the court.

10
<PAGE>
AIA HOLDING SA ET AL. V. LEHMAN BROTHERS INC. AND BEAR STEARNS & CO., INC.

On July 9, 1997, LBI was served with a complaint in the U.S. District Court
for the Southern District of New York in which 277 named plaintiffs assert 24
causes of action against LBI and Bear Stearns & Co., Inc. The amount of damages
claimed is unspecified. The claims arise from the activities of an individual
named Ahmad Daouk, who was employed by an introducing broker which introduced
accounts to Shearson Lehman Hutton between 1988 and 1992. Daouk allegedly
perpetrated a fraud upon the claimants, who are mostly investors of Middle
Eastern origin, and the complaint alleges that Shearson breached various
contractual and common law duties owed to the investors. On March 27, 1998, the
District Court dismissed without prejudice 18 of the 24 counts pleaded in the
complaint. On July 3, 1998 the plaintiffs served their First Amended Complaint
containing 18 causes of action against LBI and/or Bear Stearns. The Court has
ordered the plaintiffs divided into 14 groups of 20 for trial purposes. The
first trial is scheduled to commence in the third quarter of 2000.

ACTIONS RELATING TO BRE-X MINERALS LTD.

MCNAMARA ET AL. V. BRE-X MINERALS LTD. ET AL. On July 25, 1997, an Amended
Class Action Complaint was filed in the United States District Court for the
Eastern District of Texas against 16 defendants, including LBI, which seeks
unspecified compensatory damages, interest, costs and attorney's fees on behalf
of purchasers of Bre-X common stock and/or Bresea common stock. The Complaint
raises claims under the federal securities laws and the common law of fraud and
negligent misrepresentation. The Complaint's stated basis for naming LBI is that
one of its securities analysts published research on Bre-X. On January 6, 1999,
the Court issued an order dismissing the claims of Canadian plaintiffs who
bought their shares on Canadian exchanges. On July 13, 1999, the District Court
issued an opinion dismissing the case against LBI and certain other defendants.
The court allowed the plaintiffs to file a Third Amended Complaint, which was
filed on August 19, 1999. On September 17, 1999, LBI moved to dismiss it. That
motion is pending.

KLAASEN V. LEHMAN BROTHERS INC. ET AL. On October 2, 1997, William L.
Klaasen, "individually and for all those similarly situated within the State of
California," filed a Complaint against LBI in the Superior Court for the State
of California in and for the County of San Diego. The Complaint raises a claim
for common law negligence, and seeks, on behalf of California purchasers of
Bre-X and Bresea stock, class certification, rescission, interest, compensatory
and punitive damages, disgorgement and restitution of profits and compensation
received by LBI, and costs. The action is currently stayed by consent until
determination of the Motion to Dismiss in the MCNAMARAcase referred to above.

CHOW ET AL. V. BRE-X MINERALS LTD. ET AL. On October 10, 1997, 125 named
plaintiffs filed an action in the Court of Queen's Bench of Alberta, in Calgary,
Canada, against 35 named defendants, including LBI. Plaintiffs' claim against
LBI, which has not yet been served, is for common law negligence.

IN RE MOBILEMEDIA SECURITIES LITIGATION

LBI was named as a defendant in several purported class actions filed in
December, 1996 in the United States District Court for the District of New
Jersey in connection with (I) a November 7, 1995 offering of common stock of
MobileMedia Corporation; and (ii) a November 7, 1995 offering of 9 3/8% senior
subordinated notes of MobileMedia Communications Inc. due in 2007. On
November 3, 1997, a consolidated amended class action complaint was filed naming
certain of MobileMedia Corporation's officers and directors and the four co-lead
underwriters of these offerings, including LBI. MobileMedia filed for Chapter 11
bankruptcy protection on January 30, 1997, and therefore was not named as a
defendant. The complaint alleged that the underwriters violated Sections 11 and
12 of the Securities Act. Plaintiffs sought rescission and unspecified
compensatory damages. On February 7, 2000, the Court orally approved a
settlement of the action and indicated that it would enter a Final Judgment and
Order upon presentation by the parties.

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<PAGE>
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, three class actions were filed in the United
States District Court for the Southern District of New York against in excess of
25 underwriters of IPO securities, including LBI. Plaintiffs in these cases seek
compensatory 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 supracompetitive levels. On
March 15, 1999, plaintiffs filed a Consolidated Amended Complaint.

CORPORACION NACIONAL DEL COBRE DE CHILE V. LEHMAN BROTHERS INC., LEHMAN BROTHERS
COMMERCIAL CORP., LEHMAN BROTHERS COMMODITIES LTD. AND LEHMAN BROTHERS
HOLDINGS INC.

On August 25, 1999, Corporacion Nacional del Cobre de Chile ("Codelco")
filed its Second Amended Statement of Claim against Holdings and certain of its
subsidiaries in a proceeding before the American Arbitration Association. In
connection with the metals trading conducted by Codelco's chief metals trader,
Juan Pablo Davila, the Second Amended Statement of Claim asserts the following
claims against Lehman Brothers: common law fraud, aiding and abetting fraud,
breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, breach
of contract, and breach of duty of good faith and fair dealing. By order dated
November 8, 1999, the arbitration panel dismissed the breach of contract claims
against Lehman Brothers Commodities Ltd. and Holdings. The Second Amended
Statement of Claim seeks damages in the amount of $48 million for Codelco's
alleged trading losses with Lehman Brothers, plus punitive damages, costs and
attorneys' fees.

PAMAHI INVESTMENT CORP., ET AL. V. LEHMAN BROTHERS INC., ET AL.

In July 1999, Pamahi Investment Corp. and eight other sets of claimants
filed an arbitration claim before the National Association of Securities
Dealers, naming as respondents LBI and two of its former brokers and a former
branch manager from its Santiago, Chile office. The claim alleges that
respondents sold unsuitable, unauthorized and/or misrepresented securities in
the form of emerging markets bonds, structured notes and subordinated notes.
Claimants seek compensatory damages of $31.6 million, plus punitive damages,
interest, and attorneys' fees and costs. Claimants voluntarily dismissed the two
former brokers. LBI and its former branch manager answered, moved to sever the
arbitration into a separate case for each set of claimants, and filed certain
counterclaims and third-party claims.

MEXPO, S.A. V. LEHMAN BROTHERS INC., ET AL.

In August 1999, Mexpo, S.A. filed an arbitration claim with the National
Association of Securities Dealers, naming as respondents LBI, Lehman Brothers
International (Europe), Lehman Brothers Securities, Holdings, and Lehman
Brothers Global Finance Limited. Mexpo alleges that respondents engaged in
unauthorized transactions, made unsuitable recommendations, failed to follow
client instructions and engaged in deceptive conduct in connection with Mexpo's
trading in emerging markets bonds, structured notes and other securities. The
legal claims asserted by Mexpo include various common law contractual and tort
claims as well as alleged violations of federal securities and commodities laws.
Mexpo seeks $28 million in compensatory damages, plus punitive damages,
interest, attorneys' fees and costs.

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

Pursuant to General Instruction I of Form 10-K, the information required by
Item 4 is omitted.

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<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of the outstanding common stock of the Company is owned by Holdings.

ITEM 6. SELECTED FINANCIAL DATA

Pursuant to General Instruction I of Form 10-K, the information required by
Item 6 is omitted.

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

Set forth on the following pages is Management's Discussion and Analysis of
Financial Condition and Results of Operations for the twelve months ended
November 30, 1999, November 30, 1998 and November 30, 1997. Such information
should be read in conjunction with the Consolidated Financial Statements of the
Registrant and its Subsidiaries together with the Notes thereto contained on
pages F-1 to F-30 hereof.

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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

BUSINESS ENVIRONMENT

The principal business activities of Lehman Brothers Inc., a registered
broker dealer with the U.S. Securities and Exchange Commission ("LBI"), and its
subsidiaries (collectively, the "Company" or "Lehman Brothers") are investment
banking and securities sales and trading, which by their nature are subject to
volatility, primarily due to changes in interest and foreign exchange rates and
security valuations, global economic and political trends and industry
competition. As a result, revenues and earnings may vary significantly from
quarter to quarter and from year to year. LBI is a wholly-owned subsidiary of
Lehman Brothers Holdings Inc. ("Holdings").

Economic growth in the United States remained very strong at the beginning
of 1999, and led to a sharp rise in U.S. bond yields, notwithstanding successive
external trade and financial shocks in many developing countries. While wage and
price inflation continued to be low, the risk of rising inflationary pressures,
emanating from a tightening labor market, caused the Federal Reserve to raise
the Federal Funds rate three times, each by 25 basis points, on June 30,
August 24, and November 16, 1999. Mounting evidence of the persistent strength
of economic growth triggered a rise in ten-year Treasury yields of approximately
1.5 percentage points over the year, to 6.2% at the end of November. Real Gross
Domestic Product growth ended the year at a stronger level than it had begun,
increasing to 5.7% in the third and fourth quarter of 1999 from 4.0% for all of
1998.

Unlike conditions in the U.S., European growth weakened in late 1998, as
consumer demand failed to offset fully the effects of a growing trade imbalance.
However, by the end of 1999, the overall European economy was clearly showing
improvement. In the euro area, official interest rates were cut in
December 1998 and the European Central Bank's key repo rate was cut by a further
50 basis points to 2.5% on April 8. For several months thereafter, European bond
yields remained within a narrow trading range. However, by May, the rise in U.S.
Treasury yields, combined with increasing evidence of a strong cyclical
recovery, led to a rise in European yields. By the end of November, the ten-year
German government bond yield had risen 1.1 percentage points to 5.1%. On
November 4, the European Central Bank, in a move acknowledging the improved
economic outlook, raised the key repo rate back to 3%. As the year ended, the
European economy was growing at an annualized rate of approximately 4%.

The recovery from the credit crisis of 1998 buoyed the U.S. equity markets
in 1999. The S&P 500 index was up 19% for the fiscal year ended November 30,
1999. Technology stocks were in the forefront, and the NASDAQ index was up an
even more impressive 71%. Increasingly, technology stocks continued to drive the
performance of U.S. equity markets as they captured a bigger share of the
market. While benchmark 30 year treasury bond yields correspondingly rose from
5% to 6 1/4%, causing negative returns in the bond market, the equity markets
benefited from good earnings growth and, among the major industry

14
<PAGE>
sectors, expansion in price to earnings multiples as well. Performance, however,
was narrow with the Technology sector performing the best among the major
industry sectors. A large number of Internet stocks had their initial public
offerings during the year and many of these were among the top performers during
the year. The first two Internet stock additions to the S&P 500 were also
announced during the year: America Online and Yahoo! Moreover, Microsoft and
Intel were added to the Dow Jones Industrial Average in 1999.

Non-U.S. stock markets also generated strong returns in the 12 months ended
November 30, 1999, outperforming U.S. equities in local currency terms. Despite
a correction during the third quarter, European equities returned 22% (FT/S&P
Europe), underpinned by the recovery in economic activity across the region,
combined with an accommodative monetary stance. Trading volumes were little
changed from the previous year, but there was a sharp acceleration in European
merger and acquisition activity, with the number of corporate deals in
continental Europe increasing by over 35% in 1999.

Corporate Finance Advisory activities on a global basis continued at record
levels in 1999. Industrywide, the volume of announced transactions soared to
$3.7 trillion. Fiscal 1999 also reflected a steady advance of merger and
acquisition activity involving European companies and cross-border mergers and
acquisitions. Merger and acquisition activities continued to reflect the trends
of consolidation, deregulation and globalization across industry sectors and
across borders.

RESULTS OF OPERATIONS

SUMMARY For 1999, the Company reported record net revenues and net income.
Net income of $696 million increased 21% over 1998. These results reflect the
continued successful execution of the Company's strategy to grow its high margin
investment banking and equities businesses and maintain a strict discipline with
regard to its expenses. The Company's strategy is based on the belief that:
(1) these businesses generate higher returns on equity because they are less
capital intensive; and (2) their rapid growth accelerates the Company's overall
rate of growth; and 3) they help reduce earnings volatility by diversifying the
Company's revenue base.

The Company reported net income of $575 million for 1998. This result was
built on the strong foundation for growth and profitability established in
earlier years and demonstrates the impact of the Company's strategy to grow its
high margin businesses within investment banking, equities, certain fixed income
products and the high-net-worth retail business. The Company's shift in revenue
mix in favor of these high margin businesses resulted in a more diversified
revenue base and helped increase the Company's operating margin to 29.5% in 1998
from 22.8% in 1997. Also contributing to these record results was the Company's
continued aggressive management of expenses.

For 1997, the Company reported net income of $391 million which was driven
by continued strength in the Company's major businesses including equities and
investment banking. The Company began to realize the benefits associated with
its strategy to grow certain high margin businesses. These results were achieved
in worldwide markets, which were extremely favorable during the early portion of
the year and became volatile in the latter portion of the year.

NET REVENUES Net revenues reached record levels in each of the past three
years and were $3,487 million for 1999, $2,871 million for 1998 and
$2,601 million for 1997. During 1999, the Company continued to execute its
growth strategy. For 1999, combined equities and banking revenues comprised 65%
of total net revenues compared to 58% in 1998. The increase in net revenues was
driven by an increase in equity and debt underwriting as well as significant
growth in institutional customer flow activities.

In 1998, the increase in net revenues from 1997 levels reflected the
Company's continued execution of its long-term strategy of growing high margin
businesses, such as investment banking, certain fixed income products and
private client services. The increase in net revenues in 1997 reflected an
increase in all of the

15
<PAGE>
major business units over the prior year led by increased customer flow
activity, a strong global market for mergers and acquisitions and increased
levels of worldwide debt and equity underwriting.

Lehman Brothers concentrates on serving the needs of major issuing and
advisory clients and investing customers worldwide to build an increasing flow
of business that leverages the Company's research, underwriting and distribution
capabilities. This "Customer flow" business continues to be the primary source
of the Company's net revenues. In addition to its customer flow activities, the
Company also takes proprietary positions based upon expected movements in
interest rate, foreign exchange, equity and commodity markets in both the
short-and long-term. The Company's success in this area is dependent upon its
ability to anticipate economic and market trends and to develop trading
strategies that capitalize on these anticipated changes. The Company believes
its customer flow orientation has historically mitigated the level of net
trading revenue volatility.

As part of its market-making activities, the Company maintains inventory
positions of varying amounts across a broad range of financial instruments,
which are marked-to-market on a daily basis and, along with the Company's
proprietary trading positions, give rise to principal transactions revenues.

