SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


               [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the quarterly period ended May 31, 1998

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
           For the transition period from ____________ to ____________

                          Commission file number 1-6817

                              Lehman Brothers Inc.
             (Exact Name of Registrant As Specified In Its Charter)

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

       3 World Financial Center
          New York, New York                          10285
        (Address of principal                      (Zip Code)
           executive offices)

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


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 ______

As of June 30, 1998,  1,006 shares of the  Registrant's  Common Stock, par value
$.10 per share, were outstanding.
                    


<PAGE>


                                                              
                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                       FOR THE QUARTER ENDED MAY 31, 1998

                                      INDEX

Part I.       FINANCIAL INFORMATION                             Page Number

    Item 1.   Financial Statements - (unaudited)

                   Consolidated Statement of Income -
                     Three and Six Months Ended
                     May 31, 1998 and 1997 ...............................3


                   Consolidated Statement of Financial Condition -
                     May 31, 1998 and 1997 ...............................5

                   Consolidated Statement of Cash Flows -
                     Six Months Ended
                         May 31, 1998 and 1997............................7


                   Notes to Consolidated Financial Statements.............9

    Item 2.   Management's Discussion and Analysis of
              Financial Condition and Results of Operations...............14

Part II.      OTHER INFORMATION

    Item 1.   Legal Proceedings...........................................30

    Item 6.   Exhibits and Reports on Form 8-K ...........................32

Signatures................................................................33

EXHIBIT INDEX         ....................................................34

Exhibits


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                        CONSOLIDATED STATEMENT of INCOME
                                   (Unaudited)
                                  (In millions)

                                                    Three months ended
                                                  May 31          May 31
                                                  1998            1997
                                                 ---------       --------
Revenues
    Principal transactions                         $  324          $  158
    Investment banking                                424             210
    Commissions                                        97              74
    Interest and dividends                          3,943           2,954
    Other                                               3               9
                                                    -----           -----
         Total revenues                             4,791           3,405
    Interest expense                                3,783           2,850
                                                    -----           -----
         Net revenues                               1,008             555
                                                    -----           -----
Non-interest expenses
    Compensation and benefits                         512             259
    Brokerage, commissions and clearance fees          48              55
    Professional services                              17              22
    Occupancy and equipment                            14              16
    Communications                                     24              22
    Business development                               22              18
    Depreciation and amortization                      13              13
    Management fees                                    16              16
    Other                                              12              48
                                                    -----           -----
          Total non-interest expenses                 678             469
                                                    -----           -----
Income before taxes                                   330              86
    Provision for income taxes                        130              27
                                                    -----           -----
Net income                                          $ 200          $   59
                                                    =====          ======


                 See notes to consolidated financial statements.


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                        CONSOLIDATED STATEMENT of INCOME
                                   (Unaudited)
                                  (In millions)

                                                          Six months ended
                                                       May 31        May 31
                                                        1998          1997
                                                     ----------   ----------
Revenues
    Principal transactions                               $  607      $  384
    Investment banking                                      682         402
    Commissions                                             192         157
    Interest and dividends                                7,403       5,885
    Other                                                     9          17
                                                         ------      ------
         Total revenues                                   8,893       6,845
    Interest expense                                      7,139       5,669
                                                         ------      ------
         Net revenues                                     1,754       1,176
                                                         ------      ------
Non-interest expenses
    Compensation and benefits                               876         619
    Brokerage, commissions and clearance fees                90         105
    Professional services                                    37          43
    Communications                                           47          44
    Occupancy and equipment                                  30          32
    Business development                                     41          35
    Depreciation and amortization                            27          26
    Management fees                                          24          31
    Other                                                    50          86
                                                          -----       -----
          Total non-interest expenses                     1,222       1,021
                                                          -----       -----
Income before taxes                                         532         155
    Provision for income taxes                              206          49
                                                          -----       -----
Net income                                                $ 326       $ 106
                                                          =====       =====


                 See notes to consolidated financial statements.


<PAGE>


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


                                                       May 31       November 30
ASSETS                                                  1998           1997
------                                                  ----           ----
       
Cash and cash equivalents                           $     512      $     220

Cash and securities segregated and on deposit
  for regulatory and other purposes                     1,259          1,128

Securities and other financial instruments owned:
   Governments and agencies                            23,918         17,467
   Corporate equities                                   7,148          5,439
   Corporate debt and other                             7,765          5,544
   Mortgages and mortgage-backed                        5,967          2,751
   Derivatives and other contractual agreements         5,543          5,528
   Certificates of deposit and other money market 
     instruments                                        2,834          2,248
                                                       ------         ------
                                                       53,175         38,977
                                                       ------         ------
Collateralized short-term agreements:
   Securities purchased under agreements to resell     54,204         49,610
   Securities borrowed                                 20,148         13,661

Receivables:
   Brokers, dealers and clearing organizations          3,372          3,148
   Customers                                            3,421          3,874
   Others                                               4,937          3,107

Property, equipment and leasehold improvements
  (net of accumulated depreciation and amortization
  of $546 in 1998 and $533 in 1997)                       262            262

Other assets                                              183            146

Excess of cost over fair value of net assets
  acquired (net of accumulated amortization
  of $105 in 1998 and $102 in 1997)                       155            158
                                                     --------       --------
       Total assets                                  $141,628       $114,291
                                                     ========       ========


                 See notes to consolidated financial statements.


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
            CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
                                   (Unaudited)
                        (In millions, except share data)

                                                          May 31     November 30
                                                            1998         1997
                                                            ----         ----

LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt                     $   1,554     $     740
Securities and other financial instruments sold but 
not yet purchased:
   Governments and agencies                                 10,459         8,556
   Corporate equities                                        4,830         3,124
   Corporate debt and other                                  1,960         1,664
   Derivatives and other contractual agreements              3,789         3,685
                                                          --------      --------
                                                            21,038        17,029
                                                           -------       -------
Collateralized short-term financings:
   Securities sold under agreements to repurchase           64,473
                                                                          56,017
   Securities loaned                                        12,010         7,764
Advances from Holdings and other affiliates                 20,881        14,777
Payables:
   Brokers, dealers and clearing organizations               5,377         3,127
   Customers                                                 7,291         6,118
Accrued liabilities and other payables                       2,172         2,166
Long-term debt:
   Senior notes                                                159           229
   Subordinated indebtedness                                 4,336         4,313
                                                         ---------     ---------
           Total liabilities                               139,291       112,280
                                                           -------       -------
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                                1,756         1,756
   Foreign currency translation adjustment                       3             3
   Retained earnings                                           578           252
                                                        ----------   -----------
            Total stockholder's equity                       2,337         2,011
                                                        ----------    ----------
            Total liabilities and stockholder's equity    $141,628      $114,291
                                                          ========      ========

                 See notes to consolidated financial statements.


