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 February 28, 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 April 13, 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 FEBRUARY 28, 1998

                                      INDEX

Part I.           FINANCIAL INFORMATION                             Page Number

 Item 1.      Financial Statements - (unaudited)

                   Consolidated Statement of Income -
                     Three Months Ended
                     February 28, 1998 and 1997 ............................3


                   Consolidated Statement of Financial Condition -
                     February 28, 1998 and November 30, 1997 ...............4

                   Consolidated Statement of Cash Flows -
                     Three Months Ended
                     February 28, 1998 and 1997.............................6


                   Notes to Consolidated Financial Statements...............8

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

Part II.          OTHER INFORMATION

 Item 1.      Legal Proceedings     ........................................27

 Item 6.      Exhibits and Reports on Form 8-K          ....................28

Signatures..................................................................29

EXHIBIT INDEX         ......................................................30

Exhibits



<PAGE>


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

                                                       Three months ended
                                                  February 28      February 28
                                                     1998             1997
                                                  -------------     ----------
Revenues
    Principal transactions                            $  282          $  226
    Investment banking                                   259             192
    Commissions                                           95              83
    Interest and dividends                             3,460           2,931
    Other                                                  6               8
                                                    --------        --------
         Total revenues                                4,102           3,440
    Interest expense                                   3,356           2,819
                                                       -----           -----
         Net revenues                                    746             621
                                                      ------          ------
Non-interest expenses
    Compensation and benefits                            364             360
    Brokerage, commissions and clearance fees             42              50
    Professional services                                 20              21
    Occupancy and equipment                               16              16
    Communications                                        23              22
    Business development                                  19              17
    Depreciation and amortization                         13              13
    Management fees                                       32              41
    Other                                                 15              12
                                                      ------          ------
          Total non-interest expenses                    544             552
                                                       -----           -----
Income before taxes                                      202              69
    Provision for income taxes                            76              22
                                                      ------          ------
Net income                                             $ 126          $   47
                                                       =====          ======



                 See notes to consolidated financial statements.


<PAGE>


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


                                                      February 28    November 30
ASSETS                                                    1998           1997
                                                      ------------  ------------
Cash and cash equivalents                             $      254     $     220

Cash and securities segregated and on deposit
  for regulatory and other purposes                        1,122         1,128

Securities and other financial instruments owned:
   Governments and agencies                               19,313        17,467
   Corporate equities                                      6,919         5,439
   Corporate debt and other                                7,708         5,544
   Mortgages and mortgage-backed                           4,059         2,751
   Derivatives and other contractual agreements            5,435         5,528
   Certificates of deposit and other money market 
     instruments                                           1,952         2,248
                                                         -------      --------
                                                          45,386        38,977
                                                          ------      --------
Collateralized short-term agreements:
   Securities purchased under agreements to resell        56,526        49,610
   Securities borrowed                                    17,599        13,661

Receivables:
   Brokers, dealers and clearing organizations             2,381         3,148
   Customers                                               3,327         3,874
   Others                                                  4,091         3,107

Property, equipment and leasehold improvements
  (net of accumulated depreciation and amortization
  of $540 in 1998 and $533 in 1997)                          259           262

Other assets                                                 187           146

Excess of cost over fair value of net assets
  Acquired (net of accumulated amortization
  of $103 in 1998 and $102 in 1997)                          157           158
                                                        --------      --------
       Total assets                                     $131,289      $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)

                                                      February 28    November 30
                                                          1998         1997
                                                      --------------------------

LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt                   $  1,410     $      740
Securities and other financial instruments sold 
but not yet purchased:
   Governments and agencies                              11,497          8,556
   Corporate equities                                     3,827          3,124
   Corporate debt and other                               1,611          1,664
   Derivatives and other contractual agreements           3,189          3,685
                                                        -------        -------
                                                         20,124         17,029
                                                         ------         ------
Collateralized short-term financings:
   Securities sold under agreements to repurchase        62,264
                                                                        56,017
   Securities loaned                                      9,756          7,764
Advances from Holdings and other affiliates              18,381         14,777
Payables:
   Brokers, dealers and clearing organizations            4,682          3,127
   Customers                                              6,273          6,118
Accrued liabilities and other payables                    1,791          2,166
Long-term debt:
   Senior notes                                             155            229
   Subordinated indebtedness                              4,316          4,313
                                                      ---------      ---------
           Total liabilities                            129,152        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                                       378             252
                                                      --------     -----------
            Total stockholder's equity                   2,137           2,011
                                                      --------      ----------
            Total liabilities and 
               stockholder's equity                   $131,289        $114,291
                                                      ========        ========