Net revenues from the Company's market-making, sales and trading activities
in the capital markets are recognized as either principal transactions,
commissions or net interest revenues, depending upon the method of execution,
financing and/or hedging related to specific inventory positions. The Company
evaluates its sales and trading strategies on an overall profitability basis,
which combines principal transactions revenues, commissions and net interest.

In the following tables, the Company has been segregated into three business
segments, which are described below: Investment Banking, Capital Markets and
Other. Each segment represents a grouping of activities and products with
similar characteristics. These business activities result in revenues from both
institutional and high-net-worth retail clients and are recognized in multiple
revenue categories contained in the Company's Consolidated Statement of Income.
(Net revenues by segment contain certain internal allocations, including funding
costs, which are centrally managed.)

TWELVE MONTHS ENDED NOVEMBER 30, 1999

<TABLE>
<CAPTION>
PRINCIPAL TRANSACTIONS,
COMMISSIONS AND
NET INTEREST INVESTMENT BANKING OTHER TOTAL
----------------------- ------------------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Investment Banking........................ $1,252 $1,252
Capital Markets........................... $2,225 $ 5 2,230
Other..................................... (7) 12 5
------ ------ ----- ------
Total..................................... $2,225 $1,245 $ 17 $3,487
====== ====== ===== ======
</TABLE>

TWELVE MONTHS ENDED NOVEMBER 30, 1998

<TABLE>
<CAPTION>
PRINCIPAL TRANSACTIONS,
COMMISSIONS AND
NET INTEREST INVESTMENT BANKING OTHER TOTAL
----------------------- ------------------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Investment Banking........................ $1,196 $1,196
Capital Markets........................... $1,573 $ 7 1,580
Other..................................... 60 35 95
------ ------ ----- ------
Total..................................... $1,573 $1,256 $ 42 $2,871
====== ====== ===== ======
</TABLE>

16
<PAGE>
TWELVE MONTHS ENDED NOVEMBER 30, 1997

<TABLE>
<CAPTION>
PRINCIPAL TRANSACTIONS,
COMMISSIONS AND
NET INTEREST INVESTMENT BANKING OTHER TOTAL
----------------------- ------------------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Investment Banking........................ $867 $ 867
Capital Markets........................... $1,573 $ 5 1,578
Other..................................... 131 25 156
------ ---- ----- ------
Total..................................... $1,573 $998 $ 30 $2,601
====== ==== ===== ======
</TABLE>

The following discussion provides an analysis of the Company's net revenues
based upon the various segments that generated these revenues.

INVESTMENT BANKING This segment's net revenues result from fees earned by
the Company for underwriting public and private offerings of fixed income and
equity securities, raising capital and advising clients on merger and
acquisition activities and other services. Investment Banking's net revenues
increased to $1,252 million in 1999 from $1,196 million in 1998, and from
$867 million in 1997, principally as a result of an increase in equity and
investment grade debt underwriting. The increased revenues reflect the Company's
ongoing efforts to grow its Investment Banking franchise. In 1999, the Company
was able to integrate its expertise in debt and equity underwriting as well as
financial advisory to complete several significant multiple product transactions
for key clients. During 1999, Holdings and its subsidiaries also met a key
strategic initiative in improving its ranking in lead-managed initial public
offerings to fifth from fourteenth in 1998.

INVESTMENT BANKING NET REVENUES:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Equity Underwriting......................................... $ 316 $ 259 $282
Debt Underwriting........................................... 579 511 338
Financial Advisory.......................................... 357 426 247
------ ------ ----
$1,252 $1,196 $867
</TABLE>

The increase in revenues in Investment Banking in 1998 from 1997 reflected a
significant increase in financial advisory fees driven by the Company's decision
to invest additional resources in this business as well as continued strength in
the overall merger and acquisition market environment. In addition, the Company
benefited from improved performance in high yield syndicate activity, driven by
the increased volume of lead managed underwritings in this area.

CAPITAL MARKETS This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to a broad
spectrum of fixed income and equity products. These products include dollar and
non-dollar government securities, mortgages, mortgage-and asset-backed
securities, money market products, dollar and non-dollar corporate debt
securities, emerging market securities, municipal securities, foreign exchange,
fixed income and equity related derivatives, convertible securities and common
and preferred equity securities.

Capital Markets' revenues were $2,230 million for 1999, $1,580 million for
1998 and $1,578 million for 1997. The 41% increase in revenues in 1999 is
attributable to significantly increased institutional customer flow activity
across most equity and fixed income products. Revenues remained relatively flat
in 1998 from 1997 due to the volatile market conditions experienced late in the
year.

17
<PAGE>
CAPITAL MARKETS NET REVENUES:

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Equities.................................................... $1,029 $ 465 $ 492
Fixed Income................................................ 1,201 1,115 1,086
------ ------ ------
$2,230 $1,580 $1,578
</TABLE>

Revenues from the equity component of Capital Markets more than doubled to
$1,029 million in 1999 from $465 million in 1998. Revenues benefited in 1999
from significantly increased institutional customer flow activity in cash and
derivative products as well as contributions from the equity arbitrage business.

Revenues from the fixed income component of Capital Markets increased to
$1,201 million in 1999 from $1,115 million in 1998. The increase in revenues in
1999 was primarily driven by strong institutional customer flow activity and
improved trading results across a wide range of products, especially mortgages,
governments and derivatives.

OTHER Other revenues reflect earnings from the Company's asset management
and private equity businesses. Other revenues were $5 million in 1999,
$95 million in 1998, and $156 million in 1997. Private equity revenues have
decreased over the past several years due to a reduction in realized gains and
incentive fees from the liquidation of private equity investments.

NON-INTEREST EXPENSES

Non-interest expenses were $2,474 million, $2,024 million and
$2,008 million for 1999, 1998 and $1997, respectively. The increase in 1999 was
primarily attributable to higher compensation and benefit costs associated with
higher revenues, as well as, an increase in net management fees paid to
affiliates. These fees increased as a result of relatively lower volume of
business transacted on behalf of other Holdings' affiliates, as well as, higher
business transacted by other Holdings' affiliates on behalf of the Company. The
decrease in management fees in 1998 was a result of reduced affiliate activities
on behalf of LBI, as well as, increased Company activities on behalf of
affiliates.

INCOME TAXES

The Company had an income tax provision of $317 million, $272 million and
$202 million for 1999, 1998 and 1997, respectively. The effective tax rates for
the Company were 31% for 1999, 32% for 1998 and 34% for 1997. The decrease in
the effective tax rate relates primarily to an increase in income and
transactions that are subject to preferential tax treatment and a favorable
change in the geographic mix of earnings.

The Company's net deferred tax assets increased by $11 million to
$118 million at November 30, 1999 from $107 million at November 30, 1998.
Additional information about the Company's deferred tax assets can be found in
Note 7 to the Consolidated Financial Statements (Income Taxes).

FUNDING, CAPITAL RESOURCES AND LIQUIDITY

FUNDING AND CAPITAL POLICIES The Company's Finance Committee is responsible
for establishing and managing the funding and liquidity policies of the Company.
These policies include recommendations for capital and balance sheet size as
well as the allocation of capital and balance sheet to product areas. Members of
the Company's treasury department and business unit financing groups work with
the Finance Committee to ensure coordination of global funding efforts and
implementation of the funding and liquidity policies. Regional asset and
liability committees in the Company's principal operating centers are
responsible for implementing funding strategies for their respective regions.

18
<PAGE>
The primary goal of the Company's funding policies is to provide sufficient
liquidity and availability of funding sources to meet the needs of the Company's
businesses. The key elements of these policies are to:

(1) Maintain a Total Capital structure that supports the business activities
in which the Company is engaged.

The Company manages Total Capital, defined as long-term debt and
stockholder's equity, on a business and product level. The determination of the
amount of Total Capital assigned to each business and product is a function of
asset quality, market risk, liquidity and regulatory capital requirements. The
Company reallocates its capital to businesses based upon their ability to obtain
targeted returns, perceived opportunities in the marketplace and the Company's
long-term strategy. The Company maintains sufficient Total Capital to meet its
anticipated long-term capital needs which are driven by cash capital
(liquidity), regulatory capital and market and credit risk requirements.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
TOTAL CAPITAL
<S> <C> <C>
In Billions ($)
LTD Stockholders E
1997 4.542 2.011
1998 4.279 2.528
1999 3.959 3.103
</TABLE>

(2) Finance the Company's assets, primarily on a secured basis.

The Company maintains a market leadership position in repurchase and reverse
repurchase financing, which is underscored by its success in developing all
forms of secured funding.

Together with Total Capital, secured funding provides a stable funding base
and enables the Company to minimize its reliance on short-term unsecured debt.
The Company continually reviews its mix of long- and short-term borrowings as it
relates to maturity matching and the availability of secured and unsecured
financing. To the extent practicable, the Company seeks to maximize its use of
secured funding. Inventories and other short-term assets are financed primarily
with a combination of secured funding, long-term debt and stockholders' equity.
Where the Company deems it to be appropriate, foreign currency denominated
assets are financed with corresponding foreign currency denominated liabilities.
In general, the Company finances its equity investments in its subsidiaries with
stockholder's equity and the subordinated capital of subsidiaries is financed
with a combination of subordinated and senior long-term debt.

(3) Maintain funding availability in excess of actual utilization and obtain
diversified funding through a global investor base which increases liquidity and
reduces concentration risk.

The Company maintains sizable uncommitted credit facilities from a broad
range of banks and financial institutions from which it draws funds in a variety
of currencies and which provide an additional source of liquidity. Uncommitted
credit facilities consist of facilities that the Company has been advised are
available but for which no contractual lending obligations exist. Additionally,
the Company maintains secured and unsecured committed revolving credit
facilities as discussed in the following section.

19
<PAGE>
The Company obtains global funding from both the banking community and
short-and long-term investors. In addition to maintaining geographic
diversification, the Company also utilizes a broad range of debt instruments,
which it issues in varying maturities and currencies.

The Company issues both commercial paper and other short-term debt
instruments, including master notes, and bank borrowings under uncommitted lines
of credit and other uncommitted arrangements. To reduce liquidity and
concentration risk, the Company limits its exposure to any single investor.

(4) Maintain sufficient financial resources to enable the Company to meet
its obligations in periods of financial stress, defined as any event that
severely constrains the Company's access to unsecured funding sources.

To achieve this objective, the Company maximizes its use of global
collateralized borrowing sources. In addition, the Company has increased Total
Capital providing additional liquidity to cover periods of financial stress and
further advance the Company's liquidity management objectives. As such, the
Company minimizes its reliance upon short-term unsecured borrowings. Lastly, the
Company periodically tests its secured and unsecured credit facilities to ensure
availability and operational readiness. These policies position the Company to
meet its liquidity requirements in all periods including those of financial
stress.

TOTAL CAPITAL During 1999, the Company continued to increase its capital
base. Total Capital was $7.1 billion at November 30, 1999, 4% higher when
compared to $6.8 billion at November 30, 1998. The net increase in Total Capital
during 1999 resulted from the retention of net earnings offset by a decrease in
long-term debt.

<TABLE>
<CAPTION>
NOVEMBER 30
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
LONG-TERM DEBT
Senior Notes.............................................. $ 186 $ 168 $ 229
Subordinated Indebtedness................................. 3,773 4,111 4,313
------ ------ ------
3,959 4,279 4,542

STOCKHOLDER'S EQUITY........................................ 3,103 2,528 2,011
------ ------ ------
TOTAL CAPITAL............................................... $7,062 $6,807 $6,553
------ ------ ------
</TABLE>

During 1999, the Company issued $200 million and repaid $560 million of
long-term debt. Long-term debt had a weighted-average maturity of 4.8 years at
November 30, 1999 and 4.6 years at November 30, 1998.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

20
<PAGE>
At November 30, 1999, the Company had approximately $1.8 billion available
for the issuance of debt securities under various shelf registrations and debt
programs.

SECURED FUNDING The Company strives to maximize the portion of the
Company's balance sheet that is funded on a secured basis. Secured funding
includes securities and other financial instruments sold but not yet purchased,
as well as collateralized short-term financings, defined as securities sold
under agreements to repurchase ("repos") and securities loaned. Because of their
secured nature, OECD government repos and other investment grade types of
collateralized borrowings are less credit-sensitive and have historically been a
stable financing source irrespective of market conditions. At November 30, 1999
and 1998, $101 billion and $80 billion, respectively, of the Company's total
balance sheet of $139 billion and $121 billion at November 30, 1999 and 1998,
respectively, were financed using collateralized borrowing sources.

By maximizing its use of secured funding, the Company minimizes its reliance
on unsecured funding. As of November 30, 1999 and 1998, short-term debt
outstanding was $615 million and $616 million, respectively. There was no
commercial paper outstanding as of November 30, 1999 or 1998.

BALANCE SHEET The Company's total assets increased to $139 billion at
November 30, 1999 from $121 billion at November 30, 1998. The Company's adjusted
total assets, defined as total assets less the lower of securities purchased
under agreements to resell or securities sold under agreements to repurchase
were $78 billion at November 30, 1999 compared to $73 billion at November 30,
1998. The Company believes adjusted total assets is a more effective measure of
evaluating balance sheet usage when comparing companies in the securities
industry. The increase in adjusted total assets reflects increases in government
and agency and corporate equity inventory levels associated with expanded
customer flow activities. The remaining increase in total assets was driven by a
higher level of secured customer financing activities.

The Company's balance sheet consists primarily of cash and cash equivalents,
securities and other financial instruments owned, and collateralized short-term
financing agreements. The liquid nature of these assets provides the Company
with flexibility in financing and managing its business. The majority of these
assets are funded on a secured basis through collateralized short-term financing
agreements with the remaining assets being funded through short-term unsecured
financing and Total Capital, defined as long-term debt and stockholder's equity.

CREDIT RATINGS The Company, like other companies in the securities
industry, relies on external sources to finance a significant portion of its
operations. The Company's access to and cost of funding is generally dependent
upon its short- and long- term debt ratings. On August 5, 1999, Moody's upgraded
LBI's senior debt from (P)A3 to (P)A2, its subordinated debt from Baa1 to A3 and
its commercial paper from Prime-2 to Prime-1. As of November 30, 1999 the short-
and long-term debt ratings of LBI were as follows:

<TABLE>
<CAPTION>
LBI
------------------------
SHORT-TERM LONG-TERM**
---------- -----------
<S> <C> <C>
Duff & Phelps Credit Rating Co. ...................... D-1 A/A-
Fitch IBCA, Inc. ..................................... F-1 A/A-
Moody's P-1 A2*/A3
Standard & Poor's Corp................................ A-1 A+*/A
Thomson BankWatch..................................... TBW-1 A+/A
</TABLE>

- ------------------------

* Provisional ratings on shelf registration

** Senior/subordinated

REGULATORY CAPITAL LBI, as a registered broker-dealer, is subject to the
Securities and Exchange Commission ("SEC") Rule 15c3-1, the Net Capital Rule,
which requires LBI to maintain net capital of not

21
<PAGE>
less than the greater of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds required to be segregated for
customers' regulated commodity accounts, as defined. At November 30, 1999, LBI's
regulatory net capital, as defined, of $1,563 million exceeded the minimum
requirement by $1,457 million.