<PAGE>


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

                                                             Six months ended
                                                            May 31      May 31
                                                             1998        1997
                                                          ---------    --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                 $   326    $    106
Adjustments to reconcile net income to net cash used in
     operating activities:
  Depreciation and amortization                                 27          26
  Provisions for losses and other reserves                      24          19
  Deferred tax benefit                                                     (24)
  Other adjustments                                             39           7
Net change in:
  Cash and securities segregated                              (131)       (143)
  Securities and other financial instruments owned         (14,198)      2,630
  Securities purchased under agreements to resell           (4,594)     (9,739)
  Securities borrowed                                       (6,487)     (1,866)
  Receivables from brokers, dealers and clearing 
     organizations                                            (224)      1,625
  Receivables from customers                                   453         192
  Securities and other financial instruments sold but
     not yet purchased                                       4,009       5,141
  Securities sold under agreements to repurchase             8,456      (2,222)
  Securities loaned                                          4,246       3,594
  Payables to brokers, dealers and clearing organizations    2,250          59
  Payables to customers                                      1,173      (1,354)
  Accrued liabilities and other payables                       (18)       (356)
  Other operating assets and liabilities, net               (1,877)       (554)
                                                            ------     -------

          Net cash used in operating activities            $(6,526)    $(2,859)
                                                           -------     -------

                 See notes to consolidated financial statements.


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
                                   (Unaudited)
                                  (In millions)

                                                             Six months ended
                                                            May 31      May 31
                                                             1998        1997
                                                            -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes                         $   (79)
Proceeds from issuance of subordinated indebtedness            600      $ (409)
Principal payments of subordinated indebtedness               (607)        508
Net (payments for) proceeds from commercial paper and
    short-term debt                                            814        (539)
Increase in advances from Holdings and other affiliates      6,104       3,094
Capital contributions                                                       48
Dividends and capital distributions paid                                   (18)
                                                            ------       ------
            Net cash provided by financing activities       6,832        2,684
                                                            ------       ------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements    (14)          (6)
                                                            ------       ------
           Net cash used in investing activities              (14)          (6)
                                                            ------       ------
           Net change in cash and cash equivalents             292        (181)
                                                            ------       ------
Cash and cash equivalents, beginning of period                 220         396
                                                            ------       ------
           Cash and cash equivalents, end of period         $  512      $  215
                                                            ======       ======


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

         Interest  paid  totaled  $7,139 and $5,676 for the six months ended May
31, 1998 and 1997, respectively. Income taxes paid totaled $298 and $307 for the
six months ended May 31, 1998 and 1997, respectively.


                 See notes to consolidated financial statements.

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation:

         The consolidated  financial  statements  include the accounts of Lehman
Brothers   Inc.,   a   registered   broker-dealer   ("LBI")   and   subsidiaries
(collectively,  the  "Company").  LBI is a  wholly-owned  subsidiary  of  Lehman
Brothers 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 Company's  financial
statements  have been prepared in accordance  with the rules and  regulations of
the Securities and Exchange Commission (the "SEC") with respect to the Form 10-Q
and  reflect  all normal  recurring  adjustments  which are,  in the  opinion of
management,  necessary  for a fair  presentation  of the results for the interim
periods  presented.  Pursuant to such rules and  regulations,  certain  footnote
disclosures  which are normally  required under  generally  accepted  accounting
principles  have  been  omitted.  It  is  recommended  that  these  consolidated
financial  statements  be read in  conjunction  with  the  audited  consolidated
financial  statements  included in the Company's  Annual Report on Form 10-K for
the twelve months ended  November 30, 1997 (the "Form 10-K").  The  Consolidated
Statement  of  Financial  Condition  at November  30, 1997 was derived  from the
audited financial statements.

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

2.  Accounting Policies:

         On  January  1, 1998,  SFAS No.  125,  "Accounting  for  Transfers  and
Servicing of Financial Assets and  Extinguishments of Liabilities"  became fully
effective.  Previously, the FASB had deferred until that date certain provisions
of SFAS No. 125  pertaining to  repurchase  agreements,  securities  lending and
similar financing transactions.  As a result of adopting the deferred provisions
of SFAS No. 125, the Company recognized approximately $100 million of collateral
controlled on certain financing  transactions and a corresponding  obligation to
return such collateral at the termination of such transactions.

         In March 1998,  the  Accounting  Standards  Executive  Committee of the
American  Institute of Certified Public Accountants issued Statement of Position
98-1,  "Accounting for the Costs of Computer Software  Developed or Obtained for
Internal  Use" (the "SOP").  The SOP requires  that  certain  costs  incurred in
connection   with   developing  or  obtaining   software  for  internal  use  be
capitalized.  The SOP requires prospective application as of the beginning of an
entity's  fiscal  year  without  adjustment  for  costs  that  would  have  been
capitalized had the SOP been in effect in prior periods. The Company has elected
early adoption of this accounting pronouncement effective as of the beginning of
its 1998 fiscal year and capitalized  approximately $4.0 million of internal use
software costs during the first half of 1998.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


3.  Long-Term Debt:

         During the six months  ended May 31,  1998,  the  Company  issued  $600
million of subordinated  indebtedness  maturing 2008.  These issuances have been
effectively  converted  to  floating  rate  obligations,  based  on  the  London
Interbank  Offered Rate  ("LIBOR")  through the use of interest  rate swaps.  In
addition, $686 million of long-term debt matured during the six months ended May
31, 1998.

4.  Capital Requirements:

         As a registered broker-dealer,  LBI, is subject to SEC Rule 15c3-1, the
Net Capital  Rule,  which  requires LBI to maintain net capital of not less than
the greater of 2% of aggregate  debit items arising from customer  transactions,
as defined,  or 4% of funds required to be segregated  for customers'  regulated
commodity  accounts,  as defined. At May 31, 1998, LBI's regulatory net capital,
as  defined,  of $1,435  million  exceeded  the  minimum  requirement  by $1,307
million.  The Company's  "AAA" rated  derivatives  subsidiary,  Lehman  Brothers
Financial Products Inc. ("LBFP"),  has established certain capital and operating
restrictions  which are reviewed by various  rating  agencies.  At May 31, 1998,
LBFP had capital which exceeded the  requirement  of the most  stringent  rating
agency by approximately $95 million.

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

5.  Derivative Financial Instruments:

         In the normal course of business,  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 risks  resulting  from its trading  activities  in
cash instruments (collectively, "Trading-Related Derivative Activities").

         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 and against cash collateral when such provisions are
stated in the master  netting  agreement.  Listed in the following  table is the
fair value and average fair value of the  Company's  Trading-Related  Derivative
Activities.  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


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


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.