                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>
                                                                                            Three months ended
                                                                                  February 28                February 28
                                                                                     1998                       1997
                                                                                  ----------               -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>                       <C>     
Net income                                                                          $   126                   $     47
Adjustments to reconcile net income to net cash provided by
     (used in) operating activities:
  Depreciation and amortization                                                          13                         13
  Provisions for losses and other reserves                                               13                          9
  Other adjustments                                                                       8                          1
Net change in:
  Cash and securities segregated                                                          6                       (372)
  Securities and other financial instruments owned                                   (6,409)                    (4,262)
  Securities purchased under agreements to resell                                    (6,916)                    (4,620)
  Securities borrowed                                                                (3,938)                    (6,915)
  Receivables from brokers, dealers and clearing organizations                          767                      1,485
  Receivables from customers                                                            547                       (550)
  Securities and other financial instruments sold but
     not yet purchased                                                                3,095                      3,376
  Securities sold under agreements to repurchase                                      6,247                      9,780
  Securities loaned                                                                   1,992                      3,667
  Payables to brokers, dealers and clearing organizations                             1,555                       (434)
  Payables to customers                                                                 155                     (1,325)
  Accrued liabilities and other payables                                               (388)                      (188)
  Other operating assets and liabilities, net                                        (1,030)                       373
                                                                                   --------                   --------

          Net cash provided by (used in) operating activities                       $(4,157)                  $     85
                                                                                    --------                  --------

</TABLE>

                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                            Three months ended
                                                                                  February 28                 February 28
                                                                                     1998                        1997
                                                                                  -----------               -------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                                                     <C>                        <C>
Principal payments of senior notes                                                      $  (79)
Proceeds from issuance of subordinated indebtedness                                        300                     $308
Principal payments of subordinated indebtedness                                           (300)                      (9)
Net proceeds from commercial paper and
    short-term debt                                                                        670                     (670)
Increase in advances from Holdings and other affiliates                                  3,604                      833
Capital contributions                                                                                                36
Dividends and capital distributions paid                                                                            (12)
                                                                                         -----                    -----
            Net cash provided by financing activities                                    4,195                      486
                                                                                         -----                    -----

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements                                  (4)                      (2)
                                                                                       -------                  -------
           Net cash used in investing activities                                            (4)                      (2)
                                                                                       --------                 -------
           Net change in cash and cash equivalents                                          34                      569
                                                                                        ------                    -----
Cash and cash equivalents, beginning of period                                             220                      396
                                                                                         -----                    -----
           Cash and cash equivalents, end of period                                      $ 254                     $965
                                                                                         =====                     ====
</TABLE>


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

         Interest  paid  totaled  $3,372 and $2,833 for the three  months  ended
February 28, 1998 and 1997, respectively. Income taxes paid totaled $139 and $27
for the three months ended February 28, 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.  ("LBI") and  subsidiaries  (collectively,  the  "Company").  The
Company  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. The Consolidated  Statement of Financial Condition at November 30, 1997
was derived from the audited financial statements.  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 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  $1 million of internal use
software costs during the first quarter of 1998.



<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS



3.  Long-Term Debt:

         During the three months ended  February  28, 1998,  the Company  issued
$300 million of subordinated  indebtedness maturing 2008. This issuance has been
effectively  converted  to a  floating  rate  obligation,  based  on the  London
Interbank  Offered Rate  ("LIBOR")  through the use of an interest rate swap. In
addition,  $379 million of long-term  debt matured during the three months ended
February 28, 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 February 28, 1998,  LBI's  regulatory  net
capital,  as defined,  of $1,477  million  exceeded the minimum  requirement  by
$1,348 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 February 28,
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.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