In addition to amounts presented in the accompanying Consolidated Statement
of Financial Condition as cash and securities segregated and on deposit for
regulatory and other purposes, securities with a market value of approximately
$1,245 million and $1,332 million at November 30, 1999 and 1998, respectively,
primarily collateralizing securities purchased under agreements to resell, have
been segregated in a special reserve bank account for the exclusive benefit of
customers pursuant to the Reserve Formula requirements of SEC Rule 15c3-3.

The Company's "AAA" rated derivatives subsidiaries, LBFP and LBDP, have
established certain capital and operating restrictions which are reviewed by
various rating agencies. At November 30, 1999, LBFP and LBDP each had capital
which exceeded the requirement of the most stringent rating agency by
approximately $12 million and $16 million, respectively.

Repayment of subordinated indebtedness and certain advances and dividend
payments by LBI are restricted by the regulations of the SEC and other
regulatory agencies. At November 30, 1999, $2,666 million of net assets of the
Company were restricted as to the payment of dividends, principally as a result
of regulations of the SEC and other regulatory agencies. In addition, certain
covenants governing the indebtedness of LBI contractually limit its ability to
pay dividends.

HIGH YIELD SECURITIES The Company underwrites, trades, invests and makes
markets in high yield corporate debt securities. The Company also syndicates,
trades and invests in loans to below investment grade-rated companies. For
purposes of this discussion, high yield debt instruments are defined as
securities or loans to companies rated BB+ or lower, or equivalent ratings by
recognized credit rating agencies, as well as non-rated securities or loans
which, in the opinion of management, are non-investment grade. Non-investment
grade securities generally involve greater risks than investment grade
securities due to the issuer's creditworthiness and the liquidity of the market
for such securities. In addition, these issuers have higher levels of
indebtedness, resulting in an increased sensitivity to adverse economic
conditions. The Company recognizes these risks and aims to reduce market and
credit risk through the diversification of its products and counterparties. High
yield debt instruments are carried at market value, and unrealized gains or
losses for these securities are reflected in the Company's Consolidated
Statement of Income. The Company's portfolio of such instruments at
November 30, 1999 and 1998 included long positions with an aggregate market
value of approximately $1.3 billion and $1.2 billion, respectively, and short
positions with an aggregate market value of approximately $177 million and
$200 million, respectively. The Company may, from time to time, mitigate its net
exposure to any single issuer through the use of derivatives and other financial
instruments.

The Company, through its high grade and high yield sales, trading and
underwriting activities, makes commitments to extend credit in loan syndication
transactions and then participates out a significant portion of these
commitments. The Company had lending commitments to high grade borrowers of
$2.8 billion and $610 million at November 30, 1999 and 1998, respectively. In
addition, lending commitments to high yield borrowers totaled $903 million and
$1.5 billion at November 30, 1999 and 1998, respectively. All of these
commitments and any related draw downs of these facilities are typically secured
against the borrower's assets, have fixed maturity dates and are generally
contingent upon certain representations, warranties and contractual conditions
applicable to the borrower. Total commitments are not indicative of actual risk
or funding requirements as the commitments may not be drawn or fully utilized
and the Company will continue to syndicate and/or sell these commitments.

In addition to these specific commitments, the Company had various other
commitments of approximately $300 million and $305 million at November 30, 1999
and 1998, respectively.

22
<PAGE>
PRIVATE EQUITY The Company's private equity activities include investments
in seven merchant banking and venture capital related partnerships, for which
the Company acts as general partner, as well as direct investments. At
November 30, 1999 and 1998, investments in these partnerships totaled
$49 million and $61 million, respectively, while direct investments totaled
$367 million and $167 million, respectively. The Company's policy is to carry
its investments, including its partnership interests, at fair value based upon
the Company's assessment of the underlying investments.

At November 30, 1999 and 1998, the Company had commitments to invest up to
an additional $302 million and $238 million, respectively, directly and through
partnerships, in private equity related investments. These commitments will be
funded as required through the end of the respective investment periods,
principally expiring in 2004.

In addition, at November 30, 1999, the Company had no direct short-term
bridge financings outstanding.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES

OVERVIEW Derivatives are financial instruments, which include swaps,
options, futures, forwards and warrants, whose value is based upon an underlying
asset (e.g., treasury bond), index (e.g., S&P 500) or reference rate (e.g.,
LIBOR). A derivative contract may be traded on an exchange or negotiated in the
over-the-counter markets. Exchange-traded derivatives are standardized and
include futures, warrants and certain option contracts listed on an exchange.
Over-the-counter ("OTC") derivative contracts are individually negotiated
between contracting parties and include forwards, swaps and certain options,
including caps, collars and floors. The use of derivative financial instruments
has expanded significantly over the past decade. One reason for this expansion
is that derivatives provide a cost effective alternative for managing market
risk. In this regard, derivative contracts provide a reduced funding alternative
for managing market risk since derivatives are based upon notional amounts,
which are generally not exchanged, but rather are used merely as a basis for
exchanging cash flows during the duration of the contract. Derivatives are also
utilized extensively as highly effective tools that enable users to adjust risk
profiles, such as interest rate, currency, or other market risks, or to take
proprietary trading positions, since OTC derivative instruments can be tailored
to meet individual client needs. Additionally, derivatives provide users with
access to market risk management tools which are often unavailable in
traditional cash instruments.

Derivatives are subject to various risks similar to non-derivative financial
instruments including market, credit and operational risk. Market risk is the
potential for a financial loss due to changes in the value of derivative
financial instruments due to market changes, including changes in interest
rates, foreign exchange rates and equity and commodity prices. Credit risk
results from the possibility that a counterparty to a derivative transaction may
fail to perform according to the terms of the contract. Therefore, the Company's
exposure to credit risk is represented by its net receivable from derivative
counterparties, after consideration of collateral. Operational risk is the
possibility of financial loss resulting from a deficiency in the Company's
systems for executing derivative transactions. In addition to these risks,
counterparties to derivative financial instruments may also be exposed to legal
risks related to derivative activities, including the possibility that a
transaction may be unenforceable under applicable law. The risks of derivatives
should not be viewed in isolation but rather should be considered on an
aggregate basis along with the Company's other trading-related activities.

As derivative products have continued to expand in volume, so has market
participation and competition. As a result, additional liquidity has been added
into the markets for conventional derivative products, such as interest rate
swaps. Competition has also contributed to the development of more complex
products structured for specific clients. It is this rapid growth and complexity
of certain derivative products which has led to the perception, by some, that
derivative products are unduly risky to users and the financial markets. In
order to remove the public perception that derivatives may be unduly risky and
to

23
<PAGE>
ensure ongoing liquidity of derivatives in the marketplace, the Company supports
the efforts of the regulators in striving for enhanced risk management
disclosures which consider the effects of both derivative products and cash
instruments. In addition, the Company supports the activities of regulators
which are designed to ensure that users of derivatives are fully aware of the
nature of risks inherent within derivative transactions. As evidence of this
support, the Company is an active participant in the Derivative Policy Group and
has been actively involved with the various regulatory and accounting
authorities in the development of additional enhanced reporting requirements
related to derivatives. The Company strongly believes that derivatives provide
significant value to the financial markets and is committed to providing its
clients with innovative products to meet their financial needs.

LEHMAN BROTHERS' USE OF DERIVATIVE INSTRUMENTS In the normal course of
business, the Company enters into derivative transactions both in a trading
capacity and as an end user. As an end user, the Company utilizes derivative
products to adjust the interest rate nature of its funding sources from fixed to
floating interest rates, and to change the index upon which floating interest
rates are based (e.g., Prime to LIBOR) (collectively, "End User Derivative
Activities"). For a further discussion of the Company's End User Derivative
Activities, see Note 8 to the Consolidated Financial Statements.

The Company utilizes derivative products in a trading capacity both as a
dealer to satisfy the financial needs of its clients and in each of its trading
businesses (collectively, "Trading-Related Derivative Activities"). The
Company's use of derivative products in its trading businesses is combined with
cash instruments to fully execute various trading strategies.

The Company conducts its derivative activities through a number of wholly
owned subsidiaries. The Company's fixed income derivative products business is
conducted through its special purpose subsidiary, Lehman Brothers Special
Financing Inc., and separately capitalized "AAA" rated subsidiaries, Lehman
Brothers Financial Products Inc. and Lehman Brothers Derivative Products Inc. In
addition, as a global investment bank, the Company is also a market-maker in a
number of foreign currencies. Counterparties to the Company's derivative product
transactions are primarily financial intermediaries (U.S. and foreign banks),
securities firms, corporations, governments and their agencies, finance
companies, insurance companies, investment companies and pension funds.

The Company manages the risks associated with derivatives on an aggregate
basis, along with the risks associated with its proprietary trading and
market-making activities in cash instruments, as part of its firmwide risk
management policies. For a further discussion of the Company's risk management
policies refer to Management's Discussion and Analysis pages 25-28.

The Company's Trading-Related Derivative Activities have increased during
the current year to a notional amount of $2,787 billion at November 30, 1999
from $2,139 billion at November 30, 1998, primarily as a result of growth in the
Company's activities as a dealer in fixed income derivative products. Notional
amounts are not recorded on the balance sheet and are not indicative of actual
or potential risk, but rather they provide a measure of the Company's
involvement with such instruments.

As a result of the Company's Trading-Related Derivative activities, the
Company is subject to credit risk. With respect to OTC derivative contracts, the
Company's credit exposure is directly with its counterparties and extends
through the duration of the derivative contracts. The Company views its third
party net credit exposure to be $3,176 million at November 30, 1999,
representing the fair value of the Company's OTC contracts in an unrealized gain
position, after consideration of amounts due from affiliates of $932 million and
collateral of $381 million. Collateral held related to OTC contracts generally
includes cash and U.S. government and federal agency securities. At
November 30, 1999, approximately 74% of the Company's net credit risk exposure
related to OTC contracts was with counterparties rated "A-" or better.

Additionally, the Company is exposed to credit risk related to its
exchange-traded derivative contracts. Exchange-traded derivative contracts
include futures contracts, warrants and certain options. Futures

24
<PAGE>
contracts and options on futures are transacted on the respective exchange. The
exchange clearinghouse is a counterparty to the futures contracts and options.
As a clearing member firm, the Company is required by the exchange clearinghouse
to deposit cash or other securities as collateral for its obligation upon the
origination of the contract and for any daily changes in the market value of
open futures contracts. Unlike OTC derivatives which involve numerous
counterparties, the number of counterparties from exchange-traded derivatives
includes only those exchange clearinghouses of which the Company is a clearing
member firm or other member firms the Company utilizes as agents. Substantially
all of the Company's exchange-traded derivatives are transacted on exchanges of
which the Company is a clearing member firm. To protect against the potential
for a default, all exchange clearinghouses impose capital requirements for their
membership. Therefore, the potential for losses from exchange-traded products is
limited. As of November 30, 1999, the Company had approximately $1,017 million
on deposit with futures exchanges consisting of cash and securities (customer
and proprietary), and had posted approximately $176 million of letters of
credit.

See Notes 1 and 8 to the Consolidated Financial Statements for a description
of the Company's accounting polices and a further discussion of the Company's
Trading-Related Derivative Activities.

RISK MANAGEMENT

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

The Company seeks to reduce risk through the diversification of its
businesses, counterparties and activities in geographic regions. The Company
accomplishes this objective by allocating the usage of capital to each of its
businesses, establishing trading limits for individual products and traders and
setting credit limits for individual counterparties, including regional
concentrations. The Company seeks to achieve adequate returns from each of its
businesses commensurate with the risks that they assume.

Overall risk management policy is established by a Risk Management Committee
(the "Committee") comprised of the Chief Executive Officer, the Global Risk
Manager, the Chief Financial and Administrative Officer, the Head of Equities,
the Head of Fixed Income, the Head of Global Sales and Research and the Co-Heads
of Investment Banking. The Committee brings together senior management with the
sole intent of discussing risk related issues and provides an effective forum
for managing risk at the highest levels within the Company. The Committee meets
on a monthly basis, or more frequently if required, to discuss, among other
matters, significant market exposures, concentrations of positions (e.g.,
counterparty, market risk), potential new transactions or positions and risk
limit exceptions.

The Global Risk Management Group (the "Group") supports the Committee, is
independent of the trading areas and reports directly to the Chief Executive
Officer. The Group combines two departments, credit risk management and market
risk management, into one unit. This facilitates the analysis of counterparty
credit and market risk exposures and leverages personnel and information
technology resources in a cost-efficient manner. The Group maintains staff in
each of the Company's regional trading centers and has daily contact with
trading staff at all levels within the Company. These discussions include a
review of trading positions and risk exposures.

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

25
<PAGE>
Department") has global responsibility for implementing the Company's overall
credit risk management framework.

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

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

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

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

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

The Company incurs short-term interest rate risk when facilitating the
orderly flow of customer transactions through the maintenance of government and
high grade corporate bond inventories. Market-making in high yield instruments
exposes the Company to additional risk due to potential variations in credit
spreads. Trading in international markets exposes the Company to spread risk
between the term structure of interest rates in differing countries. Mortgages
and mortgage-related securities are subject to

26
<PAGE>
prepayment risk and changes in the level of interest rates. Trading in
derivatives and structured products exposes the Company to changes in the level
and volatility of interest rates. The Company actively manages interest rate
risk through the use of interest rate futures, options, swaps, forwards, and
offsetting cash market instruments. Inventory holdings, concentrations, and
agings are monitored closely and used by management to selectively hedge or
liquidate undesirable exposures.

The Company is a significant intermediary in the global equity markets by
making markets in U.S. and non-U.S. equity securities, including common stock,
convertible debt, exchange-traded and OTC equity options, equity swaps and
warrants. These activities expose the Company to market risk as a result of
price and volatility changes in its equity inventory. Inventory holdings are
also subject to market risk resulting from concentrations, aging and liquidity
that may adversely impact its market valuation. Equity market risk is actively
managed through the use of index futures, exchange-traded and OTC options, swaps
and cash instruments. Equity risk exposures are aggregated and reported to
management on a regular basis.

