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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

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

Commission file number 1-6817

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

|Delaware(State or other jurisdiction of incorporation or organization)        |  | 13-2518466(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------- |  | ----------------------------------------------
|745 Seventh Avenue
New York, New York(Address of principal
executive offices) |  | 10019(Zip Code)                               
|(212) 526-7000(Registrant's telephone number, including area code)           

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.Yes ý    No o

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

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE
REDUCED DISCLOSURE PERMITTED THEREBY.

As of July 15, 2003, 1,006 shares of the Registrant's Common Stock, par value $0.10 per share, were
outstanding.

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LEHMAN BROTHERS INC. and SUBSIDIARIES    FORM 10-Q    FOR THE QUARTER ENDED MAY 31, 2003    CONTENTS

|                      |  |                       |  |                                                |  |                                                                                            |  | Page
Number
|--------------------- |  | --------------------- |  | ---------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | -----------
|Available Information |  | 3                    
|Part I.               |  | FINANCIAL INFORMATION |  |                                               
|                      |  | Item 1.               |  | Financial Statements(unaudited)               |  |                                                                                           
|                      |  |                       |  |                                                |  | Consolidated Statement of Income
Three and Six Months Ended
May 31, 2003 and May 31, 2002 |  | 4          
|                      |  |                       |  |                                                |  | Consolidated Statement of Financial Condition
May 31, 2003 and November 30, 2002          |  | 6          
|                      |  |                       |  |                                                |  | Consolidated Statement of Cash Flows
Six Months Ended
May 31, 2003 and May 31, 2002       |  | 8          
|                      |  |                       |  |                                                |  | Notes to Consolidated Financial Statements                                                 |  | 9          
|                      |  | Item 2.               |  | Management's Analysis of Results of Operations |  | 21                                                                                        
|                      |  | Item 4.               |  | Controls and Procedures                        |  | 38                                                                                        
|Part II.              |  | OTHER INFORMATION     |  |                                               
|                      |  | Item 1.               |  | Legal Proceedings                              |  | 39                                                                                        
|                      |  | Item 6.               |  | Exhibits and Reports on Form 8-K               |  | 43                                                                                        
|Signature             |  | 45                   
|Certifications        |  | 46                   
|Exhibit Index         |  | 48                   
|Exhibits              |  |                      

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[THIS PAGE INTENTIONALLY LEFT BLANK]

2

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AVAILABLE INFORMATION

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

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

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

3

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LEHMAN BROTHERS INC. and SUBSIDIARIES  PART IFINANCIAL INFORMATION

ITEM 1                        Financial Statements

|                      |                               | Three months ended         
|--------------------- | ----------------------------- | ---------------------------
|
|Revenues              |                               |                            
|                      | Principal transactions        |                            
|                      | Investment banking            |                            
|                      | Commissions                   |                            
|                      | Interest and dividends        |                            
|                      | Other                         |                            
|                      |                               |                            
|                      |                               | Total revenues             
|Interest expense      |                               |                            
|                      |                               |                            
|                      |                               | Net revenues               
|                      |                               |                            
|Non-interest expenses |                               |                            
|                      | Compensation and benefits     |                            
|                      | Brokerage and clearance fees  |                            
|                      | Technology and communications |                            
|                      | Occupancy                     |                            
|                      | Business development          |                            
|                      | Professional fees             |                            
|                      | Management fees, net          |                            
|                      | Other                         |                            
|                      | Real estate reconfiguration   |                            
|                      |                               |                            
|                      |                               | Total non-interest expenses
|                      |                               |                            
|Income before taxes   |                               |                            
|                      | Provision for income taxes    |                            
|                      |                               |                            
|Net income            |                               | $                          
|                      |                               |                            

See
notes to consolidated financial statements.

4

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

|                      |                               | Six months ended           
|--------------------- | ----------------------------- | ---------------------------
|
|Revenues              |                               |                            
|                      | Principal transactions        |                            
|                      | Investment banking            |                            
|                      | Commissions                   |                            
|                      | Interest and dividends        |                            
|                      | Other                         |                            
|                      |                               |                            
|                      |                               | Total revenues             
|Interest expense      |                               |                            
|                      |                               |                            
|                      |                               | Net revenues               
|                      |                               |                            
|Non-interest expenses |                               |                            
|                      | Compensation and benefits     |                            
|                      | Brokerage and clearance fees  |                            
|                      | Technology and communications |                            
|                      | Occupancy                     |                            
|                      | Business development          |                            
|                      | Professional fees             |                            
|                      | Management fees, net          |                            
|                      | Other                         |                            
|                      | Real estate reconfiguration   |                            
|                      |                               |                            
|                      |                               | Total non-interest expenses
|                      |                               |                            
|Income before taxes   |                               |                            
|                      | Provision for income taxes    |                            
|                      |                               |                            
|Net income            |                               | $                          
|                      |                               |                            

See
notes to consolidated financial statements.