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 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*                   Three Months Ended
                                                                 February 28, 1998                    February 28, 1998
                                                                 -----------------                    -----------------
(in millions)                                                     Assets      Liabilities          Assets       Liabilities
---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S>                                                               <C>           <C>               <C>            <C>   
     (including caps, collars and floors)                         $4,327        $2,309            $4,500         $2,317
Foreign exchange forward contracts and options                       688           459               863            681
Options on other fixed income securities,
     mortgage-backed securities forward contracts
     and options                                                     228           198               231            240
Equity contracts (including equity swaps, warrants
     and options)                                                    171           213               185            196
Commodity contracts (including swaps, forwards,
     and options)                                                     21            10                34              9
                                                                -------------------------------------------------------

Total                                                             $5,435        $3,189            $5,813         $3,443
                                                                -------------------------------------------------------
</TABLE>


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


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


<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 swaps, 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 and on the previous page  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 February 28, 1998  represents  the Company's
net receivable/payable for derivative financial instruments before consideration
of  collateral.  Included  within  the  $5,435  million  fair value of assets at
February 28, 1998 was $5,327 million related to swaps and OTC contracts and $108
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.

         With respect to OTC contracts,  including  swaps, the Company views its
net credit  exposure to be $4,503 million at February 28, 1998  (including  $611
million  from  affiliates),  representing  the fair value of the  Company's  OTC
contracts in an unrealized gain position,  after  consideration of collateral of
$824  million.  Presented  below is an  analysis  of the  Company's  net  credit
exposure at February 28, 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                           23%
       2                AA-/Aa3 or higher                 16%
       3                A-/A3 or higher                   44%
       4                BBB-/Baa3 or higher                8%
       5                BB-/Ba3 or higher                  8%
       6                B+/B1 or lower                     1%

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


         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 Note 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 $1.9
billion at February 28, 1998 and 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 participates a significant portion of these
commitments. These commitments, which are net of syndications and participations
totaled  $1.2  billion and $1.4  billion at February  28, 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.  The  total  commitments  may  not be  indicative  of  actual  funding
requirements  as they may expire  without  being  drawn upon and the Company may
participate additional amounts in the normal course of its business.

         The  Company  has   commitments   to  invest  up  to  $280  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.

         The Company is also a sponsor of a fund to provide interim  acquisition
facilities.  In connection therewith, the Company may provide up to $150 million
to be used by the fund to provide  short-term  acquisition  financing.  Any draw
downs under the facility are expected to be repaid within a short-term period.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


         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 financing  activities with Holdings
and many of its subsidiaries (the "Related Parties").  Various charges,  such as
compensation and benefits, occupancy, administration and computer processing are
allocated between the Related Parties,  based upon specific  identification  and
allocation methods.



<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 three months of the Company's
fiscal  year  ("fiscal  1998").  During the first three  months of fiscal  1998,
investor demand in the worldwide debt and equity markets  remained strong led by
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 which  occurred  during the latter half of 1997,  as well as any signs of
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
change  the  overnight  lending  rate from 5.5% and  whether  the  crisis  which
occurred  in the Asian  region in 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. In fact, rates on the 30-year U.S. Treasury remained below
6% for most of the first  quarter of 1998. In Europe,  the economic  environment
remained  extremely  favorable  throughout  the  first  quarter.  Low  levels of
inflation and the continued  strength of the U.S. dollar  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 new record lows not seen by
any modern, industrialized country.

         U.S.   equity  markets   continued  to  recover  from  the  1997  Asian
correction,  and most equity indices posted  successive  record highs during the
quarter.  Concerns about earnings weakness related to Asia and several corporate
profit warnings, prompted analysts to reduce their earnings expectations for the
beginning of 1998. Nevertheless, profit margins expanded early in fiscal 1998 to
6.5%,  the highest since the 1960's,  while  inflation  fell further  during the
quarter,  from a 1.8% annual  rate to 1.4%,  helped in part by lower oil prices.
These factors,  combined with the maintenance of the 30-year U.S. treasury yield
below 6%,  expanded  the "price to  earnings"  multiple:  the forward  "price to
earnings"  multiple on the U.S.  stock market rose from 18.9 at the beginning of
the quarter to 20.6 in February.  Thus,  despite slowing profit growth,  the S&P
500 returned almost 10% for the quarter. After a strong performance in 1997, the
European  equity  markets rose even more  rapidly  during  fiscal  1998,  with a
corresponding  increase in trading  volumes.  The Financial Times - S&P European
Index  recorded a 17% gain in dollar terms,  fueled by the rally in bonds,  with
smaller markets achieving the best performance.  Elsewhere, the stock markets of
Southeast  Asia  rebounded  from the lows reached in January 1998,  but remained
well below levels of a year ago. In Japan,  the equity market failed to make any
progress during fiscal 1998.