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

VALUE AT RISK For purposes of Securities and Exchange Commission risk
disclosure requirements, the Company discloses an entity-wide value at risk
analysis of virtually all of the Company's trading activities. The value at risk
calculation measures the potential loss in expected revenues with a 95%
confidence level. The methodology incorporates actual trading revenues over a
standardized 250-day historical period. A confidence level of 95% implies, on
average, that daily trading revenues or losses will exceed daily expected
trading revenues by an amount greater than value at risk one out of every 20
trading days.

Value at risk is one measurement of potential losses in revenues that may
result from adverse market movements over a specified period of time with a
selected likelihood of occurrence. Value at risk has substantial limitations,
including its reliance on historical performance and data as valid predictors of
the future. Consequently, value at risk is only one of a number of tools the
Company utilizes in its daily risk management activities.

The Company's value at risk for each component of market risk, and in total
was as follows (in millions):

<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Interest rate risk.......................................... $ 8.3 $16.6
Equity price risk........................................... 9.3 9.7
Foreign exchange risk....................................... 1.2 1.5
Diversification benefit..................................... (4.8) (7.2)
----- -----
Total Company............................................... $14.0 $20.6
===== =====
</TABLE>

During 1999, the Company's value at risk averaged $20.0 million and varied
from a high of $22.7 million to a low of $13.3 million. Value at risk at
November 30, 1999 decreased from November 30, 1998 because of the extreme market
volatility during the August-October 1998 period.

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

27
<PAGE>
necessarily indicative of future performance, the Company believes its focus on
business diversification and customer flow activities should continue to help
mitigate the volatility of future net trading revenues.

YEAR 2000

Financial markets were essentially unaffected by the Y2K issue, reporting
only a few minor technical problems. The Company and its counterparties were not
adversely affected. The Company's success can be attributed to its high level of
preparedness and the early level of support the project received from the
highest levels of the Company, beginning in 1996. Remediation and testing were
given a high priority, and Holdings emerged as one of the financial industry's
leaders in targeting and fixing all possible components of the problem. The
Company spent approximately $10 million on Y2K related issues, including systems
testing, updating and replacement and consultant fees.

NEW ACCOUNTING DEVELOPMENTS

In September 1999, the FASB issued an Exposure Draft, "Business Combinations
and Intangible Assets." The proposal would eliminate the use of the
pooling-of-interests method and require that all business combinations be
accounted for using the purchase method. The Exposure Draft would also require
goodwill arising from the application of the purchase method to be written off
over a maximum 20-year amortization period, which is shorter than the current
40-year period. The provisions of the Exposure Draft related to business
combinations are expected to be applied only for those business combinations
initiated after the issuance of a final statement, projected to be late in 2000.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires all derivatives to be
recorded on the balance sheet at fair value. In June 1999, the FASB extended the
implementation date of SFAS No. 133 by one year. As a result, SFAS No. 133 will
now be effective for the Company on December 1, 2000 (Fiscal Year 2001). The
expected impact of adoption on the Company's results of operations has not yet
been determined, however it is not likely to be material since most of the
Company's derivatives are carried at fair value.

EFFECTS OF INFLATION

Because the Company's assets are, to a large extent, liquid in nature, they
are not significantly affected by inflation. However, the rate of inflation
affects the Company's expenses, such as employee compensation, office space
leasing costs and communications charges, which may not be readily recoverable
in the price of services offered by the Company. To the extent inflation results
in rising interest rates and has other adverse effects upon the securities
markets, it may adversely affect the Company's financial position and results of
operations in certain businesses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption "Risk Management" on pages 25-28 hereof is
incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial information required by
this Item and included in this Report are listed in the Index to Financial
Statements and Schedules appearing on page F-l and are incorporated herein by
reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

28
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction I of Form 10-K, the information required by
Item 10 is omitted.

ITEM 11. EXECUTIVE COMPENSATION

Pursuant to General Instruction I of Form 10-K, the information required by
Item 11 is omitted.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Pursuant to General Instruction I of Form 10-K, the information required by
Item 12 is omitted.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to General Instruction I of Form 10-K, the information required by
Item 13 is omitted.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements:

See Index to Financial Statements and Schedules appearing on page F-l.

2. Financial Statement Schedules:

Schedules are omitted since they are not required or are not applicable.

29
<PAGE>
3. Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant
dated May 27, 1994 (incorporated by reference to Exhibit 3.1
of the Registrant's Transition Report on Form 10-K for the
eleven months ended November 30, 1994)

3.2 By-Laws of the Registrant, amended as of March 26, 1997
(incorporated by reference to Exhibit 10 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
February 28, 1997

4.1 The instruments defining the rights of holders of the
long-term debt securities of the Registrant and its
subsidiaries are omitted pursuant to section (b) (4) (iii)
(A) of Item 601 of Regulation S-K. The Registrant hereby
agrees to furnish copies of these instruments to the
Securities and Exchange Commission upon request.

10.1 Agreement of Tenants-In-Common by and among American Express
Company, American Express Bank Ltd., American Express Travel
Related Services Company, Inc., Shearson Lehman Brothers
Inc., Shearson Lehman Government Securities, Inc. and
Shearson Lehman Commercial Paper Incorporated (incorporated
by reference to Exhibit 10.1 of Lehman Brothers Holdings
Inc.'s Transition Report on Form 10-K for the eleven months
ended November 30, 1994.)

12.1 Computation in support of ratio of earnings to fixed
charges.*

21.1 Pursuant to General Instruction I of Form 10-K, the list of
the Registrant's Subsidiaries is omitted.

23.1 Consent of Ernst & Young LLP.*

24.1 Powers of Attorney.*

27.1 Financial Data Schedule.*

(b) Reports on Form 8-K.

None.
</TABLE>

- ------------------------

* Filed herewith.

30
<PAGE>
SIGNATURES

Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
LEHMAN BROTHERS INC.
(Registrant)
February 28, 2000

By: /s/ JENNIFER MARRE
----------------------------------------
Jennifer Marre
Title: VICE PRESIDENT
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
Chief Executive Officer and,
* Chairman of the Board of
------------------------------------------- Directors (principal February 28, 2000
Richard S. Fuld, Jr. executive officer)

* Chief Financial Officer
------------------------------------------- (principal financial February 28, 2000
David Goldfarb officer)

* Director
------------------------------------------- February 28, 2000
Roger S. Berlind

* Director
------------------------------------------- February 28, 2000
Howard L. Clark, Jr.

* Director
------------------------------------------- February 28, 2000
Frederick Frank

* Director
------------------------------------------- February 28, 2000
Harvey M. Krueger

* Director
------------------------------------------- February 28, 2000
Sherman R. Lewis, Jr.
</TABLE>

<TABLE>
<S> <C> <C>
/s/ JENNIFER MARRE
--------------------------------------
Jennifer Marre
(Attorney-in-Fact)
*By: February 28, 2000
</TABLE>

31
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LEHMAN BROTHERS INC. and SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
- -------------------- --------
<S> <C>
Report of Independent Auditors.............................. F-2

Consolidated Statement of Income for the Twelve Months Ended
November 30, 1999, November 30, 1998, and November 30,
1997...................................................... F-3

Consolidated Statement of Financial Condition at
November 30, 1999 and November 30, 1998................... F-4

Consolidated Statement of Changes in Stockholder's Equity
for the Twelve Months Ended November 30, 1999,
November 30, 1998, and November 30, 1997.................. F-5

Consolidated Statement of Cash Flows for the Twelve Months
Ended November 30, 1999, November 30, 1998, and
November 30, 1997......................................... F-6

Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholder of
Lehman Brothers Inc.

We have audited the accompanying consolidated statement of financial
condition of Lehman Brothers Inc. and Subsidiaries (the "Company") as of
November 30, 1999 and 1998, and the related consolidated statements of income,
changes in stockholder's equity, and cash flows for each of the three years in
the period ended November 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lehman
Brothers Inc. and Subsidiaries at November 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years ended November 30, 1999 in conformity with accounting principles generally
accepted in the United States.

ERNST & YOUNG LLP

New York, New York
January 6, 2000

F-2
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
NOVEMBER 30
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Investment banking........................................ $ 1,245 $ 1,256 $ 998
Principal transactions.................................... 1,378 589 848
Commissions............................................... 478 406 350
Interest and dividends.................................... 12,904 15,308 12,591
Other..................................................... 17 42 30
------- ------- -------
Total revenues.......................................... 16,022 17,601 14,817
Interest expense.......................................... 12,535 14,730 12,216
------- ------- -------
Net revenues............................................ 3,487 2,871 2,601
------- ------- -------
NON-INTEREST EXPENSES
Compensation and benefits................................. 1,764 1,445 1,288
Brokerage and clearance................................... 183 192 197
Technology and communications............................. 162 170 176
Business development...................................... 83 77 68
Professional fees......................................... 58 50 58
Occupancy................................................. 40 48 52
Management fees........................................... 130 13 81
Other..................................................... 54 29 88
------- ------- -------
Total non-interest expenses............................. 2,474 2,024 2,008
------- ------- -------
Income before taxes......................................... 1,013 847 593
Provision for income taxes................................ 317 272 202
------- ------- -------
Net income.................................................. $ 696 $ 575 $ 391
======= ======= =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1,384 $ 460
Cash and securities segregated and on deposit for regulatory
and other purposes........................................ 1,434 909
Securities and other financial instruments owned:
Governments and agencies.................................. 21,603 15,931
Corporate equities........................................ 9,144 5,694
Mortgages and mortgage-backed............................. 8,457 10,524
Corporate debt and other.................................. 5,331 6,824
Derivatives and other contractual agreements.............. 5,249 5,580
Certificates of deposit and other money market
instruments............................................. 2,123 1,392
-------- --------
51,907 45,945
-------- --------
Collateralized short-term agreements:
Securities purchased under agreements to resell........... 61,365 47,913
Securities borrowed....................................... 11,243 14,760
Receivables:
Brokers, dealers and clearing organizations............... 2,346 2,154
Customers................................................. 2,922 3,148
Others.................................................... 5,920 4,859
Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $588 in 1999
and $559 in 1998)......................................... 280 272
Other assets................................................ 261 261
Excess of cost over fair value of net assets acquired (net
of accumulated amortization of $115 in 1999 and $108 in
1998)..................................................... 120 152
-------- --------
Total assets............................................ $139,182 $120,833
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY

Commercial paper and short-term debt........................ $ 615 $ 616
Securities and other financial instruments sold but not yet
purchased:
Governments and agencies.................................. 10,237 12,028
Derivatives and other contractual agreements.............. 3,985 3,816
Corporate equities........................................ 3,207 1,428
Corporate debt and other.................................. 1,218 1,761
-------- --------
18,647 19,033
-------- --------
Collateralized short-term financing:
Securities sold under agreements to repurchase............ 76,587 58,905
Securities loaned......................................... 9,809 5,474
Advances from Holdings and other affiliates................. 16,118 21,560
Payables:
Brokers, dealers and clearing organizations............... 2,485 2,230
Customers................................................. 5,535 4,540
Accrued liabilities and other payables...................... 2,324 1,668
Long-term debt:
Senior notes.............................................. 186 168
Subordinated indebtedness................................. 3,773 4,111
-------- --------
Total liabilities....................................... 136,079 118,305
-------- --------
Commitments and contingencies
STOCKHOLDER'S EQUITY
Preferred stock, $0.10 par value; 10,000 shares
authorized; none outstanding
Common stock, $0.10 par value; 10,000 shares authorized;
1,006 shares issued and outstanding
Additional paid-in capital................................ 1,684 1,759
Accumulated other comprehensive income.................... 2 3
Retained earnings......................................... 1,417 766
-------- --------
Total stockholder's equity.............................. 3,103 2,528
-------- --------
Total liabilities and stockholder's equity.............. $139,182 $120,833
======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
NOVEMBER 30
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Additional paid-in capital
Beginning balance......................................... $1,759 $1,756 $1,828
Capital contributions..................................... 7 3
Capital distributions..................................... (75) (4) (75)
------ ------ ------
Ending balance.............................................. 1,684 1,759 1,756
------ ------ ------
Accumulated other comprehensive income
Beginning balance......................................... 3 3 3
Foreign currency translation.............................. (1)
------ ------ ------
Ending balance.............................................. 2 3 3
------ ------ ------
Retained earnings (accumulated deficit)
Beginning balance......................................... 766 252 (139)
Net income................................................ 696 575 391
Dividends................................................. (45) (61)
------ ------ ------
Ending balance.............................................. 1,417 766 252
------ ------ ------
Total stockholder's equity.................................. $3,103 $2,528 $2,011
====== ====== ======
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NOVEMBER 30
------------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 696 $ 575 $ 391
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 37 32 39
Provisions for losses and other reserves.................. 32 37 52
Deferred tax provision (benefit).......................... (150) 1
Other adjustments......................................... 40 29 21
Net change in:
Cash and securities segregated and on deposit............. (525) 219 (465)
Securities and other financial instruments owned.......... (5,962) (6,968) 1,349
Securities borrowed....................................... 3,517 (1,099) 5,374
Receivables from brokers, dealers and clearing
organizations........................................... (192) 994 1,761
Receivables from customers................................ 226 726 82
Securities and other financial instruments sold but not
yet purchased........................................... (386) 2,004 (837)
Securities loaned......................................... 4,335 (2,290) (2,321)
Payables to brokers, dealers and clearing organizations... 255 (897) 927
Payables to customers..................................... 995 (1,578) (277)
Accrued liabilities and other payables.................... 624 (536) (135)
Other operating assets and liabilities, net............... (886) (1,859) 1,579
------- -------- -------
Net cash provided by (used in) operating activities..... $ 2,656 $(10,610) $ 7,540
------- -------- -------
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NOVEMBER 30
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes.......................... $ (1) $ (80) $ (1)
Proceeds from issuance of subordinated indebtedness......... 200 750 1,108
Principal payments of subordinated indebtedness............. (559) (963) (750)
Net proceeds from (payments for) commercial paper and
short-term debt........................................... (1) (124) (1,559)
Resale agreements net of repurchase agreements.............. 4,230 4,585 (12,648)
Increase (decrease) in advances from Holdings and other
affiliates................................................ (5,442) 6,783 6,225
Capital contributions....................................... 7 3
Dividends and capital distributions paid.................... (120) (65) (75)
------- ------- --------
Net cash provided by (used in) financing activities... (1,693) 10,893 (7,697)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements,
net....................................................... (39) (43) (19)
------- ------- --------
Net cash used in investing activities..................... (39) (43) (19)
------- ------- --------
Net change in cash and cash equivalents................... 924 240 (176)
------- ------- --------
Cash and cash equivalents, beginning of period.............. 460 220 396
------- ------- --------
Cash and cash equivalents, end of period.............. $ 1,384 $ 460 $ 220
======= ======= ========
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)

Interest paid totaled $12,516 in 1999, $14,793 in 1998, and $12,225 in 1997.
Income taxes paid totaled $143 in 1999, $342 in 1998 and $151 in 1997.