<TABLE>
<CAPTION>
                                                                                                    Average Fair Value*
                                                                       Fair Value*                    Six Months Ended
                                                                       May 31, 1998                    May 31, 1998
                                                                 ------------------------        ------------------
(in millions)                                                     Assets      Liabilities          Assets       Liabilities
---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S>                                                               <C>           <C>               <C>            <C>   
     (including caps, collars and floors)                         $4,300        $2,294            $4,241         $2,420
Foreign exchange forward contracts and options                       754           993               745            712
Options on other fixed income securities,
     mortgage-backed securities forward contracts
     and options                                                     237           202               234            218
Equity contracts (including equity warrants
     and options)                                                    224           293               196            226
Commodity contracts (including swaps, forwards,
     and options)                                                     28             7                34              8
                                                                -------------------------------------------------------
Total                                                             $5,543        $3,789            $5,450         $3,584
                                                                -------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

                                                                                                 Average Fair Value*
                                                                       Fair Value*              Twelve Months Ended
                                                                November 30, 1997                     November 30, 1997
                                                                -----------------                   -------------------
(in millions)                                                     Assets      Liabilities        Assets         Liabilities
---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S>                                                               <C>           <C>                <C>              <C>   
     (including caps, collars and floors)                         $4,123        $2,344             $4,227           $2,295
Foreign exchange forward contracts and options                     1,066          1,072               847            1,120
Options on other fixed income securities, 
     mortgage-backed securities forward contracts
     and options                                                     200           200                244              221
Equity contracts (including equity warrants
     and options)                                                     87            63                102               50
Commodity contracts (including swaps, forwards,
     and options)                                                     52             6                 34               19
                                                                 ---------------------------------------------------------
Total                                                             $5,528        $3,685             $5,454           $3,705
                                                                  --------------------------------------------------------
</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  May  31,  1998   represents   the   Company's   net
receivable/payable  for derivative financial instruments before consideration of
collateral.  Included  within the $5,543 million fair value of assets at May 31,
1998 was $5,403  million  related to swaps and OTC  contracts  and $140  million
related to  exchange-traded  option and warrant  contracts.  Included within the
$5,528  million  fair value of assets at November  30,  1997 was $5,444  million
related to swaps and OTC  contracts and $84 million  related to  exchange-traded
option and warrant contracts.


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


         With respect to OTC contracts,  including  swaps, the Company views its
net credit exposure to be $4,631 million at May 31, 1998 (including $668 million
from affiliates),  representing the fair value of the Company's OTC contracts in
an unrealized gain position,  after consideration of collateral of $772 million.
Presented  below is an analysis of the Company's net credit  exposure at May 31,
1998 for OTC contracts based upon internal  designations of counterparty  credit
quality.

Counterparty                     S&P/Moody's
 Risk Rating                     Equivalent                  Net Credit Exposure
------------               -------------------------         -------------------
       1                   AAA/Aaa                                        17%
       2                   AA-/Aa3 or higher                              24%
       3                   A-/A3 or higher                                45%
       4                   BBB-/Baa3 or higher                             8%
       5                   BB-/Ba3 or higher                               5%
       6                   B+/B1 or lower                                  1%

         These  designations are based on actual ratings made by external rating
agencies or by  equivalent  ratings  established  and utilized by the  Company's
Corporate Credit Department.

         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  clearing  houses impose net
capital requirements for their membership.  Additionally,  the exchange clearing
house  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.

         For  a  further   discussion  of  the  Company's   derivative   related
activities,   refer  to  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Off-Balance  Sheet  Financial  Instruments
and  Derivatives" and Notes 1 and 8 to the  Consolidated  Financial  Statements,
included in the Form 10-K.

6.  Other Commitments and Contingencies:

         In  connection   with  its  financing   activities,   the  Company  has
outstanding commitments under certain lending arrangements of approximately $2.5
billion at May 31, 1998 and $1.9 billion at November 30, 1997. 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.

         The Company, through its high yield sales and trading activities, makes
commitments  to extend credit in loan  syndication  transactions  principally to
below investment grade borrowers and then participates a significant  portion of
these commitments.  These commitments,  net of syndications and  participations,
totaled  $1.9  billion and $1.4  billion at May 31, 1998 and  November 30, 1997,
respectively, are typically secured against the borrower's assets and have fixed
maturity dates. The draw down of these  facilities is generally  contingent upon
certain representations,  warranties and contractual conditions of the borrower.

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


Total  commitments  may not be indicative of actual funding  requirements as the
Company intends to continue  syndicating,  selling,  and/or  participating these
commitments.

         The  Company  has   commitments   to  invest  up  to  $205  million  in
partnerships,   which  in  turn  will  make  direct  merchant   banking  related
investments. These commitments will be funded as required through the end of the
respective partnerships' investment periods, principally expiring in 2004.

         In June 1998,  the Company  sponsored a $5 billion  interim  loan fund,
designed  to extend  financing  to  clients in  connection  with a wide range of
domestic  and  international  leveraged  transactions,  including  acquisitions,
corporate  recapitalization  and  refinancing  of existing  debt.  In connection
therewith,  the Company  intends to provide up to $400 million to be used by the
fund.  Any draw downs under the  facility  are  expected  to be repaid  within a
short-term period.

         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.

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

7.  Related Party Transactions:

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


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS



                                                        
Business Environment

         The principal business activities of the Company are investment banking
and  securities  trading  and  sales,  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,  the  Company's  revenues  and  earnings  may  vary
significantly from quarter to quarter and from year to year.

         The   generally   favorable   market  and  economic   conditions   that
characterized  fiscal 1997  continued into the first six months of the Company's
fiscal  year  ("fiscal  1998").  During  the  first six  months of fiscal  1998,
investor demand in the worldwide debt and equity markets  remained strong led by
continued   growth  in  the  U.S.   economy  and  the  favorable   interest-rate
environment.  The pace of  underwriting  for  combined  fixed  income and equity
securities  accelerated to record levels. The unabated pace of global merger and
acquisition activity fueled financing of all types. Investors continued to focus
on worldwide  market  conditions,  particularly  with  respect to the  potential
effects of the Asian crisis, as well as any signs of potential  weakening in the
U.S. economy.