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



         Worldwide   underwriting   volumes  in  fixed  income   products   were
unprecedented during fiscal 1998. U.S. underwriting volumes,  while experiencing
a slowdown in December 1997 and January 1998,  strengthened  over the prior year
led by the 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  declined  slightly during fiscal 1998 from the comparable
period in fiscal 1997.  During fiscal 1998,  companies reduced their reliance on
equity and equity-related underwriting as a result of the use of stock-for-stock
mergers and acquisitions  activity and the favorable borrowing rate environment.
Although the average equity deal size in terms of dollar value increased  during
fiscal  1998,  the  actual  number  of  equity  and  equity-related   deals  was
overshadowed  by the  number of debt  deals at a rate not seen  since the fourth
quarter of 1990.

         Corporate  Finance Advisory  activities  continued  unabated during the
first three months of fiscal 1998.  Coming off a record year in 1997,  the first
quarter of 1998 continued to reflect the continuing trend of  consolidation  and
globalization  across  industry  sectors and the overall  strength in the global
capital markets.

         Strong financial markets 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 February 28, 1998 and 1997
-----------------------------------------------------

         The Company  reported net income of $126 million for the first  quarter
ended February 28, 1998  representing an increase of 168% from net income of $47
million for the first quarter ended February 28, 1997.  This increase  reflected
across-the-board  strength in the Company's fixed income and investment  banking
businesses.   The  Company's  earnings  momentum  and  profitability   increased
significantly throughout the first quarter of 1998.

         Net revenues  increased  to $746 million for the first  quarter of 1998
from $621  million for the first  quarter of 1997.  The increase in net revenues
from the first quarter of 1997 resulted from continued  strong  performance in a
number of higher-margin  businesses  including the global merger and acquisition
advisory business and high yield trading and origination.

         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.  Increased principal transactions revenues
across many of the Company's fixed income product lines were partially offset by
increased  interest  expenses  resulting from a shift in the  composition of the
Company's fixed income  portfolio and an increase in financing costs  associated
with higher equity inventory levels.




<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.

<TABLE>
<CAPTION>

Three Months Ended February 28, 1998

                                      Principal
                                  Transactions and                         Investment
                                    Net Interest         Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>              <C>              <C>          <C> 
Fixed Income                               $374              $  4             $125             $2           $505
Equity                                       22                87               52                           161
Corporate Finance Advisory                   (3)                                73                            70
Merchant Banking                             (7)                                 9                             2
Other                                                           4                               4              8
---------------------------------------------------------------------------------------------------------------------------
                                           $386               $95             $259             $6           $746
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

Three Months Ended February 28, 1997

                                      Principal
                                  Transactions and                         Investment
                                    Net Interest         Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>             <C>               <C>          <C> 
Fixed Income                               $302              $  9            $  88             $1           $400
Equity                                       36                70               54              1            161
Corporate Finance Advisory                                     45                              45
Merchant Banking                             (3)                                 3
Other                                         3                 4                2              6             15
---------------------------------------------------------------------------------------------------------------------------
                                           $338               $83             $192             $8           $621
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

         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 26% to
$505  million  for the first  quarter  of 1998 from $400  million  for the first
quarter of 1997. The increase in the first 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
activities  in high yield  corporates  as well as increased  contributions  from
municipals,  governments and foreign exchange. Investment banking revenues, as a
component  of fixed  income  revenues,  increased  to $125 million for the first

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


quarter of 1998 from $88 million for the first  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 and equity  arbitrage  activities.  The Company's
equity net revenues were $161 million for the first  quarter of 1998,  unchanged
from the first quarter of 1997.