5

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

|                                                                                                                                           |                                                 | May 31
2003  |        | November 30
2002
|------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------- | ------------ | ------ | ----------------
|ASSETS                                                                                                                                     |                                                 |              |        |                 
|Cash and cash equivalents                                                                                                                  |                                                 | $            | 295    |                 
|Cash and securities segregated and on deposit for regulatory and other purposes                                                            |                                                 |              | 1,882  |                 
|Securities and other financial instruments owned (includes $28,438 at May 31, 2003 and $22,407 at November 30, 2002 pledged as collateral) |                                                 |              | 80,624 |                 
|Collateralized agreements:                                                                                                                 |                                                 |              |        |                 
|                                                                                                                                           | Securities purchased under agreements to resell |              |        | 87,393          
|                                                                                                                                           | Securities borrowed                             |              |        | 35,762          
|Receivables:                                                                                                                               |                                                 |              |        |                 
|                                                                                                                                           | Brokers, dealers and clearing organizations     |              |        | 8,608           
|                                                                                                                                           | Customers                                       |              |        | 7,902           
|                                                                                                                                           | Receivables from affiliates                     |              |        | 11,017          
|                                                                                                                                           | Others                                          |              |        | 99              
|Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $149 in 2003 and $129 in 2002)         |                                                 |              | 130    |                 
|Other assets                                                                                                                               |                                                 |              | 462    |                 
|Excess of cost over fair value of net assets acquired (net of accumulated amortization of $135 in 2003 and $134 in 2002)                   |                                                 |              | 150    |                 
|                                                                                                                                           |                                                 |              |        |                 
|                                                                                                                                           |                                                 | Total assets |        | $               
|                                                                                                                                           |                                                 |              |        |                 

See
notes to consolidated financial statements.

6

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

|                                                                                             |                                                | May 31
2003                                |        | November 30
2002
|-------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------ | ------ | ----------------
|LIABILITIES AND STOCKHOLDER'S EQUITY                                                         |                                                |                                            |        |                 
|Short-term debt                                                                              |                                                | $                                          | 125    |                 
|Securities and other financial instruments sold but not yet purchased                        |                                                |                                            | 53,741 |                 
|Collateralized financing:                                                                    |                                                |                                            |        |                 
|                                                                                             | Securities sold under agreements to repurchase |                                            |        | 101,855         
|                                                                                             | Securities loaned                              |                                            |        | 32,652          
|                                                                                             | Other secured borrowings                       |                                            |        |                
|Advances from Holdings and other affiliates                                                  |                                                |                                            | 14,056 |                 
|Payables:                                                                                    |                                                |                                            |        |                 
|                                                                                             | Brokers, dealers and clearing organizations    |                                            |        | 8,152           
|                                                                                             | Customers                                      |                                            |        | 8,882           
|Accrued liabilities and other payables                                                       |                                                |                                            | 3,224  |                 
|Long-term debt:                                                                              |                                                |                                            |        |                 
|                                                                                             | Senior notes                                   |                                            |        | 3,511           
|                                                                                             | Subordinated indebtedness                      |                                            |        | 4,393           
|                                                                                             |                                                |                                            |        |                 
|                                                                                             |                                                | Total liabilities                          |        |                 
|                                                                                             |                                                |                                            |        |                 
|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                                                                   |                                                |                                            | 1,788  |                 
|Accumulated other comprehensive income (net of tax)                                          |                                                |                                            | 3      |                 
|Retained earnings                                                                            |                                                |                                            | 1,942  |                 
|                                                                                             |                                                |                                            |        |                 
|                                                                                             |                                                | Total stockholder's equity                 |        |                 
|                                                                                             |                                                |                                            |        |                 
|                                                                                             |                                                | Total liabilities and stockholder's equity |        | $               
|                                                                                             |                                                |                                            |        |                 

See
notes to consolidated financial statements.