         In the global fixed income markets,  fiscal 1998 began with uncertainty
as investors focused on whether the U.S. Federal Reserve Board (the "Fed") would
raise the overnight lending rate from 5.5% and whether the crisis which began in
the Asian region in the latter half of 1997 would have a negative  impact on the
U.S. economy. By the end of January,  however, the bond markets rallied when the
Fed left rates  unchanged:  interest  rates on the 30-year  U.S.  Treasury  bond
remained  below 6% for most of the first half of fiscal  1998.  In  Europe,  the
economic  environment  remained extremely favorable  throughout this period. Low
levels of inflation, the continued strength of the U.S. dollar and the prospects
of European  Monetary Union  propelled the European bond markets,  especially in
some of the smaller  markets (e.g.,  Italy and Spain).  In Japan,  the weakening
economy   drove  bond  yields  to   historic   lows  not  seen  by  any  modern,
industrialized  country. In the six months ending May 31, 1998, Japanese 10 year
yields fell 50bp to 1.45% as the Yen fell 8% to Y/$ 138.8.

         U.S.   equity  markets   continued  to  recover  from  the  1997  Asian
correction, with most equity indices posting successive record highs during this
period.  However,  concerns  about  earnings  weakness  related  to Asia  and an
increase  in  corporate  profit  warnings,  prompted  analysts  to reduce  their
earnings  expectations.  Earnings growth slowed considerably with the turmoil in
Asia;  indeed,  most of the markets' rise came from an increase in the "price to
earnings"  multiple  for the equity  market as a whole.  The  forward  "price to
earnings"  multiple on the U.S. stock market (measured by the S&P 500) rose from
19 times at the  beginning  of the  fiscal  year to  above  21 times  now.  This
increase was  facilitated  by moderate  inflation and the 30 year U.S.  Treasury
bond yield staying below 6% for almost the entire period.  Thus, despite slowing
profit  growth,  the S&P 500  returned  almost  14% for the first  half of 1998.
Supported  by a favorable  bond market  environment,  together  with  increasing
evidence of a recovery in domestic  demand,  European  equity markets  performed
very strongly.  The FT/S&P  European Index gained 28.5% in dollar terms over the
period,  while trading volumes remained  buoyant.  By contrast,  in late spring,
increasing pessimism over Japan's ability to resolve its bad debt and structural
problems and the  associated  weakness in the yen sparked off a wave of negative
sentiment  towards markets across the Far East and throughout  emerging  markets

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


globally.  In the six months  ending May,  the FT/S&P  Pacific  Basin Index fell
11.6% in U.S. dollar terms, and Latin American  equities (IFC Investable  Index)
declined 11.4%.

         Worldwide   underwriting   volumes  in  fixed  income   products   were
unprecedented  during the first six  months of fiscal  1998.  U.S.  underwriting
volumes,  while  experiencing  a slowdown  in December  1997 and  January  1998,
strengthened  over the prior year, with heavy issuance of corporate,  high yield
and  asset-backed  bonds.  Issuers  came  to  market  to take  advantage  of the
historically  attractive  yields  as well as  favorable  pricing  in the  spread
sectors.  Equity and equity-related  underwriting  volumes also increased during
fiscal 1998 from the comparable  period in fiscal 1997 as increased stock prices
and favorable valuations induced capital raising by issuers. However, the actual
number of equity and  equity-related  deals was  overshadowed by the significant
number of debt  transactions,  where issuance proceeded at a rate not seen since
the fourth quarter of 1990.

         Corporate Finance Advisory activities continued at record levels during
the first six  months of fiscal  1998.  Coming  off a strong  pace in 1997,  the
volume of announced  transactions in the first half of 1998 continued to reflect
the trend of  consolidation,  deregulation  and  globalization  across  industry
sectors as well as the overall strength in the global capital markets.

         Strong financial markets have characterized fiscal 1998;  nevertheless,
the  financial  services  industry  is  cyclical.  As a  result,  the  Company's
businesses are evaluated  across market cycles for operating  profitability  and
their contribution to the Company's long-term strategic objectives.  The Company
strives to minimize the effects of economic  downturns  through its  diversified
product base;  stringent  cost  controls,  global  presence and risk  management
practices.






Note: Except for the historical  information contained herein, this Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
contains  forward-looking  statements  that are based on  current  expectations,
estimates and  projections  about the industries in which the Company  operates.
These  statements are not guarantees of future  performance  and involve certain
risks, uncertainties and assumptions which are difficult to predict. The Company
undertakes  no  obligation to update  publicly any  forward-looking  statements,
whether as a result of new information, future events or otherwise.

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


Results of Operations
For the Three Months Ended May 31, 1998 and 1997

         The Company  reported net income of $200 million for the second quarter
ended May 31,  1998  representing  an  increase  of 239% from net  income of $59
million for the second  quarter  ended May 31,  1997.  This  increase  reflected
across-the-board  strength in the Company's fixed income,  equity and investment
banking businesses.  The Company's earnings momentum and profitability increased
significantly throughout the second quarter of 1998.

         Net revenues increased to $1,008 million for the second quarter of 1998
from $555 million for the second  quarter of 1997.  The increase in net revenues
from the second  quarter of 1997 resulted from continued  strong  performance in
the global merger and acquisition  advisory business,  fixed income derivatives,
leveraged  lending  and high yield  origination,  and real  estate and  mortgage
activities.

         As  part  of  its  market-making  activities,   the  Company  maintains
inventory  positions  of  varying  amounts  across a broad  range  of  financial
instruments  that are  marked-to-market  on a daily  basis  and  along  with the
Company's  proprietary  trading positions,  give rise to principal  transactions
revenues.  The Company  utilizes  various  hedging  strategies  to minimize  its
exposure to significant movements in interest and foreign exchange rates and the
equity markets.

         Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest  revenues  depending upon the method of financing and/or hedging
related to  specific  inventory  positions.  The Company  evaluates  its trading
strategies  on an overall  profitability  basis which  includes  both  principal
transactions  revenues  and net  interest.  Therefore,  changes in net  interest
should  not be viewed in  isolation  but  should be viewed in  conjunction  with
revenues from principal  transactions.  Principal  transactions and net interest
revenues  increased 85% to $484 million in the second  quarter of 1998 from $262
million in the second quarter of 1997. Principal transactions revenues increased
as favorable  market  conditions  characterized  by low  interest  rates and low
inflation supported debt markets and helped to spur growth in the equity markets
in both the U.S.  and  Europe.  Growth  in fixed  income  revenues  was paced by
mortgages,  derivatives  and high yields,  while growth in equities  revenue was
driven by U.S. and European listed  securities.  Net interest revenues increased
as a result of an increase in inventory  and a shift in the  composition  of the
Company's fixed income portfolio.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


         The  following   table  of  net  revenues  by  business  unit  and  the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that  reflects the manner in which the Company  manages its
businesses.  For internal management  purposes,  the Company has been segregated
into  four  major  business  units:  Fixed  Income,  Equity,  Corporate  Finance
Advisory,  and Merchant  Banking.  Each business  unit  represents a grouping of
financial activities and products with similar  characteristics.  These business
activities result in revenues that are recognized in multiple revenue categories
contained in the  Company's  Consolidated  Statement of Income.  Net revenues by
business unit contain certain  internal  allocations,  including  funding costs,
which are centrally managed.