See Notes to Consolidated Financial Statements.

F-7
<PAGE>
TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
Note 1. Summary of Significant Accounting Policies.................. F-9

Note 2. Short-term Financings....................................... F-12

Note 3. Long-term Debt.............................................. F-13

Note 4. Holdings' Incentive Plans................................... F-15

Note 5. Capital Requirements........................................ F-16

Note 6. Holdings' Employee Benefit Plans............................ F-17

Note 7. Income Taxes................................................ F-18

Note 8. Derivative Financial Instruments............................ F-20

Note 9. Fair Value of Financial Instruments......................... F-25

Note 10. Other Commitments and Contingencies......................... F-26

Note 11. Related Party Transactions.................................. F-28

Note 12. Segments.................................................... F-29

Note 13. Quarterly Information (Unaudited)........................... F-30
</TABLE>

F-8
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Lehman
Brothers Inc., a registered broker-dealer ("LBI") and subsidiaries
(collectively, the "Company"). LBI is a wholly-owned subsidiary of Lehman
Brothers Holdings Inc. ("Holdings"). LBI is one of the leading global investment
banks serving institutional, corporate, government and high-net-worth individual
clients and customers. The Company's worldwide headquarters in New York are
complemented by offices in additional locations in North America, Europe, the
Middle East, Latin America and the Asia Pacific Region. The Company is engaged
in providing financial services. All material intercompany accounts and
transactions have been eliminated in consolidation.

The consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Management believes that the estimates
utilized in preparing its financial statements are reasonable and prudent.
Actual results could differ from these estimates.

The Company uses the trade date basis of accounting.

Certain prior period amounts reflect reclassifications to conform to the
current period's presentation.

SECURITIES AND OTHER FINANCIAL INSTRUMENTS

Securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased are valued at market or fair
value, as appropriate, with unrealized gains and losses reflected in Principal
transactions in the Consolidated Statement of Income. Market value is generally
based on listed market prices. If listed market prices are not available, fair
value is determined based on other relevant factors, including broker or dealer
price quotations and valuation pricing models which take into account time value
and volatility factors underlying the financial instruments.

DERIVATIVE FINANCIAL INSTRUMENTS

A derivative is typically defined as an instrument whose value is "derived"
from an underlying instrument, index or rate, such as a future, forward, swap,
or option contract, or other financial instrument with similar characteristics.
A derivative contract generally represents future commitments to exchange
interest payment streams or currencies based on the contract or notional amount
or to purchase or sell other financial instruments at specified terms on a
specified date.

Derivatives utilized for trading purposes are recorded at market or fair
value in the Consolidated Statement of Financial Condition on a net by
counterparty basis where a legal right of set-off exists and are netted across
products when such provisions are stated in the master netting agreement. The
market or fair value related to swap and forward transactions, as well as
options and warrants, is reported in the Consolidated Statement of Financial
Condition as an asset or liability in Derivatives and other contractual
agreements, as appropriate. Margin on futures contracts is included in
receivables and payables, as applicable. Changes in fair values of derivatives
are recorded as principal transactions revenues in the current period. Market or
fair value for trading related instruments is generally determined by either
quoted market prices (for exchange-traded futures and options) or pricing models
(for over-the-counter swaps, forwards and options). Pricing models utilize a
series of market inputs to determine the present value of future cash flows,
with adjustments, as required for credit risk and liquidity risk. Further
valuation

F-9
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

adjustments may be recorded as deemed appropriate for new or complex products or
for positions with significant concentrations. These adjustments are integral
components of the mark-to-market process. Credit-related valuation adjustments
incorporate business and economic conditions, historical experience,
concentrations, estimates of expected losses and the character, quality and
performance of credit sensitive financial instruments.

The Company enters into various derivative financial instruments for
non-trading purposes as an end user to modify the market risk exposures of
certain assets and liabilities. In this regard, the Company utilizes interest
rate and currency swaps to modify the interest rate and foreign currency
exposure of existing assets and liabilities. In addition to modifying the
interest rate and foreign currency exposure of existing assets and liabilities,
the Company utilizes derivative financial instruments as an end user to modify
the interest rate characteristics of certain anticipated transactions related to
its secured financing activities, where there is a high degree of certainty that
the Company will enter into such contracts.

Derivatives that have been designated as non-trading related positions are
accounted for on an accrual basis. Under the accrual basis, interest is accrued
into income or expense over the life of the contract, resulting in the net
interest impact of the derivative and the underlying hedged item being
recognized in income throughout the hedge period. Related unrealized receivables
or payables due from or to counterparties are included in receivables from or
payables to brokers, dealers and clearing organizations.

The Company also utilizes foreign exchange forward contracts to manage the
currency exposure related to its net monetary investment in non-U.S. dollar
functional currency operations. The gain or loss from revaluing these contracts
is deferred and reported within Accumulated other comprehensive income in
stockholder's equity. The related unrealized receivables or payables due from or
to counterparties are included in receivables from or payables to brokers,
dealers and clearing organizations.

In the event that a hedge is no longer effective, the derivative transaction
is no longer accounted for as a hedge on an accrual basis. Instead, the Company
immediately recognizes the market or fair value of the derivative financial
instrument through earnings. Changes in the fair value of such derivative
contracts would then be accounted for as a derivative used for trading purposes
as discussed above. Realized gains or losses on early terminations of
derivatives that were classified as hedges are deferred and amortized to
interest income or interest expense over the remaining life of the instrument
being hedged.

REPURCHASE AND RESALE AGREEMENTS

Securities purchased under agreements to resell and securities sold under
agreements to repurchase, which are treated as financing transactions for
financial reporting purposes, are collateralized primarily by government and
government agency securities and are carried net by counterparty, when
permitted, at the amounts at which the securities will be subsequently resold or
repurchased plus accrued interest. It is the policy of the Company to take
possession of securities purchased under agreements to resell. The Company
monitors the market value of the underlying positions on a daily basis as
compared to the related receivable or payable balances, including accrued
interest. The Company requires counterparties to deposit additional collateral
or return collateral pledged as necessary, to ensure that the market value of
the underlying collateral remains sufficient. Securities and other financial
instruments owned that are financed under repurchase agreements are carried at
market value with changes in market value reflected in the Consolidated
Statement of Income.

F-10
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SECURITIES BORROWED AND LOANED

Securities borrowed and securities loaned are carried at the amount of cash
collateral advanced or received plus accrued interest. It is the Company's
policy to value the securities borrowed and loaned on a daily basis, and to
obtain additional cash as necessary to ensure such transactions are adequately
collateralized.

PRIVATE EQUITY INVESTMENTS

The Company carries its private equity investments, including its
partnership interests, at fair value based upon the Company's assessment of the
underlying investments.

INVESTMENT BANKING

Underwriting revenues and fees for merger and acquisition advisory services
are recognized when services for the transactions are substantially completed.
Underwriting expenses are deferred and recognized at the time the related
revenues are recorded.

INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using the
provisions of the enacted tax laws. In this regard, deferred tax assets are
recognized for temporary differences that will result in deductible amounts in
future years and for tax loss carryforwards, if in the opinion of management, it
is more likely than not that the deferred tax asset will be realized. SFAS 109
requires companies to set up a valuation allowance for that component of net
deferred tax assets which does not meet the "more likely than not" criterion for
realization. Deferred tax liabilities are recognized for temporary differences
that will result in taxable income in future years.

TRANSLATION OF FOREIGN CURRENCIES

Assets and liabilities of foreign subsidiaries having non-U.S. dollar
functional currencies are translated at exchange rates at the statement of
financial condition date. Revenues and expenses are translated at average
exchange rates during the period. The gains or losses resulting from translating
foreign currency financial statements into U.S. dollars, net of hedging gains or
losses and taxes, are included in Accumulated other comprehensive income, a
separate component of stockholder's equity. Gains or losses resulting from
foreign currency transactions are included in the Consolidated Statement of
Income.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment, and leasehold improvements are recorded at historical
cost, net of accumulated depreciation and amortization. Depreciation is
recognized on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the lesser of their
economic useful lives or the terms of the underlying leases. Internal use
software which qualifies for capitalization under AICPA Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (the "SOP"), is capitalized and subsequently amortized over the
softwares' estimated useful life. At November 30, 1999 and 1998, the unamortized
amount of capitalized internal use software was $25 million and $18 million,
respectively.

F-11
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

GOODWILL

Excess of cost over fair value of net assets acquired ("goodwill") is
amortized using the straight-line method over periods not exceeding 35 years.
Goodwill is evaluated periodically for impairment and also is reduced upon the
recognition of certain acquired net operating loss carryforward benefits.

STATEMENT OF CASH FLOWS

The Company defines cash equivalents as highly liquid investments with
original maturities of three months or less, other than those held for sale in
the ordinary course of business.

STOCK-BASED AWARDS

The Company's employees participate in Holdings' stock-based incentive
plans. Holdings accounts for these awards on a consolidated basis in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and its related interpretations. The Company records as
compensation and benefits the allocated share of Holdings' stock-based
compensation cost.

NEW ACCOUNTING STANDARDS

The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", in fiscal 1999. SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. See Note 12 of
Notes to Consolidated Financial Statements.

NOTE 2. SHORT-TERM FINANCINGS

The Company obtains short-term financing on both a secured and unsecured
basis. The secured financing is obtained through the use of repurchase
agreements and securities loaned agreements, which are primarily collateralized
by government, agency and equity securities. The unsecured financing is
generally obtained through short-term debt and the issuance of commercial paper.

The Company's commercial paper and short-term debt financing is comprised of
the following:

<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Short-term debt
Payables to banks......................................... $358 $377
Master notes.............................................. 132 51
Bank loans................................................ 125 188
---- ----
Total....................................................... $615 $616
==== ====
</TABLE>

F-12
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's weighted-average interest rates were as follows:

<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Short-term debt(1).......................................... 4.9% 5.1%
Securities sold under agreements to repurchase.............. 5.6% 5.1%
</TABLE>

- ------------------------

(1) Includes $75 million and $25 million of short-term debt with
weighted-average interest rates of 0.1% and 0.3% as of November 30, 1999 and
1998, respectively, related to non-U.S. dollar obligations.

NOTE 3. LONG-TERM DEBT

<TABLE>
<CAPTION>
U.S. DOLLAR
------------------- NOVEMBER 30
FIXED FLOATING -------------------
RATE RATE 1999 1998
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
SENIOR NOTES
Maturing in Fiscal 1999..................................... $ 1
Maturing in Fiscal 2000..................................... 1
Maturing in Fiscal 2001..................................... $ 184 $ 184 165
Maturing in Fiscal 2002..................................... 2 2
Maturing in Fiscal 2003..................................... 1
Maturing in Fiscal 2004.....................................
December 1, 2004 and thereafter.............................
------ ------ ------
Senior Notes.............................................. 186 186 168
------ ------ ------

SUBORDINATED INDEBTEDNESS
Maturing in Fiscal 1999..................................... 691
Maturing in Fiscal 2000..................................... 192 $356 548 193
Maturing in Fiscal 2001..................................... 195 195 194
Maturing in Fiscal 2002..................................... 450 405 855 855
Maturing in Fiscal 2003..................................... 475 475 475
Maturing in Fiscal 2004..................................... 191 191 409
December 1, 2004 and thereafter............................. 1,406 103 1,509 1,294
------ ---- ------ ------
Subordinated Indebtedness................................. 2,909 864 3,773 4,111
------ ---- ------ ------
LONG-TERM DEBT.............................................. $3,095 $864 $3,959 $4,279
====== ==== ====== ======
</TABLE>

Of the Company's long-term debt outstanding as of November 30, 1999,
$200 million is repayable prior to maturity at the option of the holder, at par
value. These obligations are reflected in the above table as maturing at their
put dates, fiscal 2003, rather than at their contractual maturities, fiscal
2026.

The Company's interest in 3 World Financial Center is financed with U.S.
dollar fixed-rate senior notes totaling $186 million as of November 30, 1999.
These notes are unconditionally guaranteed by American Express and
collateralized by a first mortgage on the property.

As of November 30, 1999, the Company had $1.8 billion available for the
issuance of debt securities under various shelf registrations.

F-13
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

END USER DERIVATIVE ACTIVITIES

The Company utilizes interest rate swaps as an end user to modify the
interest rate characteristics of its long-term debt portfolio. The Company
actively manages the interest rate exposure on its long-term debt portfolio
through the use of interest rate and currency swaps to more closely match the
terms of the assets being funded and to minimize interest rate risk. In certain
instances, two or more derivative contracts may be utilized by the Company to
manage the interest rate nature and/or currency exposure of an individual
long-term debt issuance. In these cases, the notional amount of the derivative
contracts may exceed the carrying value of the related long-term debt issuance.

At November 30, 1999 and 1998, the notional amounts of the Company's
interest rate swaps related to its long-term debt obligations were approximately
$3.0 billion and $2.9 billion, respectively. In terms of notional amounts
outstanding, these derivative products mature as follows:

<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Maturing in Fiscal 1999..................................... $ 334
Maturing in Fiscal 2000..................................... $ 384 192
Maturing in Fiscal 2001..................................... 194 194
Maturing in Fiscal 2002..................................... 450 250
Maturing in Fiscal 2003..................................... 475 475
Maturing in Fiscal 2004..................................... 191 191
December 1, 2004 and thereafter............................. 1,293 1,293
------ ------
Total................................................... $2,987 $2,929
====== ======
Weighted-average interest rate at November 30:
Receive rate................................................ 7.30% 7.60%
Pay rate.................................................... 6.39% 6.25%
</TABLE>

On an overall basis, the Company's long-term debt-related end user
derivative activities resulted in reduced interest expense of approximately
$34 million, $24 million and $26 million in 1999, 1998 and 1997, respectively.
In addition, the Company's end user derivative activities resulted in the
following changes to the Company's mix of fixed and floating rate debt and
effective weighted-average rates of interest:

<TABLE>
<CAPTION>
NOVEMBER 30, 1999
------------------------------------------------------
LONG-TERM DEBT WEIGHTED-AVERAGE
----------------------- ----------------------------
BEFORE AFTER EFFECTIVE RATE
END END CONTRACTUAL AFTER END
USER USER INTEREST USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
---------- ---------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
USD Obligations
Fixed-rate $3,095 $ 300
Floating rate.................................... 864 3,659
------ ------ ---- ----
Total.......................................... $3,959 $3,959 7.55% 6.86%
====== ====== ==== ====
</TABLE>

F-14
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
NOVEMBER 30, 1998
------------------------------------------------------
LONG-TERM DEBT WEIGHTED-AVERAGE
----------------------- ----------------------------
BEFORE AFTER EFFECTIVE RATE
END END CONTRACTUAL AFTER END
USER USER INTEREST USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
---------- ---------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
USD Obligations
Fixed-rate $3,170 $ 241
Floating rate.................................... 1,109 4,038
------ ------ ---- ----
Total.......................................... $4,279 $4,279 7.57% 6.65%
====== ====== ==== ====
</TABLE>

NOTE 4. HOLDINGS' INCENTIVE PLANS

The Company's employees participate in Holdings' various incentive plans.
The Company records its allocated share of Holdings' stock-based compensation
cost. Holdings' stock-based compensation cost was $363 million, $221 million,
and $162 million for the years ended November 30, 1999, 1998 and 1997,
respectively. The Company's allocated cost was $236 million, $155 million, and
$113 million for the years ended November 30, 1999, 1998 and 1997, respectively.
In accordance with APB 25, Holdings has not recognized compensation cost for its
stock option awards and ESPP. The following is a description of Holdings'
various incentive plans.