         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 $70 million for the first
quarter of 1998,  reflecting a 56% increase  from the $45 million  recognized in
the first quarter of 1997. This increase  reflected the closing of several large
transactions in the first quarter of 1998 and continued  strength in the overall
merger and acquisition  market  environment.  During the first calendar quarter,
the volume of announced  domestic M&A transactions was $68 billion,  earning the
Company a #1  ranking  in this  category.  In  addition,  the  volume of pending
domestic M&A transactions was $165 billion at March 31, 1998. Ranking and volume
information are 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 $2  million  for the first  quarter of 1998 and less than $1
million in the first 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 $544 million for the
first quarter of 1998 and $552 million for the first 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.  During
fiscal 1998, the decrease in management  fees was a result of reduced  affiliate
activities on behalf of LBI as well as increased Company activities on behalf of
affiliates.

         Income Taxes.  The  Company's  income tax provision was $76 million for
the first quarter of 1998 compared to $22 million for the first quarter of 1997.
The  effective  tax rate was 38% for the first  quarter  of 1998 and 32% for the
first quarter of 1997.  The 1998  effective  tax rate  reflects a  significantly
higher level of pretax earnings, which resulted in an increase in income subject
to state and local taxes and decreased the effects of the benefits  derived from
tax-exempt income.




<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 $131.3 billion at February 28, 1998 from
$114.3  billion at November  30, 1997  reflecting  the  strategic  expansion  of
certain business lines. This continued focus on growing higher margin businesses
resulted in  increased  levels of  mortgages,  corporate  bonds and  equities at
February 28, 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 stockholder's 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 February
28, 1998 and November 30, 1997,  $89 billion and $77 billion,  respectively,  of
the Company's  total balance sheet was financed using  collateralized  borrowing
sources.

As of February 28, 1998 and November 30, 1997,  short-term debt was $1.4 billion
and $740 million,  respectively.  There was no commercial  paper  outstanding at
February 28, 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 $6.61 billion at February 28, 1998 from $6.55 billion at
November 30, 1997. Total Capital increased due to the retention of earnings.

                                     February 28           November 30
(in millions)                           1998                  1997
---------------------------------------------------------------------------
Long-term Debt
     Senior Notes                     $    155              $   229
     Subordinated Indebtedness           4,316                4,313
                                       -------              -------
                                         4,471                4,542

Stockholder's Equity                     2,137                2,011

---------------------------------------------------------------------------
Total Capital                           $6,608               $6,553
---------------------------------------------------------------------------

During the first quarter of 1998,  the Company  issued $300 million in long-term
debt and  approximately  $379 million of long-term debt matured.  Long-term debt
decreased to $4.47  billion at February 28, 1998 from $4.54  billion at November
30, 1997 with a weighted  average maturity of 4.7 years at February 28, 1998 and
4.5 years at November 30, 1997.

At February 28, 1998, the Company had  approximately  $795 million 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.  As of February 28, 1998,  the short- and long-term
senior debt ratings of Lehman Brothers Inc. ("LBI") 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 February 28, 1998 and November 30, 1997 included
long positions with an aggregate market value of approximately  $2.7 billion and
$2.6 billion,  respectively,  and short positions with an aggregate market value
of approximately $111 million and $151 million, respectively. The portfolio may,
from  time to time,  contain  concentrated  holdings  of  selected  issues.  The
Company's largest high yield position was $155 million at February 28, 1998.

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 $1.2 billion at February 28, 1998,  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.  The  total  commitments  may  not be
indicative of actual funding requirements as they may expire without being drawn
upon and the Company may participate  additional amounts in the normal course of
its business.

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  February  28,  1998,  the  investment  in  merchant   banking
partnerships  was $22  million  and direct  investments  were $19  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.

In  September  1997,  Holdings  established  a $2.0  billion  fund for which the
Company will act as general partner. The Company has commitments to invest up to
an additional $280 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



The  Company  is  also  a  sponsor  of a fund  to  provide  interim  acquisition
facilities.  In connection therewith, the Company may provide up to $150 million
to be used by the fund to provide  short-term  acquisition  financing.  Any draw
downs under the facility are expected to be repaid within a short-term period.