Three Months Ended May 31, 1998

                       Principal
                    Transactions and                Investment
                     Net Interest    Commissions     Banking     Other    Total
-------------------------------------------------------------------------------
Fixed Income                $424       $    7         $212       $ (1)  $   642
Equity                        59           86           99                  244
Corporate Finance 
 Advisory                     (5)                       96                   91
Merchant Banking               5                        17                   22
Other                          1            4                       4         9
-------------------------------------------------------------------------------
                            $484        $  97         $424       $  3    $1,008
-------------------------------------------------------------------------------

Three Months Ended May 31, 1997

                       Principal
                   Transactions and                Investment
                     Net Interest    Commissions     Banking     Other    Total
-------------------------------------------------------------------------------
Fixed Income                $231         $  9        $  64       $  2      $306
Equity                        34           62           37                  133
Corporate Finance 
 Advisory                                               56                   56
Merchant Banking              (4)                       54                   50
Other                          1            3           (1)         7        10
--------------------------------------------------------------------------------
                            $262          $74         $210       $  9      $555
--------------------------------------------------------------------------------

         Fixed Income.  The Company's fixed income net revenues reflect customer
flow  activities  (both  institutional  and  high-net-worth  retail),  secondary
trading, debt underwriting,  syndicate and financing activities related to fixed
income products. Fixed income products include dollar- and non-dollar government
securities,  mortgage-  and  asset-backed  securities,  money  market  products,
dollar- and non-dollar  corporate debt securities,  emerging market  securities,
municipal  securities,  financing  (global  access  to  debt  financing  sources
including  repurchase and reverse repurchase  agreements),  foreign exchange and
fixed income derivative  products.  Fixed income net revenues  increased 110% to
$642  million  for the second  quarter of 1998 from $306  million for the second
quarter of 1997.  The increase in the second  quarter  results  versus the prior
year quarter reflected increased revenues from a number of fixed income products
including  improved   performance  in  both  sales  and  trading  and  syndicate

<PAGE>



                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


activities  in high yield  corporates  as well as increased  contributions  from
mortgages,   fixed  income  derivative   products  and  high  grade  corporates.
Investment banking revenues, as a component of fixed income revenues,  increased
to $212  million for the second  quarter of 1998 from $64 million for the second
quarter of 1997 due to increased  underwriting fees,  particularly in high yield
corporates.

         Equity.  Equity net revenues  reflect  customer flow  activities  (both
institutional   and   high-net-worth   retail),    secondary   trading,   equity
underwriting,   equity  finance,   equity   derivatives  and  equity   arbitrage
activities.  The Company's equity net revenues increased to $244 million for the
second quarter of 1998 from $133 million for the second quarter of 1997.  Higher
revenues resulted from increased underwriting volumes, higher levels of customer
flow   activities  in  U.S.  and  European   listed   securities   and  improved
contributions  from NASDAQ and equity  financing  products.  Investment  Banking
revenues,  as a component of equity  revenues,  increased to $99 million for the
second  quarter of 1998 from $37 million  for the second  quarter of 1997 due to
increased underwriting volumes in U.S. listed and convertible securities.

         Corporate  Finance  Advisory.  Corporate finance advisory net revenues,
classified in the Consolidated  Statement of Income as a component of investment
banking  revenues,  result primarily from fees earned by the Company in its role
as strategic  advisor to its clients.  This role consists of advising clients on
mergers   and   acquisitions,   divestitures,   leveraged   buyouts,   financial
restructurings,  and a variety of cross-border  transactions.  Net revenues from
corporate  finance advisory  activities  increased to $91 million for the second
quarter of 1998,  reflecting a 63% increase  from the $56 million  recognized in
the second quarter of 1997. This increase reflected the closing of several large
transactions in the second quarter of 1998 and continued strength in the overall
merger and acquisition market environment.  The Company ended the second quarter
with a strong transaction pipeline which stood at $166 billion in terms of total
dollar value based on data supplied by Securities Data Company.

         Merchant  Banking.  The Company is the general  partner for five active
merchant banking partnerships.  Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies. Merchant
banking net revenues primarily  represent the Company's  proportionate  share of
net realized and  unrealized  gains and losses from the sale and  revaluation of
investments  held  by the  partnerships.  Such  amounts  are  classified  in the
Consolidated  Statement of Income as a component of investment banking revenues.
Merchant  banking net revenues also reflect the net interest expense relating to
the financing of the Company's investment in the partnerships.  Merchant banking
net  revenues  were $22  million  for the  second  quarter of 1998 down from $50
million in the second  quarter of 1997.  The second quarter of 1997 reflects the
realized  gain  on the  sale  of a  significant  portion  of a  publicly  traded
investment held by the partnerships.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


         Non-Interest Expenses.  Non-interest expenses were $678 million for the
second  quarter  of 1998  and  $469  million  for the  second  quarter  of 1997.
Management   fees  represent  the  allocation  of  various   charges,   such  as
compensation and benefits,  occupancy,  administration  and computer  processing
between the Company, Holdings and other affiliates based upon certain allocation
methods.

         Income Taxes.  The Company's  income tax provision was $130 million for
the second  quarter of 1998  compared to $27  million for the second  quarter of
1997.  The effective tax rate was 39% for the second quarter of 1998 and 31% for
the second  quarter of 1997.  The  increase in the  effective  tax rate  relates
primarily to a  significantly  higher level of pretax income (which  reduces the
impact of permanent differences), and an increase in income subject to state and
local taxes,  partially  offset by an increase in tax benefits  attributable  to
income and transactions subject to preferential tax treatment.



<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS



Results of Operations
For the Six Months Ended May 31, 1998 and 1997

         The  Company  reported  net income of $326  million  for the six months
ended May 31,  1998,  representing  an  increase of 208% from net income of $106
million for the six months ended May 31, 1997.

         Net  revenues  increased  to $1,754  million for the six months of 1998
from $1,176  million for the six months of 1997.  The  increase in net  revenues
from the first half of 1997 resulted from continued  strong  performances in the
global merger and acquisition advisory, fixed income and equity businesses.

         Principal  transactions  and net  interest  revenues  increased to $871
million for the six months of 1998 from $600 million for the six months of 1997.
Principal   transactions  revenues  increased  as  favorable  market  conditions
characterized by low interest rates and low inflation supported debt markets and
helped to spur growth in the equity markets in both the U.S. and Europe.  Growth
in fixed income  revenue was paced by  mortgages,  derivatives  and high yields,
while  growth in  equities  revenue  was  driven  by U.S.  and  European  listed
securities.  Net  interest  revenues  increased  as a result of an  increase  in
inventory  and a  shift  in  the  composition  of  the  Company's  fixed  income
portfolio.