EMPLOYEE STOCK PURCHASE PLAN

Holdings' Employee Stock Purchase Plan (the "ESPP") allows employees to
purchase Holdings' common stock ("Common Stock") at a 15% discount from market
value, with a maximum of $25,000 in annual aggregate purchases by any one
individual. The number of shares of Common Stock authorized for purchase by
eligible employees is 6 million. As of November 30, 1999 and 1998, 2.4 million
shares and 2.0 million shares, respectively, of Common Stock had been purchased
by eligible employees of Holdings through the ESPP.

1994 INCENTIVE PLANS

Holdings' 1994 Management Replacement Plan (the "Replacement Plan") provided
awards similar to the American Express common shares granted to Holdings'
employees which were canceled as of the date of the spin-off from American
Express. Through November 30, 1999, a total of 2.0 million awards had been
granted under the Replacement Plan, including both stock options and restricted
stock; 0.3 million were outstanding at November 30, 1999. No future awards will
be granted under this plan.

Holdings' 1994 Management Ownership Plan (the "1994 Plan") provides for the
issuance of restricted stock units ("RSUs"), performance stock units ("PSUs"),
stock options and other equity awards for a period of up to ten years to
eligible employees. A total of 16.6 million shares of Common Stock may be
granted under the 1994 Plan. At November 30, 1999, RSU and stock option awards
by Holdings with respect to 16.1 million shares of Common Stock have been made
under the 1994 Plan of which 7.8 million are outstanding and 8.3 million have
been converted to freely transferable Common Stock. Holdings will utilize the
remaining authorization of 0.5 million shares to satisfy dividend reinvestment
requirements for outstanding awards and to fund the annual RSU awards for
Holdings' non-employee directors.

F-15
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1996 MANAGEMENT OWNERSHIP PLAN

During 1996, Holdings' stockholders approved the 1996 Management Ownership
Plan (the "1996 Plan") under which awards similar to those of the 1994 Plan may
be granted, and under which up to 15.5 million shares of Common Stock may be
subject to awards. At November 30, 1999, RSU, PSU and stock option awards by
Holdings with respect to 11.6 million shares of Common Stock have been made
under the 1996 Plan of which 10.1 million are outstanding and 1.5 million have
been converted to freely transferable Common Stock.

EMPLOYEE INCENTIVE PLAN

Holdings' Employee Incentive Plan ("EIP") has provisions similar to the 1994
Plan and the 1996 Plan, and authorization for up to 53 million shares of Common
Stock which may be subject to awards. At November 30, 1999, awards with respect
to 46.8 million shares of Common Stock have been made under the EIP of which
45.5 million are outstanding and 1.3 million have been converted to freely
transferable Common Stock. Approximately 31.7 million of the outstanding awards
consist of RSUs and PSUs which have vesting and transfer restrictions extending
through the year 2006.

STOCK OPTIONS

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation",
Holdings utilized the Black-Scholes option-pricing model to quantify the
proforma effects of the fair value of the stock options granted and outstanding
during 1999 and 1998 on net income. The Company's 1999, 1998 and 1997 proforma
net income would have been approximately $669 million, $566 million and
$378 million, respectively, compared to actual net income of $696 million,
$575 million and $391 million, respectively. The proforma amounts reflect the
effects of the 1999 and 1998 stock option grants and the 15% purchase discount
from market value offered to the Company's employees who participate in the
ESPP.

NOTE 5. CAPITAL REQUIREMENTS

As a registered broker dealer, LBI is subject to the Securities and Exchange
Commission ("SEC") Rule 15c3-1, the Net Capital Rule, which requires LBI to
maintain net capital of not less than the greater of 2% of aggregate debit items
arising from customer transactions, as defined, or 4% of funds required to be
segregated for customers' regulated commodity accounts, as defined. At
November 30, 1999, LBI's regulatory net capital, as defined, of $1,563 million
exceeded the minimum requirement by $1,457 million.

The Company's "AAA" rated derivatives subsidiaries, Lehman Brothers
Financial Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc.
("LBDP"), have established certain capital and operating restrictions which are
reviewed by various rating agencies. At November 30, 1999, LBFP and LBDP had
capital which exceeded the requirement of the most stringent rating agency by
approximately $12 million and $16 million, respectively.

F-16
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. HOLDINGS' EMPLOYEE BENEFIT PLANS

Holdings provides various pension plans for the majority of its employees
worldwide. In addition, Holdings provides certain other postretirement benefits,
primarily health care and life insurance, to eligible employees. The Company
records as compensation and benefits its allocated share of the cost of these
plans. The following summarizes Holdings' domestic employee benefit plans in
which the Company's employees participate:

<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
NOVEMBER 30 NOVEMBER 30
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS, EXCEPT FOR WEIGHTED-
AVERAGE)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $522 $475 $ 50 $ 49
Service cost before expenses................................ 12 9 1 1
Interest cost............................................... 35 32 3 3
Actuarial (gain) loss....................................... (73) 22 (4)
Benefits paid............................................... (17) (16) (3) (3)
---- ---- ---- ----
Benefit obligation at end of year........................... $479 $522 $ 47 $ 50
==== ==== ==== ====
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $672 $618
Actual return on plan assets, net of expenses............... 95 70
Benefits paid............................................... (17) (16)
---- ----
Fair value of plan assets at end of year.................... $750 $672
==== ====
Funded (underfunded) status................................. $271 $150 $(47) $(50)
Unrecognized net actuarial (gain) loss...................... (50) 56 (24) (21)
Unrecognized prior service cost (credit).................... 15 16 (6) (6)
---- ---- ---- ----
Prepaid (accrued) benefit cost.............................. $236 $222 $(77) $(77)
==== ==== ==== ====
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................................... 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets.............................. 9.25% 8.75%
Rate of compensation increase............................... 5.00% 5.00% 5.00% 5.00%
</TABLE>

F-17
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For measurement purposes, the annual health care cost trend rate was assumed
to be 7.5% for the year ended November 30, 2000. The rate was assumed to
decrease at the rate of 0.5% per year to 5.5% in the year ended November 30,
2004 and remain at that level thereafter.

<TABLE>
<CAPTION>
POSTRETIREMENT
BENEFITS
PENSION BENEFITS TWELVE MONTHS
TWELVE MONTHS ENDED ENDED
NOVEMBER 30 NOVEMBER 30
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT (INCOME) COST
Service cost............................................ $ 12 $ 9 $ 8 $ 1 $ 1 $ 1
Interest cost........................................... 35 32 29 3 3 3
Expected return on plan assets.......................... (62) (54) (50)
Recognized net actuarial (gain) loss.................... 1 (1) (1) (1) (1) (2)
---- ---- ---- --- --- ---
Net periodic benefit (income) cost...................... $(14) $(14) $(14) $ 3 $ 3 $ 2
==== ==== ==== === === ===
</TABLE>

Assumed health care cost trend rates have an effect on the amount reported
for postretirement benefits. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
1% POINT INCREASE 1% POINT DECREASE
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Effect on total service and interest cost components in
fiscal 1999............................................... $ 0.3 $(0.4)
Effect on postretirement benefit obligation at November 30,
1999...................................................... $ 4.0 $(3.9)
</TABLE>

NOTE 7. INCOME TAXES

The Company's income is included in the consolidated U.S. federal income tax
return of Holdings and its subsidiaries. The income tax provision for the
Company is computed in accordance with the tax sharing agreement between
Holdings and its subsidiaries. In accordance with this agreement, the balances
due to Holdings at November 30, 1999 and 1998 were $483 million and
$158 million, respectively.

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
NOVEMBER 30
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
Federal................................................... $ 264 $102 $ 84
State..................................................... 135 88 66
Foreign................................................... 68 81 52
----- ---- ----
$ 467 $271 $202
===== ==== ====
DEFERRED
Federal................................................... (96) 16 1
State..................................................... (54) (15) (1)
----- ---- ----
(150) 1
----- ---- ----
$ 317 $272 $202
===== ==== ====
</TABLE>

F-18
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income before taxes included $35 million, $79 million, and $86 million that
has also been subject to income taxes of foreign jurisdictions for 1999, 1998
and 1997, respectively.

The income tax provision (benefit) differs from that computed by using the
statutory federal income tax rate for the reasons shown below:

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
NOVEMBER 30
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Federal income taxes at statutory rate...................... $354 $296 $208
State and local taxes....................................... 53 47 42
Tax-exempt income........................................... (95) (70) (45)
Amortization of goodwill.................................... 3 3 3
Other, net.................................................. 2 (4) (6)
---- ---- ----
$317 $272 $202
==== ==== ====
</TABLE>

Deferred income taxes are provided for the differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated
financial statements. These temporary differences will result in future income
or deductions for income tax purposes and are measured using the enacted tax
rates that will be in effect when such items are expected to reverse. The
Company provides for deferred income taxes on undistributed earnings of foreign
subsidiaries.

At November 30, 1999 and 1998 the deferred tax assets and liabilities
consisted of the following:

<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Unrealized trading and investment activity.................. $101 $ 98
Other....................................................... 19 11
---- ----
Deferred tax assets......................................... 120 109
Deferred tax liabilities.................................... (2) (2)
---- ----
Net deferred tax assets..................................... $118 $107
==== ====
</TABLE>

The net deferred tax assets are included in Other assets in the accompanying
Consolidated Statement of Financial Condition. It is anticipated that the
Company's net deferred tax assets will be realized through future earnings,
therefore no valuation allowance has been recorded against the deferred tax
assets.

The Company has approximately $14 million of NOL carryforwards,
substantially all of which are attributable to the 1988 acquisition of E.F.
Hutton Group Inc., (now known as LB 1 Group Inc.). For book purposes, the NOL
carryforward has been transferred to Holdings in accordance with the tax sharing
agreement.

In accordance with the tax sharing agreement with Holdings, LBI was
reimbursed for $140 million of net deferred tax assets in 1999 and reimbursed
Holdings for $72 million of reversals of net deferred tax assets in 1998.

F-19
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives are financial instruments whose value is based upon an
underlying asset (e.g., treasury bond), index (e.g., S&P 500) or reference rate
(e.g., LIBOR). Over-the-counter ("OTC") derivative products are privately
negotiated contractual agreements that can be tailored to meet individual client
needs and include forwards, swaps and certain options including caps, collars
and floors. Exchange-traded derivative products are standardized contracts
transacted through regulated exchanges and include futures and certain option
contracts listed on an exchange.

In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a trading
capacity, the Company enters into derivative transactions to satisfy the needs
of its clients and to manage the Company's own exposure to market and credit
risk resulting from its trading activities (collectively, "Trading-Related
Derivative Activities"). As an end user, the Company primarily enters into
interest rate swap and option contracts to adjust the interest rate nature of
its funding sources from fixed to floating rates and to change the index upon
which floating interest rates are based (e.g., Prime to LIBOR) (collectively,
"End User Derivative Activities").

There is an extensive volume of derivative products available in the
marketplace, which can vary from a simple forward foreign exchange contract to a
complex derivative instrument with multiple risk characteristics involving the
aggregation of the risk characteristics of a number of derivative product types
including swap products, options and forwards. Listed below are examples of
various derivative product types along with a brief discussion of the
performance mechanics of certain specific derivative instruments.

SWAP PRODUCTS

Interest rate swap products include interest rate and currency swaps,
leveraged swaps, swap options, and other interest rate option products including
caps, collars, and floors. An interest rate swap is a negotiated OTC contract in
which two parties agree to exchange periodic interest payments for a defined
period, calculated based upon a predetermined notional amount. Interest payments
are usually exchanged on a net basis throughout the duration of the swap
contract. A currency swap is an OTC agreement to exchange a fixed amount of one
currency for a specified amount of a second currency at the outset and
completion of the swap term. Leveraged swaps involve the multiplication of the
interest rate factor upon which the interest payment streams are based (e.g.,
Party A pays three times the six-month LIBOR). Caps are contractual commitments
that require the writer to pay the purchaser the amount by which an interest
reference rate exceeds a defined contractual rate, if any, at specified times
during the contract. Conversely, a floor is a contractual commitment that
requires the writer to pay the amount by which a defined contractual rate
exceeds an interest reference rate at specified times over the life of the
contract, if any. Equity swaps are contractual agreements whereby one party
agrees to receive the appreciation (or depreciation) value over a strike price
on an equity investment in return for paying another rate, which is usually
based upon equity index movements or interest rates. Commodity swaps are
contractual commitments to exchange the fixed price of a commodity for a
floating price (which is usually the prevailing spot price) throughout the swap
term.

F-20
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OPTIONS

Option contracts provide the option purchaser (holder) with the right but
not the obligation to buy or sell a financial instrument, commodity or currency
at a predetermined exercise price (strike price) during a defined period
(American Option) or at a specified date (European Option). The option purchaser
pays a premium to the option seller (writer) for the right to exercise the
option. The option seller is obligated to buy (put) or sell (call) the item
underlying the contract at a set price, if the option purchaser chooses to
exercise. Option contracts also exist for various indices and are similar to
options on a security or other instrument except that, rather than settling
physical with delivery of the underlying instrument, they are cash settled. As a
purchaser of an option contract, the Company is subject to credit risk, since
the counterparty is obligated to make payments under the terms of the option
contract, if the Company exercises the option. As the writer of an option
contract, the Company is not subject to credit risk but is subject to market
risk, since the Company is obligated to make payments under the terms of the
option contract if exercised.