In addition,  at February 28, 1998,  the Company had $1.5 billion  direct bridge
financings outstanding.  Subsequent to February 28, 1998, the Company syndicated
a substantial 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.

At February 28, 1998 and November 30, 1997, the Company's value at risk for each
component of market risk, and in total was as follows (in millions):

                                      February 28, 1998       November 30, 1997
                                      ---------------         -----------------
         Interest rate risk                $9.4                    $9.8
         Equity price risk                  5.6                     4.7
         Foreign exchange risk              1.2                     1.3
         Diversification benefit           (5.1)                   (4.8)
                                           ----                    ----
         Total Company                    $11.1                   $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  statements;  position  reports;  aged
inventory  position  reports;  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.



<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 the Company's 
activities as a broker or dealer in securities and  commodities  and actions
brought on behalf of various classes of claimants against many securities and 
commodities firms, including the Company.

         Although there can be no assurance as to the ultimate  outcome,  the
Company  has denied,  or believes it has  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)

         The Virginia  Commissioner of Insurance  Action.  On April 1, 1998, the
trial court issued a decision and order reversing the earlier  summary  judgment
decision  that had  limited  damages to under $30  million  and  reinstated  the
Commissioner's  claims  for  approximately  $300  million.  The  defendants  are
currently  appealing that decision and seeking a stay of the trial scheduled for
April 24, 1998 to the United States Court of Appeals for the Fourth  Circuit and
seeking to enjoin the  Commissioner  from seeking these damages based on a prior
settlement  with the  policyholders  of  Fidelity  Bankers  Life in the  Central
District of California.

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

         The  expert  has filed its  report  which is  favorable  to EFH.  After
comments to the report are filed, the Court of Cassation will close the hearings
and render judgment.

MCC Proceeds Inc. v. Lehman Brothers International (Europe).  (Reported in 
LBI's Annual Report on Form 10-K).

         On March 9, 1998, the House of Lords refused MCC Proceeds' petition for
appeal, effectively ending the case.

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



<PAGE>


        By  memorandum  and order  dated March 27,  1998,  the  District  Court
dismissed  without  prejudice  18 of the 24  counts  pleaded  in the  complaint.
Plaintiffs  have  until  June 24,  1998 to  replead.  Defendants'  answer to the
remaining counts is due May 8, 1998.



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:    April 14, 1998                   By /s/ Richard S. Fuld Jr.
                                             -------------------------
                                                 Richard S. Fuld, Jr.
                                                 Chairman of the Board and
                                                 Chief Executive Officer
                                                (Principal Executive Officer)




Date:   April 14, 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
                                      Twelve Months     Eleven Months                   Twelve Months                  Three Months
                                          Ended             Ended                           Ended                         Ended
                                       December 31       November 30                     November 30                   February 28
                                                                                ---------------------------------------------------
                                           1993            1994                 1995          1996             1997        1998
                                           ----            ----                 ----          ----             ----        ----
Fixed charges:
  Interest expense:
<S>                                     <C>                <C>               <C>            <C>            <C>          <C>     
    Subordinated indebtedness           $   192            $  184            $   204        $   221        $   236      $     55
    Bank loans and other
      borrowings*                         4,393             5,661              9,750          9,900         11,980         3,301
    Interest component of rentals
      of office and equipment                62                27                 25             18             16             4
  Other adjustments**                       101                53                  2              7              3             3
                                        -------           --------          ---------     ----------    -----------    ----------
    TOTAL (A)                            $4,748            $5,925             $9,981        $10,146        $12,235        $3,363
                                         ======            ======             ======        =======        =======        ======

Earnings:
  Pre-tax income (loss) from
    continuing operations              $   (146)         $      1           $     78      $     309        $   593        $  202   
  Fixed charges                           4,748             5,925              9,981         10,146         12,235         3,363
  Other adjustments***                      (68)              (52)                (1)            (6)            (2)           (3)
                                       --------          --------           --------         -------        -------       -------
    TOTAL (B)                            $4,534            $5,874            $10,058        $10,449        $12,826        $3,562
                                         ======            ======            =======        =======        =======        ======
(B / A)                                   ****               ****               1.01           1.03           1.05          1.06


</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 costs and 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