         The  following   table  of  net  revenues  by  business  unit  and  the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that  reflects the manner in which the Company  manages its
businesses.  Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.

Six Months Ended May 31, 1998

                        Principal
                     Transactions and                 Investment
                       Net Interest    Commissions     Banking   Other   Total
--------------------------------------------------------------------------------
Fixed Income                 $797         $  12         $337     $  1   $1,147
Equity                         81           173          150        1      405
Corporate Finance 
 Advisory                      (8)                       169               161
Merchant Banking               (1)                        26                25
Other                           2             7                     7       16
--------------------------------------------------------------------------------
                             $871          $192         $682     $  9   $1,754
--------------------------------------------------------------------------------



<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS



Six Months Ended May 31, 1997

                        Principal
                    Transactions and                 Investment
                        Net Interest   Commissions     Banking   Other   Total
--------------------------------------------------------------------------------
Fixed Income                 $533         $  18         $152     $  3    $ 706
Equity                         70           132           91        1      294
Corporate Finance 
 Advisory                                                102               102
Merchant Banking               (7)                        57                50
Other                           4             7                    13       24
--------------------------------------------------------------------------------
                             $600          $157         $402      $17   $1,176
--------------------------------------------------------------------------------

         Fixed Income. Fixed income net revenues increased to $1,147 million for
the six  months of 1998  from  $706  million  for the six  months  of 1997.  The
increase  in the six months of 1998  versus the prior year six months  reflected
increased  revenues from a number of fixed income  products  including  improved
performance  in both sales and trading and  syndicate  activities  in high yield
corporates as well as increased  contributions  from  mortgages and fixed income
derivative products. Investment banking revenues, as a component of fixed income
revenues, increased to $337 million for the six months of 1998 from $152 million
for the six months of 1997 due to increased  underwriting fees,  particularly in
high yield corporates.

         Equity. The Company's equity net revenues increased to $405 million for
the six  months of 1998 from $294  million  for the six  months of 1997.  Higher
revenues resulted from increased underwriting volumes, higher levels of customer
flow   activities  in  U.S.  and  European   listed   securities   and  improved
contributions  from NASDAQ and equity  financing  products.  Investment  banking
revenues,  as a component of equity revenues,  increased to $150 million for the
six months of 1998 from $91 million for the six months of 1997 due to  increased
underwriting volumes in U.S. listed and convertible securities.

         Corporate  Finance  Advisory.   Net  revenues  from  corporate  finance
advisory  activities  increased  to $161  million  for the  six  months  of 1998
reflecting a 58% increase from the $102 million  recognized in the six months of
1997.  This  increase  reflected  continued  strength in the overall  merger and
acquisition market  environment.  For completed M&A transactions  involving U.S.
targets,  Lehman has improved its ranking from number 8 to number 4,  increasing
its market share from 9% to 19%, for the first six months of calendar  year 1998
compared to the first six months of calendar year 1997.

         Merchant  Banking.  Merchant  banking net revenues were $25 million for
the six  months of 1998 and $50  million  in the six  months  of 1997.  1998 net
revenues reflect the realized gains on the sales of the  partnerships'  interest
in  several  investments  as  well as net  unrealized  gains  recognized  on the
publicly traded  investments.  1997 net revenues  reflect a realized gain on the
sale of a  significant  portion  of a  publicly  traded  investment  held by the
partnerships which was completely divested in the third quarter of 1997.

<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS



         Non-Interest  Expenses.  Non-interest  expenses were $1,222  million 
for the six months of 1998 and $1,021 million for the six months of 1997.

         Income Taxes.  The Company's  income tax provision was $206 million for
the six months of 1998  compared to $49 million for the six months of 1997.  The
effective tax rate was 39% for the six months of 1998 and 32% for the six months
of  1997.  The  increase  in the  effective  tax  rate  relates  primarily  to a
significantly  higher  level of  pretax  income  (which  reduces  the  impact of
permanent  differences),  and an increase  in income  subject to state and local
taxes,  partially  offset by an increase in tax benefits  attributable to income
and transactions subject to preferential tax treatment.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS



Liquidity and Capital Resources

Overview

As a leading global  investment  bank that actively  participates  in the global
capital markets, the Company has large and diverse capital requirements. Many of
the businesses in which the Company operates are capital  intensive.  Capital is
required to finance,  among other things, the Company's securities  inventories,
underwriting activities, principal investments,  merchant banking activities and
investments in fixed assets.

The Company's  balance  sheet is liquid and 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  Company's  primary  activities  are  based on the  execution  of
customer-related transactions. This flow of customer business supports the rapid
asset turnover rate of the Company's inventory.

The  Company's  total assets  increased  to $141.6  billion at May 31, 1998 from
$114.3  billion at November  30, 1997,  reflecting  the  strategic  expansion of
certain business lines.  The Company's  continued focus on growing higher margin
businesses  resulted in across the board increases in inventory positions at May
31, 1998 compared to November 30, 1997.  The Company also  positioned  itself to
benefit from  favorable  conditions  in the  worldwide  fixed income  markets by
increasing its secured customer financing activities.

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.  Under the authority of the Finance
Committee, members of the Company's treasury department work with Regional Asset
and Liability  Committees to ensure  coordination  of global funding efforts and
implementation  of the funding and liquidity  policies.  The Regional  Asset and
Liability  Committees are aligned with the Company's  geographic funding centers
and are responsible for  implementing  funding  strategies for their  respective
regions.

The primary  goal of the  Company's  funding  policies is to provide  sufficient
liquidity  and  availability  of funding  sources  across a wide range of market
environments.  There are five key  elements  of its  funding  strategy  that the
Company attempts to achieve:

(1)  Maintain an  appropriate  Total  Capital  structure to support the business
activities  in which the  Company  is  engaged.  Total  Capital  is  defined  as
long-term debt, preferred stock and common stockholders' equity.

(2) Minimize liquidity and refinancing risk by funding the Company's assets on a
global basis with secured and unsecured liabilities, which have maturities equal
to or exceeding the anticipated liquidation period of the assets.

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS



(3) Maintain  sufficient  financial  resources to enable the Company to meet its
obligations   in  a  period  of  financial   stress  through  a  combination  of
collateralized   short-term  financings  and  Total  Capital,  as  well  as  the
implementation of a contingency funding plan. Financial stress is defined as any
event which  severely  constrains  the  Company's  access to  unsecured  funding
sources.