Option contracts may be exchange-traded or OTC. Exchange-traded options are
the obligations of the exchange and generally have standardized terms and
performance mechanics. In contrast, all of the terms of an OTC option including
the method of settlement, term, strike price, premium and security are
determined by negotiation of the parties.

FUTURES AND FORWARDS

Futures contracts are exchange-traded contractual commitments to either
receive (purchase) or deliver (sell) a standard amount or value of a financial
instrument or commodity at a specified future date and price. Maintaining a
futures contract requires the Company to deposit with the exchange an amount of
cash or other specified assets as security for its obligation. Additionally,
futures exchanges generally require the daily cash settlement of unrealized
gains/losses on open contracts with the futures exchange. Therefore, futures
contracts provide a reduced funding alternative to purchasing the underlying
cash position in the marketplace. Futures contracts may be settled by physical
delivery of the underlying asset or cash settlement (for index futures) on the
settlement date or by entering into an offsetting futures contract with the
futures exchange prior to the settlement date.

Forwards are OTC contractual commitments to purchase or sell a specified
amount of a financial instrument, foreign currency or commodity at a future date
at a predetermined price. TBAs are forward contracts which give the
purchaser/seller an obligation to obtain/deliver mortgage securities in the
future. Therefore, TBAs subject the holder to both interest rate risk and
principal prepayment risk.

TRADING-RELATED DERIVATIVE ACTIVITIES

Derivatives are subject to various risks similar to other financial
instruments including market, credit, and operational risk. In addition, the
Company may also be exposed to legal risks related to its derivative activities
including the possibility that a transaction may be unenforceable under
applicable law. The risks of derivatives should not be viewed in isolation, but
rather should be considered on an aggregate basis along with the Company's other
trading-related activities. The Company manages the risks associated with
derivatives on an aggregate basis along with the risks associated with its
proprietary trading and market-making activities in cash instruments as part of
its firmwide risk management policies.

Derivatives are generally based upon notional amounts. Notional amounts are
not recorded on-balance sheet, but rather are utilized solely as a basis for
determining future cash flows to be

F-21
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

exchanged. Therefore, notional amounts provide a measure of the Company's
involvement with such instruments, but are not indicative of actual or potential
risk.

The following table reflects the notional/contract amounts of the Company's
Trading-Related Derivative Activities:

TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
WEIGHTED-
NOTIONAL/CONTRACT AMOUNTS AVERAGE
------------------------- MATURITY
NOVEMBER 30 NOVEMBER 30 NOV. 30
1999 1998 1999
----------- ----------- ----------
(IN MILLIONS) (IN YEARS)
<S> <C> <C> <C>
Interest rate and currency swaps and options (including
caps, collars and floors)................................ $2,323,602 $1,635,636 4.64
Foreign exchange forward and future contracts and
options.................................................. 210,294 194,652 .17
Other fixed income securities contracts (including futures
contracts, options and TBAs)............................. 229,850 305,096 .45
Equity contracts (including equity swaps, futures, warrants
and options)............................................. 22,940 3,922 2.16
---------- ---------- ----
TOTAL...................................................... $2,786,686 $2,139,306 3.93
========== ========== ====
</TABLE>

Of the total notional amounts at November 30, 1999 and 1998, approximately
$2,647 billion and $1,961 billion are over-the-counter and $139 billion and
$178 billion are exchange-traded, respectively. The total weighted-average
maturity at November 30, 1999, for over-the-counter and exchange-traded
contracts was 4.11 years and 0.60 years, respectively. Approximately
$1,025 billion of the notional/contract amount of the Company's Trading-Related
Derivative Activities mature within the year ended November 30, 2000, of which
approximately 27% have maturities of less than one month.

The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains and losses recognized
currently in Principal transactions in the Consolidated Statement of Income.
Unrealized gains and losses on derivative contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products when such provisions are stated in the master netting
agreement. The Company offers equity, fixed income and foreign exchange products
to its customers. Because of the integrated nature of the market for such
products, each product area trades cash instruments as well as related
derivative products.

Listed in the following table is the fair value of the Company's
Trading-Related Derivative Activities as of November 30, 1999 and 1998 as well
as the average fair value of these instruments. Average fair values of these
instruments were calculated based upon month-end statement of financial
condition values, which the Company believes do not vary significantly from the
average fair value calculated on a more frequent basis. Variances between
average fair values and period-end values are due to changes in the volume of
activities in these instruments and changes in the valuation of these
instruments due to variations in market and credit conditions.

F-22
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
AVERAGE FAIR VALUE*
TWELVE MONTHS
FAIR VALUE* ENDED
NOVEMBER 30, 1999 NOVEMBER 30, 1999
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options (including
caps, collars and floors).............................. $3,409 $2,738 $3,620 $2,388
Foreign exchange forward contracts and options........... 650 424 678 582
Other fixed income securities contracts (including
options and TBAs)...................................... 256 192 243 232
Equity contracts (including equity swaps, warrants and
options)............................................... 934 631 459 406
Commodity contracts (including swaps, forwards, and
options)............................................... 3 1
------ ------ ------ ------
TOTAL.................................................... $5,249 $3,985 $5,003 $3,609
====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
AVERAGE FAIR VALUE*
TWELVE MONTHS
FAIR VALUE* ENDED
NOVEMBER 30, 1998 NOVEMBER 30, 1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options (including
caps, collars and floors).............................. $4,491 $2,371 $4,298 $2,283
Foreign exchange forward contracts and options........... 476 752 652 593
Other fixed income securities contracts (including
options and TBAs)...................................... 217 211 281 256
Equity contracts (including equity swaps, warrants and
options)............................................... 385 473 188 246
Commodity contracts (including swaps, forwards, and
options)............................................... 11 9 24 7
------ ------ ------ ------
TOTAL.................................................... $5,580 $3,816 $5,443 $3,385
====== ====== ====== ======
</TABLE>

- ------------------------

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

Assets included in the table above represent the Company's unrealized gains,
net of unrealized losses for situations in which the Company has a master
netting agreement. Similarly, liabilities represent net amounts owed to
counterparties. Therefore, the fair value of assets/liabilities related to
derivative contracts at November 30, 1999 represents the Company's net
receivable/payable for derivative financial instruments before consideration of
collateral. Included within the $5,249 million fair value of assets at
November 30, 1999 was $4,489 million related to swaps and other OTC contracts
and $760 million related to exchange-traded option and warrant contracts.
Included within the $5,580 million fair value of assets at November 30, 1998 was
$5,333 million related to swaps and other OTC contracts and $247 million related
to exchange-traded option and warrant contracts.

The primary difference in risks related to OTC and exchange-traded contracts
is credit risk. OTC contracts contain credit risk for unrealized gains from
various counterparties for the duration of the contract, net of collateral.

F-23
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

With respect to OTC contracts, including swaps, the Company views its third
party net credit exposure to be $3,176 million at November 30, 1999,
representing the fair value of the Company's OTC contracts in an unrealized gain
position, after consideration of amounts due from affiliates of $932 million and
collateral of $381 million.

Counterparties to the Company's OTC derivative products are primarily
financial intermediaries (U.S. and foreign banks), securities firms,
corporations, governments and their agencies, finance companies, insurance
companies, investment companies and pension funds. Collateral held related to
OTC contracts generally includes cash and U.S. government and federal agency
securities. Presented below is an analysis of the Company's third party net
credit exposure at November 30, 1999 for OTC contracts based upon actual ratings
made by external rating agencies or by equivalent ratings established and
utilized by the Company's Credit Risk Management Department.

<TABLE>
<CAPTION>
COUNTERPARTY S&P/MOODY'S NET CREDIT
RISK RATING EQUIVALENT EXPOSURE
- --------------------- ------------------- ----------
<S> <C> <C>
1...... AAA/Aaa 17%
2...... AA-/Aa3 or higher 19%
3...... A-/A3 or higher 38%
4...... BBB-/Baa3 or higher 18%
5...... BB-/Ba3 or higher 5%
6...... B+/B1 or lower 3%
</TABLE>

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

END USER DERIVATIVE ACTIVITIES

The Company utilizes interest rate swap agreements as an end user to modify
the interest rate characteristics of its long-term debt portfolio. The Company
actively manages the interest rate exposure on its long-term debt portfolio
through the use of interest rate and currency swaps to more closely match the
terms of its debt portfolio to the assets being funded and to minimize interest
rate risk. At November 30, 1999 and 1998, the notional amounts of the Company's
end user activities related to its long-term debt obligations were approximately
$3.0 billion and $2.9 billion, respectively. (For a further discussion of the
Company's long-term debt-related end user derivative activities see Note 3).

The Company also utilizes derivative products as an end user to modify its
interest rate exposure associated with its secured financing activities,
including securities purchased under agreements to resell, securities borrowed,
securities sold under agreements to repurchase and securities loaned. At
November 30, 1999 and 1998, the Company had $159 billion and $127 billion,
respectively, of such secured financing activities. As with the Company's
long-term debt, its secured financing activities expose the Company to interest
rate risk. The Company, as an end user, manages the interest rate risk related
to these activities by utilizing derivative financial instruments, including
interest rate swaps and purchased options. The Company designates certain
specific derivative transactions against specific assets and liabilities with
matching maturities. In addition, the Company manages the interest rate risk of
anticipated secured financing transactions with derivative products. The Company
actively monitors the level of anticipated

F-24
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

secured financing transactions to ensure there is a high degree of certainty
that such secured financing transactions will be executed at levels at least
equal to the designated derivative product transactions. At November 30, 1999
and 1998, the Company, as an end user, utilized derivative financial instruments
with an aggregate notional amount of $12.9 billion and $73.4 billion,
respectively, to modify the interest rate characteristics of its secured
financing activities. The total notional amount of these agreements had a
weighted-average maturity of 2.3 years and 1.0 years as of November 30, 1999 and
1998, respectively. On an overall basis, the Company's secured financing end
user derivative activities increased (decreased) net revenues by approximately
$(13) million, $4 million and $(10) million for 1999, 1998 and 1997,
respectively.

NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires the Company to report the fair value of financial instruments, as
defined. Assets and liabilities that are carried at fair value include all of
the Company's trading assets and liabilities including derivative financial
instruments used for trading purposes as described in Note 1, which are recorded
as securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased.

Assets and liabilities, which are recorded at contractual amounts that
approximate market or fair value include cash and cash equivalents, cash and
securities segregated and on deposit for regulatory and other purposes,
receivables, certain other assets, commercial paper and short-term debt, and
payables. The market value of such items are not materially sensitive to shifts
in market interest rates because of the limited term to maturity of these
instruments or their variable interest rates.

Financial instruments which are recorded at amounts that do not necessarily
approximate market or fair value include long-term debt, certain secured
financing activities and the related financial instruments utilized by the
Company as an end user to manage the interest rate risk of these exposures. The
Company's long-term debt is recorded at contractual or historical amounts. The
following table provides a summary of the fair value of the Company's long-term
debt and related end user derivative activities. The fair value of the Company's
long-term debt was estimated using either quoted market prices or discounted
cash flow analyses based on the Company's current borrowing rates for similar
types of borrowing arrangements. The fair value of the Company's long-term debt
is subject to changes in its credit spreads, which fluctuated significantly in
1999 and 1998. The unrecognized net gain (loss) related to the Company's end
user derivative activities reflects estimated fair values based on market rates
at November 30, 1999 and 1998, respectively.

<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Carrying value of long-term debt............................ $3,959 $4,279
Fair value of long-term debt................................ 3,944 4,381
------ ------
Unrecognized net gain (loss) on long-term debt.............. $ 15 $ (102)
====== ======
Unrecognized net gain (loss) on long-term debt end user
activities................................................ $ (36) $ 155
====== ======
</TABLE>

The Company carries its secured financing activities, including securities
purchased under agreements to resell, securities borrowed, securities sold under
agreements to repurchase, and securities loaned, at their original contract
amount plus accrued interest. As the majority of such financing activities are
short term in nature, carrying value approximates fair value. At November 30,
1999 and 1998, the Company had $159 billion and $127 billion, respectively, of
such secured financing activities. As with the Company's long-term debt, its
secured financing activities expose the Company to interest rate risk.

F-25
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At November 30, 1999 and 1998, the Company, as an end user, utilized
derivative financial instruments with an aggregate notional amount of
$12.9 billion and $73.4 billion, respectively, to modify the interest rate
characteristics of its secured financing activities. The unrecognized net losses
related to these derivative financial instruments were $11 million and
$110 million at November 30, 1999 and 1998, respectively, which were
substantially offset by unrecognized net gains on the Company's secured
financing activities, including anticipated transactions during the hedge
period. Additionally, at November 30, 1999 the Company had approximately
$23 million of unrecognized gains related to approximately $2.5 billion of
long-term fixed-rate repurchase agreements as compared to unrecognized net
losses of approximately $84 million on approximately $4.4 billion of such
agreements at November 30, 1998.

NOTE 10. OTHER COMMITMENTS AND CONTINGENCIES

As of November 30, 1999 and 1998, the Company was contingently liable for
$1.9 billion and $1.7 billion, respectively, of letters of credit, primarily
used to provide collateral for securities and commodities borrowed and to
satisfy margin deposits at option and commodity exchanges, and other guarantees.

As of November 30, 1999 and 1998, in connection with its financing
activities, the Company had outstanding commitments under certain lending
arrangements of approximately $4.2 billion and $3.0 billion, respectively. These
commitments require borrowers to provide acceptable collateral, as defined in
the agreements, when amounts are drawn under the lending facilities. Advances
made under the above lending arrangements are typically at variable interest
rates and generally provide for over-collateralization based upon the borrowers'
creditworthiness.

As of November 30, 1999, the Company had pledged securities, primarily fixed
income, having a market value of approximately $18.3 billion, as collateral for
securities borrowed having a market value of approximately $17.7 billion.

Securities and other financial instruments sold but not yet purchased
represent obligations of the Company to purchase the securities at prevailing
market prices. Therefore, the future satisfaction of such obligations may be for
an amount greater or less than the amount recorded. The ultimate gain or loss is
dependent upon the price at which the underlying financial instrument is
purchased to settle its obligation under the sale commitment.

In the normal course of business, the Company is exposed to off-balance
sheet credit and market risk as a result of executing, financing and settling
various customer security and commodity transactions. Off-balance sheet risk
arises from the potential that customers or counterparties fail to satisfy their
obligations and that the collateral obtained is insufficient. In such instances,
the Company may be required to purchase or sell financial instruments at
unfavorable market prices. The Company seeks to control these risks by obtaining
margin balances and other collateral in accordance with regulatory and internal
guidelines.