(4) Obtain  diversified  funding  through a global investor base which maximizes
liquidity and reduces concentration risk.

(5) Maintain funding availability in excess of actual utilization.

Short-Term Funding

The Company strives to maximize the portion of the Company's  balance sheet that
is funded through collateralized  borrowing sources, which in turn minimizes the
reliance placed upon unsecured short-term debt. Collateralized borrowing sources
include cash market 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 certain other types
of  collateralized   borrowing  sources  are  less   credit-sensitive  and  have
historically   been  a  more  stable   financing  source  under  adverse  market
conditions.

The  amount  of the  Company's  collateralized  borrowing  activities  will vary
reflecting  changes  in the mix and  overall  levels  of  securities  and  other
financial  instruments owned and global market  conditions.  The majority of the
Company's assets are funded with  collateralized  borrowing sources.  At May 31,
1998 and November 30, 1997,  $94 billion and $77 billion,  respectively,  of the
Company's  total  balance  sheet was  financed  using  collateralized  borrowing
sources.

As of May 31, 1998 and November 30, 1997,  short-term  debt was $1.6 billion and
$740 million, respectively. There was no commercial paper outstanding at May 31,
1998 or November 30, 1997.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS



Total Capital

In accordance with the Company's liquidity plan, the Company increased its Total
Capital  base in 1998 to $6.83  billion at May 31,  1998 from  $6.55  billion at
November 30,  1997.  Total  Capital  increased  primarily  due to an increase in
long-term debt and the retention of earnings.

                                        May 31            November 30
(in millions)                            1998                1997
--------------------------------------------------------------------------
Long-term Debt
     Senior Notes                        $  159            $   229
     Subordinated Indebtedness            4,336              4,313
                                          -----              -----
                                          4,495              4,542

Stockholder's Equity                      2,337              2,011

--------------------------------------------------------------------------
Total Capital                            $6,832             $6,553
--------------------------------------------------------------------------

During the six months of 1998,  the  Company  issued $600  million in  long-term
debt,  and $686 million of long-term  debt matured.  Long-term debt decreased to
$4.50  billion at May 31, 1998 from $4.54  billion at  November  30, 1997 with a
weighted average maturity of 4.8 years at May 31, 1998 and 4.5 years at November
30, 1997.

At May 31, 1998, the Company had  approximately  $2.0 billion  available for the
issuance of debt securities under various shelf registrations.

Credit Ratings

The Company, like other companies in the securities industry, relies on external
sources  to finance a  significant  portion of its  day-to-day  operations.  The
Company's  access to and cost of funding is generally  dependent upon its short-
and long- term debt  ratings.  In May 1998,  Thomson  Bank Watch,  upgraded  its
long-term senior and  subordinated  debt ratings of the Company to "A+" from "A"
and "A" from "A-",  respectively.  As of May 31, 1998,  the short- and long-term
senior debt ratings of the Company were as follows:
                                                             LBI
                                                    --------------------------
                                                    Short-term      Long-term**
--------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co.                         D-1               A/A-
Fitch IBCA, Inc.                                        F-1               A/A-
Moody's                                             P2                A3*/Baa1
S&P                                                     A-1              A+*/A
Thomson BankWatch                                     TBW-1               A+/A

   *  Provisional ratings on shelf registration
 **  Senior/subordinated


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


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  securities  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 securities
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 securities at May 31, 1998 and November 30, 1997 included long
positions with an aggregate market value of approximately  $2.8 billion and $2.6
billion,  respectively,  and short  positions with an aggregate  market value of
approximately  $369 million and $151 million,  respectively.  The portfolio may,
from time to time, contain concentrated holdings of selected issues. The Company
may also,  from time to time,  mitigate  its net  exposure to any single  issuer
through the use of derivatives and other financial instruments. At May 31, 1998,
the Company had no single exposure to an issuer of high yield securities greater
than $100 million.

Lending Activities

The  Company,  through  its high  yield  sales  and  trading  activities,  makes
commitments  to extend credit in loan  syndication  transactions  principally to
below investment grade borrowers and participates a significant portion of these
commitments. These commitments, which are net of syndications and participations
totaled  $1.9  billion  at May 31,  1998,  are  typically  secured  against  the
borrower's  assets and have  fixed  maturity  dates.  The  utilization  of these
facilities is generally contingent upon certain representations,  warranties and
contractual conditions of the borrower.  Total commitments may not be indicative
of actual funding  requirements as the Company intends to continue  syndicating,
selling, and/or participating these commitments.

Merchant Banking and Related Lending Activities

The  Company's  merchant  banking   activities   include   investments  in  five
partnerships,  for which the Company acts as general partner,  as well as direct
investments.  At May 31, 1998, the investment in merchant  banking  partnerships
was $22 million and direct  investments were $192 million.  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.

The Company has  commitments  to invest up to $205 million in the  partnerships,
which in turn will make  direct  merchant  banking  related  investments.  These
commitments  will be  funded  as  required  through  the  end of the  respective
partnerships' investment periods, principally expiring in 2004.


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


In June 1998, the Company sponsored a $5 billion interim loan fund,  designed to
extend  financing  to clients in  connection  with a wide range of domestic  and
international   leveraged  transactions,   including   acquisitions,   corporate
recapitalization and refinancing of existing debt. In connection therewith,  the
Company  intends to provide up to $400 million to be used by the fund.  Any draw
downs under the facility are expected to be repaid within a short-term period.

In  addition,  at May 31,  1998,  the Company  had $727  million  direct  bridge
financings  outstanding.  Subsequent to May 31, 1998,  the Company  syndicated a
significant portion of these financings.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


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 trading, brokerage 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,  information technology infrastructure
and systems.

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 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 equity 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.

Value at Risk

For purposes of Securities and Exchange Commission disclosure requirements,  the
Company  has  elected to  disclose  an  entity-wide  value at risk  analysis  of
virtually all of the Company's trading activities.  The value at risk related to
non-trading  financial  instruments has been excluded from this analysis and not
reported  separately  because the amounts were not  material.  The value at risk
calculation  measures  potential  losses in expected  revenues and is based on a
methodology  which uses a one-day  holding  period and a 95%  confidence  level.
Value at risk as of each date  presented  below was  measured by  analyzing  the
distribution of actual trading revenues during the preceding one year period and
assumed a relatively consistent portfolio mix.


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


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):

                                     May 31, 1998         November 30, 1997
                                     ------------         -----------------
Interest rate risk                        $8.9                $  9.8
Equity price risk                          5.6                   4.7
Foreign exchange risk                      0.9                   1.3
Diversification benefit                   (3.8)                 (4.8)
                                          -----                 -----
Total Company                            $11.6                 $11.0
                                          =====                 =====

The  Company  utilizes  a  wide  variety  of  market  risk  management  methods,
including:  limits for each trading activity; marking all positions to market on
a daily basis; daily profit and loss analyses;  position reports; aged inventory
position analyses;  and independent  verification of all inventory pricing.  The
Company  believes  that these  procedures,  which  stress  timely  communication
between risk, trading and senior  management,  are critical elements of the risk
management process.

Other

Recent Development

On April 17, 1998, the United States District Court for the Northern District of
Texas approved the settlement of a class action captioned Warren Chisum,  et al.
v. Lehman  Brothers  Inc.,  et al. The class action  alleged  violations  of the
federal  securities  laws  and  breaches  of  fiduciary  duty by  defendants  in
connection  with the  origination,  sale and  operation of nine E.F.  Hutton net
lease real estate limited  partnerships sold in the early 1980's. The settlement
cost of $75 million was charged against existing reserves.


<PAGE>



                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 1   Legal Proceedings

         The  Company  is  involved  in a number  of  judicial,  regulatory  and
arbitration  proceedings  concerning  matters  arising  in  connection  with the
conduct of its business.  Such  proceedings  include actions brought against the
Company and others with respect to transactions in which the Company acted as an
underwriter or financial  advisor,  actions arising out of LBI'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  meritorious  defenses  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 its  business  or
consolidated financial condition.

Actions Relating to First Capital  Holdings Inc.  (Reported in LBI's Annual 
Report on Form 10-K and First Quarter Report on Form 10-Q)

         The Virginia  Commissioner  of Insurance.  On May 21, 1988 after trial,
the Court  entered a Judgment  Order in accord with the jury  verdict,  ordering
that the  plaintiffs  recover  nothing from the  defendants  and  dismissing the
complaint.

Warren D. Chisum,  et al. v. Lehman  Brothers  Inc. et al.  (Reported in LBI's
Annual Report on Form 10-K and First Quarter Report on Form 10-Q)

         On April 17,  1988,  the  Court  entered a final  order  approving  the
settlement of this action.

Bamaodah v. E.F.  Hutton & Company Inc.  (Reported in LBI's' Annual  Report on 
Form 10-K and First  Quarter  Report on Form 10-Q)

         The  Court has  ordered  the  experts  to  conduct a review of  certain
additional documents and has set October 25, 1998 as the next hearing date.


<PAGE>


AIA Holding SA et al. V. Lehman  Brothers Inc. and Bear Stearns & Co., Inc.  
(Reported in LBI's Annual Report on Form 10-K and First Quarter Report on 
Form 10-Q)

         On July 3, 1998 the  Plaintiffs  served their First  Amended  Complaint
which contains  eighteen  causes of action against Lehman  Brothers  and/or Bear
Stearns.

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,  is not named as a
defendant.  The complaint alleges that the underwriters violated Sections 11 and
12 of the 1933  Securities  Act.  Plaintiffs  seek  rescission  and  unspecified
compensatory damages.



<PAGE>



ITEM 6   Exhibits and Reports on Form 8-K

The  following  exhibits  and  reports  on Form  8-K are  filed  as part of this
Quarterly  Report,  or where  indicated,  were  heretofore  filed and are hereby
incorporated by reference:

(a)      Exhibits:

         12.      Computation in Support of Ratio of Earnings to Fixed Charges

         27       Financial Data Schedule


(b)      Reports on Form 8-K:

         None.




<PAGE>



                                   SIGNATURES



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



                                           LEHMAN BROTHERS INC.
                                               (Registrant)





Date:    July 15, 1998            By       /s/ Richard S. Fuld Jr.
                                        --------------------------
                                           Richard S. Fuld, Jr.
                                           Chairman of the Board and
                                           Chief Executive Officer
                                           (Principal Executive Officer)




Date:   July 15, 1998             By       /s/ Charles B. Hintz
                                        -----------------------
                                           Charles B. Hintz
                                           Chief Financial Officer
                                           (Principal Financial Officer)




<PAGE>



                                  EXHIBIT INDEX


Exhibit No.                                 Exhibit


Exhibit 12  Computation in Support of Ratio of Earnings to Fixed Charges

Exhibit 27  Financial Data Schedule



<PAGE>

                                                                 Exhibit 12

<PAGE>



                      LEHMAN BROTHERS INC. and SUBSIDIARIES
          COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
                              (Dollars in millions)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                         For the         For the        For the          For the        For the       For the
                                     Twelve Months   Eleven Months   Twelve Months    Twelve Months  Twelve Months   Six Months
                                          Ended           Ended          Ended           Ended           Ended          Ended
                                       December 31     November 30    November 30      November 30    November 30      May 31
                                          1993            1994           1995             1996           1997           1998
                                          ----            ----           ----             ----           ----           ----
Fixed Charges:
Interest expense:
<S>                                       <C>        <C>                <C>           <C>               <C>            <C>    
    Subordinated indebtedness             $   192    $      184         $   204       $     221         $   236        $   116
    Bank loans and other
      borrowings*                           4,393         5,661           9,750           9,900          11,980          7,024
    Interest component of rentals
      of office and equipment                  62            27              25              18              16              8
  Other adjustments**                         101            53               2               7               3              4
                                           ------        -------         ------         -------         --------        ------
    TOTAL (A)                              $4,748        $5,925          $9,981         $10,146         $12,235         $7,152
                                           ======        ========        ======         =======         ========        ======

Earnings:
  Pretax income (loss) from
    continuing operations                 $  (146)   $        1      $       78       $     309        $    593        $   532
  Fixed charges                             4,748         5,925           9,981          10,146          12,235          7,152
  Other adjustments***                        (68)          (52)             (1)             (6)             (2)            (4)
                                          -------         ------        --------        -------         -------         ------
    TOTAL (B)                              $4,534        $5,874         $10,058         $10,449         $12,826         $7,680
                                           ======        ======         =======         =======         =======         ======
(B / A)                                     ****           ****             1.01           1.03          1.05             1.07
</TABLE>

*        Includes amortization of long-term debt discount.

**       Other adjustments include capitalized interest and debt issuance costs,
         amortization of capitalized interest and preferred stock dividends of a
         wholly owned subsidiary.

***      Other adjustments  include adding the net loss of affiliates  accounted
         for  at  equity  whose  debt  is not  guaranteed  by  the  Company  and
         subtracting capitalized interest and debt issuance costs, undistributed
         net income of affiliates  accounted  for at equity and preferred  stock
         dividends of a wholly owned subsidiary.

****     Earnings were  inadequate to cover fixed charges and would have had to
         increase  approximately  $214 million in 1993 and $51 million in 1994
         in order to cover the deficiencies.





<PAGE>



                                                                 Exhibit 27