The Company through its high grade and high yield sales, trading and
underwriting activities, makes commitments to extend credit in loan syndication
transactions and then participates out a significant portion of these
commitments. The Company had lending commitments to high grade borrowers of
$2.8 billion and $610 million at November 30, 1999 and 1998, respectively. In
addition, lending commitments to high yield borrowers totaled $903 million and
$1.5 billion at November 30, 1999 and 1998, respectively. All of these
commitments and any related draw downs of these facilities are typically secured
against the borrower's assets, have fixed maturity dates, and are generally
contingent upon certain representations, warranties and contractual conditions
applicable to the borrower. Total commitments are

F-26
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

not indicative of actual risk or funding requirements as the commitments may not
be drawn or fully utilized and the Company will continue to syndicate and/or
sell these commitments.

At November 30, 1999 and 1998, the Company had commitments to invest up to
$302 million and $238 million, respectively, directly and through partnerships,
in private equity related investments. These commitments will be funded as
required through the end of the respective investment periods, principally
expiring in 2004.

In addition to these specific commitments, the Company had various other
commitments of approximately $300 million and $305 million at November 30, 1999
and 1998, respectively.

Subsidiaries of the Company, as general partner, are contingently liable for
the obligations of certain public and private limited partnerships organized as
pooled investment funds or engaged primarily in real estate activities. In the
opinion of the Company, contingent liabilities, if any, for the obligations of
such partnerships will not in the aggregate have a material adverse effect on
the Company's consolidated financial position or results of operations.

In the normal course of its business, the Company has been named a defendant
in a number of lawsuits and other legal proceedings. After considering all
relevant facts, available insurance coverage and the advice of outside counsel,
in the opinion of the Company such litigation will not, in the aggregate, have a
material adverse effect on the Company's consolidated financial position or
results of operations.

CONCENTRATIONS OF CREDIT RISK

As a major international securities firm, the Company is actively involved
in securities underwriting, brokerage, distribution and trading. These and other
related services are provided on a worldwide basis to a large and diversified
group of clients and customers, including multinational corporations,
governments, emerging growth companies, financial institutions and individual
investors.

A substantial portion of the Company's securities and commodities
transactions is collateralized and is executed with, and on behalf of,
commercial banks and other institutional investors, including other brokers and
dealers. The Company's exposure to credit risk associated with the
non-performance of these customers and counterparties in fulfilling their
contractual obligations pursuant to securities transactions can be directly
impacted by volatile or illiquid trading markets, which may impair the ability
of customers and counterparties to satisfy their obligations to the Company.

Securities and other financial instruments owned by the Company include U.S.
government and agency securities, and securities issued by non-U.S. governments
which, in the aggregate, represented 16% of the Company's total assets at
November 30, 1999. In addition, primarily all of the collateral held by the
Company for resale agreements represented 44% of total assets at November 30,
1999 and consisted of securities issued by the U.S. government, federal agencies
or non-U.S. governments. The Company's most significant industry concentration
is financial institutions, which include other brokers and dealers, commercial
banks and institutional clients. This concentration arises in the normal course
of the Company's business.

LEASE COMMITMENTS

The Company leases office space and equipment throughout the world and is a
party to a ground lease with the Battery Park City Authority covering its
headquarters at 3 World Financial Center which extends through 2069. Total rent
expense for 1999, 1998 and 1997 was $12 million, $12 million and $15 million,
respectively. Certain leases on office space contain escalation clauses
providing for additional rentals based upon maintenance, utility and tax
increases.

F-27
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Minimum future rental commitments under non-cancelable operating leases (net
of subleases of $25 million) are as follows (in millions):

<S> <C>
Fiscal 2000.............................................. $ 14
Fiscal 2001.............................................. 13
Fiscal 2002.............................................. 13
Fiscal 2003.............................................. 11
Fiscal 2004.............................................. 8
December 1, 2004 and thereafter.......................... 179
----
$238
====
</TABLE>

NOTE 11. RELATED PARTY TRANSACTIONS

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

Holdings has allocated to the Company the cost of certain employees and
space in the World Financial Center and 101 Hudson Street, Jersey City, New
Jersey. In addition, the Company charges other affiliates of Holdings for
services it provides. A portion of these reimbursements are variable in nature.
These amounts, including any reimbursements, are classified in the Consolidated
Statement of Income as Management fees or Compensation and benefits as
appropriate.

In addition, Holdings and subsidiaries of Holdings raise money through
short-and long-term funding in the capital markets, which is used to fund the
operations of certain of the Company's wholly owned subsidiaries. Advances from
Holdings and other affiliates were $16.1 billion and $21.5 billion at
November 30, 1999 and 1998, respectively.

In connection therewith, advances from Holdings aggregating approximately
$13.2 billion and $18.3 billion at November 30, 1999 and 1998, respectively, are
generally payable on demand. The average interest rate charged on these advances
is primarily based on Holdings' average daily cost of funds, which was 5.5% and
5.8% for the twelve months ended November 30, 1999 and 1998, respectively. In
addition, the Company had borrowings from Holdings and subsidiaries of Holdings,
classified as subordinated indebtedness, of approximately $757 million and
$957 million at November 30, 1999 and 1998, respectively. In addition, the
Company has advances from other subsidiaries of Holdings aggregating
approximately $2.9 billion and $3.2 billion at November 30, 1999 and 1998,
respectively, with various repayment terms. The Company had notes and other
receivables due from Holdings and subsidiaries of Holdings aggregating
approximately $5.1 billion and $4.3 billion at November 30, 1999 and 1998,
respectively, with various interest rates and repayment terms.

At November 30, 1999, the Company had $15.6 billion of securities purchased
under agreements to resell and $14.3 billion of securities sold under agreements
to repurchase with Holdings and subsidiaries of Holdings.

The Company believes that amounts arising through related party
transactions, including those allocated expenses referred to above, are
reasonable and approximate the amounts that would have been recorded if the
Company operated as an unaffiliated entity.

F-28
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 1999, the Company paid $120 million to Holdings, $75 million as a
return of capital and $45 million as dividends. In 1998, the Company paid
$65 million to Holdings, $4 million as a return of capital and $61 million as
dividends.

NOTE 12. SEGMENTS

Lehman Brothers operates in three segments: Investment Banking, Capital
Markets, and Other.

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

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

Other consists of the Company's asset management and private equity
businesses, neither of which represents more than 10% of the Company's
consolidated net revenues, earnings before taxes or assets.

The Company's segment information for fiscal years 1999, 1998 and 1997 is
presented below and was developed consistent with the accounting policies used
to prepare the Company's consolidated financial statements.

<TABLE>
<CAPTION>
INVESTMENT CAPITAL
BANKING MARKETS OTHER TOTAL
---------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
NOVEMBER 30, 1999
Net revenue................................................ $1,252 $2,230 $ 5 $3,487
====== ====== ==== ======
Earnings before taxes...................................... $ 270 $ 772 $(29) $1,013
====== ====== ==== ======
Segment assets (billions).................................. $ 1.1 $130.9 $7.2 $139.2
====== ====== ==== ======

NOVEMBER 30, 1998
Net revenue................................................ $1,196 $1,580 $ 95 $2,871
====== ====== ==== ======
Earnings before taxes...................................... $ 322 $ 461 $ 64 $ 847
====== ====== ==== ======
Segment assets (billions).................................. $ 0.7 $112.4 $7.7 $120.8
====== ====== ==== ======

NOVEMBER 30, 1997
Net revenue................................................ $ 867 $1,578 $156 $2,601
====== ====== ==== ======
Earnings before taxes...................................... $ 190 $ 278 $125 $ 593
====== ====== ==== ======
Segment assets (billions).................................. $ 1.1 $105.5 $7.7 $114.3
====== ====== ==== ======
</TABLE>

F-29
<PAGE>
LEHMAN BROTHERS INC. AND SUBSIDIAIRES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following are net revenues by geographic region:

<TABLE>
<CAPTION>
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Americas*................................ $3,132 $2,688 $2,357
Europe................................... 266 31 96
Asia Pacific............................. 89 152 148
------ ------ ------
Total................................ $3,487 $2,871 $2,601
====== ====== ======
</TABLE>

- ------------------------

* Includes non-U.S. revenues of $22 million, $35 million and $17 million in
1999, 1998 and 1997, respectively.

The following information describes the Company's methods of allocating
consolidated net revenues to geographic regions. Net Revenues, if syndicated or
trading-related, have been distributed based upon the location where the primary
or secondary position was fundamentally risk managed: if fee-related, by the
location of the senior coverage banker; if commission-related, by the location
of the salespeople. In addition, certain revenues associated with domestic
products and services which resulted from relationships with international
clients and customers have been reclassified as international revenues using an
allocation consistent with the Company's internal reporting.

NOTE 13. QUARTERLY INFORMATION (UNAUDITED)

The following information represents the Company's unaudited quarterly
results of operations for 1999 and 1998. Certain amounts reflect
reclassifications to conform to the current period's presentation. These
quarterly results reflect all normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the results.
Revenues and earnings of the Company can vary significantly from quarter to
quarter due to the nature of the Company's business activities.

<TABLE>
<CAPTION>
1999 1998
----------------------------------------- -----------------------------------------
NOV. 30 AUG. 31 MAY 31 FEB. 28 NOV. 30 AUG. 31 MAY 31 FEB. 28
-------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues........................ $3,995 $3,985 $4,093 $3,949 $3,930 $4,766 $4,791 $4,102
Interest expense...................... 2,987 3,100 3,272 3,176 3,663 3,928 3,783 3,356
------ ------ ------ ------ ------ ------ ------ ------
Net revenues.......................... 1,008 885 821 773 267 838 1,008 746
Non-interest expenses
Compensation and benefits........... 508 446 434 376 194 375 512 364
Other expenses...................... 138 230 169 173 56 165 166 180
------ ------ ------ ------ ------ ------ ------ ------
Total non-interest expenses........... 646 676 603 549 250 540 678 544
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes................... 362 209 218 224 17 298 330 202
Provision for (benefit from) income
taxes............................... 118 70 62 67 (40) 106 130 76
------ ------ ------ ------ ------ ------ ------ ------
Net income............................ $ 244 $ 139 $ 156 $ 157 $ 57 $ 192 $ 200 $ 126
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

F-30

<PAGE>
EXHIBIT 12

LEHMAN BROTHERS INC. AND SUBSIDIARIES

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

(DOLLARS IN MILLIONS)

(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE FOR THE
TWELVE TWELVE TWELVE TWELVE TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing
operations...................... $ 78 $ 309 $ 593 $ 847 $ 1,013
Add: Fixed charges (excluding
capitalized interest)........ 9,980 10,140 12,233 14,746 12,552
------- ------- ------- ------- -------
Pre-tax earnings before
fixed charges................... 10,058 10,449 12,826 15,593 13,565
======= ======= ======= ======= =======
Fixed charges:
Interest........................ 9,954 10,121 12,216 14,730 12,535
Other(a)........................ 27 25 19 20 17
------- ------- ------- ------- -------
Total fixed charges............. $ 9,981 $10,146 $12,235 $14,750 $12,552
======= ======= ======= ======= =======
RATIO OF EARNINGS TO
FIXED CHARGES................... 1.01 1.03 1.05 1.06 1.08
</TABLE>

- ------------------------

(a) Other fixed charges consist of the interest factor in rentals and
capitalized interest.

<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this 1999 Annual Report on
Form 10-K of Lehman Brothers Holdings Inc. (the "Company") of our report dated
January 6, 2000, included in the 1999 Annual Report to Stockholders of Lehman
Brothers Holdings Inc.

Our audits also included the financial statement schedule of Lehman Brothers
Holdings Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

We also consent to the incorporation by reference in the Registration
Statements and Post Effective Amendments on Form S-3 File Nos. 333-50197,
33-53651, 333-57238, 333-07875 and 33-53923 of Lehman Brothers Holdings Inc. and
in the related Prospectuses, of our report dated January 6, 2000 with respect to
the consolidated financial statements and financial statement schedule of Lehman
Brothers Holdings Inc. included or incorporated by reference in this 1999 Annual
Report on Form 10-K for the year ended November 30, 1999.

[LOGO]

Ernst & Young LLP

New York, New York
February 28, 2000

<PAGE>
EXHIBIT 24

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Russo, Joseph Polizzotto and Jennifer
Marre and each of them, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign the Annual Report
on Form10-K of Lehman Brothers HoldingsInc., for the fiscal year ended
November30, 1999 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Dated: As of February 28, 2000

<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ RICHARD S. FULD JR. Chief Executive Officer and Chairman of the
------------------------------------------- Board of Directors
Richard S. Fuld Jr. (principal executive officer)

/s/ JOHN L. CECIL
------------------------------------------- Chief Financial and Administrative Officer
John L. Cecil (principal financial and accounting officer)

/s/ MICHAEL L. AINSLIE
------------------------------------------- Director
Michael L. Ainslie

/s/ JOHN F. AKERS
------------------------------------------- Director
John F. Akers

/s/ ROGER S. BERLIND
------------------------------------------- Director
Roger S. Berlind

/s/ THOMAS H. CRUIKSHANK
------------------------------------------- Director
Thomas H. Cruikshank

/s/ HENRY KAUFMAN
------------------------------------------- Director
Henry Kaufman

/s/ HIDEICHIRO KOBAYASHI
------------------------------------------- Director
Hideichiro Kobayashi

/s/ JOHN D. MACOMBER
------------------------------------------- Director
John D. Macomber

/s/ DINA MERRILL
------------------------------------------- Director
Dina Merrill
</TABLE>

<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT NOVEMBER 30, 1999
(UNAUDITED) AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED
NOVEMBER 30, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 2,818
<RECEIVABLES> 11,188
<SECURITIES-RESALE> 61,365
<SECURITIES-BORROWED> 11,243
<INSTRUMENTS-OWNED> 51,907
<PP&E> 280
<TOTAL-ASSETS> 139,182
<SHORT-TERM> 615
<PAYABLES> 10,344
<REPOS-SOLD> 76,587
<SECURITIES-LOANED> 9,809
<INSTRUMENTS-SOLD> 18,647
<LONG-TERM> 3,959
0
0
<COMMON> 0
<OTHER-SE> 3,103
<TOTAL-LIABILITY-AND-EQUITY> 139,182
<TRADING-REVENUE> 1,378
<INTEREST-DIVIDENDS> 12,904
<COMMISSIONS> 478
<INVESTMENT-BANKING-REVENUES> 1,245
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 12,535
<COMPENSATION> 1,764
<INCOME-PRETAX> 1,013
<INCOME-PRE-EXTRAORDINARY> 696
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 696
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>