7

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

|                                                                                            |                                                                       | Six Months Ended                                    |      
|------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------- | -----
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                                        |                                                                       |                                                     |      
|Net income                                                                                  |                                                                       | $                                                   | 531  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                                       |                                                     |      
|                                                                                            | Depreciation and amortization                                         |                                                     |      
|                                                                                            | Real estate reconfiguration charge                                    |                                                     |      
|                                                                                            | Other adjustments                                                     |                                                     |      
|Net change in:                                                                              |                                                                       |                                                     |      
|                                                                                            | Cash and securities segregated and on deposit                         |                                                     |      
|                                                                                            | Securities and other financial instruments owned                      |                                                     |      
|                                                                                            | Securities borrowed                                                   |                                                     |      
|                                                                                            | Other secured borrowings                                              |                                                     |      
|                                                                                            | Receivables from brokers, dealers and clearing organizations          |                                                     |      
|                                                                                            | Receivables from customers                                            |                                                     |      
|                                                                                            | Securities and other financial instruments sold but not yet purchased |                                                     |      
|                                                                                            | Securities loaned                                                     |                                                     |      
|                                                                                            | Payables to brokers, dealers and clearing organizations               |                                                     |      
|                                                                                            | Payables to customers                                                 |                                                     |      
|                                                                                            | Accrued liabilities and other payables                                |                                                     |      
|                                                                                            | Other operating assets and liabilities, net                           |                                                     |      
|                                                                                            |                                                                       |                                                     |      
|                                                                                            |                                                                       | Net cash provided by (used in) operating activities |      
|                                                                                            |                                                                       |                                                     |      
|CASH FLOWS FROM FINANCING ACTIVITIES                                                        |                                                                       |                                                     |      
|Proceeds from issuance of senior notes                                                      |                                                                       |                                                     |     
|Proceeds from issuance of subordinated indebtedness                                         |                                                                       |                                                     | 131  
|Principal payments of subordinated indebtedness                                             |                                                                       |                                                     | (275 
|Net proceeds from (payments for) short-term debt                                            |                                                                       |                                                     | 2    
|Resale agreements net of repurchase agreements                                              |                                                                       |                                                     | 6,888
|Decrease in advances from Holdings and other affiliates                                     |                                                                       |                                                     | (230 
|Capital contribution from Holdings                                                          |                                                                       |                                                     | 50   
|Dividends paid or accrued                                                                   |                                                                       |                                                     |     
|                                                                                            |                                                                       |                                                     |      
|                                                                                            |                                                                       | Net cash provided by (used in) financing activities |      
|                                                                                            |                                                                       |                                                     |      
|CASH FLOWS FROM INVESTING ACTIVITIES                                                        |                                                                       |                                                     |      
|Purchase of property, equipment and leasehold improvements, net                             |                                                                       |                                                     | (10  
|                                                                                            |                                                                       |                                                     |      
|                                                                                            |                                                                       | Net cash used in investing activities               |      
|                                                                                            |                                                                       |                                                     |      
|                                                                                            |                                                                       | Net change in cash and cash equivalents             |      
|                                                                                            |                                                                       |                                                     |      
|Cash and cash equivalents, beginning of period                                              |                                                                       |                                                     | 369  
|                                                                                            |                                                                       |                                                     |      
|                                                                                            | Cash and cash equivalents, end of period                              |                                                     | $    
|                                                                                            |                                                                       |                                                     |      

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest
paid totaled $3,543 and $4,212 for the six months ended May 31, 2003 and May 31, 2002, respectively.
Income taxes paid totaled $69 and $204 for the six months ended May 31, 2003 and May 31, 2002, respectively.

See
notes to consolidated financial statements.

8

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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"). (Holdings and its subsidiaries are collectively referred to as "Lehman Brothers".) The Company 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 primarily 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. These consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto
(the "2002 Consolidated Financial Statements") included in LBI's Annual Report on Form 10-K for the twelve months ended November 30, 2002 (the
"Form 10-K"). The Consolidated Statement of Financial Condition at November 30, 2002 was derived from the audited financial statements.

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

2.    Real Estate Reconfiguration Charge:

The Company's second quarter results include a $31 million real estate charge ($17 million after tax). The charge represents an adjustment of the
real estate charge taken in the fourth quarter of 2002 and reflects the further deterioration in the sublease market for properties in New York since the fourth quarter.

3.    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, 2003, LBI's regulatory net capital, as defined, of $1,675 million exceeded the minimum requirement by $1,432 million.

As
a clearing broker-dealer, the Company has elected to compute a reserve requirement for Proprietary Accounts of Introducing Broker-Dealers ("PAIB calculation"). The PAIB calculation is
completed in order for each correspondent firm that uses the Company as its clearing broker-dealer to classify its assets held by the Company as allowable assets in the correspondent's net capital
calculation. At May 31, 2003, the Company had a reserve requirement for PAIB of $7.9 million. Additionally, the Company had $58 million of qualified securities or cash on deposit
in a Special Reserve Bank Account as of May 31, 2003.

9

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The
Company's "AAA" rated derivatives subsidiaries, Lehman Brothers Financial Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc. ("LBDP"), have established
certain capital and operating restrictions which are reviewed by various rating agencies. At May 31, 2003, LBFP and LBDP each had capital which exceeded the requirements of the rating agencies.

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
covenants governing the indebtedness of LBI contractually limit its ability to pay dividends.

4.    Derivative Financial Instruments:

In the normal course of business, the Company enters into derivative transactions both in a trading capacity and as an end-user. The Company's
derivative activities (both trading and end-user) are recorded at fair value on the Consolidated Statement of Financial Condition. As an end user, the Company utilizes derivatives to
modify the market risk exposures of certain assets and liabilities. In this regard, the Company primarily enters into fair value hedges utilizing interest rate swaps to convert a substantial portion
of the Company's fixed rate long-term debt and certain term fixed rate secured financing activities to a floating interest rate. The ineffective portion of the fair value hedges was
included in Interest expense on the Consolidated Statement of Income and was immaterial for the three and six months ended May 31, 2003 and 2002.

Market
or fair value is generally determined by either quoted market prices (for exchange-traded futures and options) or pricing models (for swaps, forwards and options). Pricing models
utilize a series of market inputs to determine the present value of future cash flows, with adjustments, as required for credit risk and liquidity risk. Further valuation adjustments may be recorded,
as deemed appropriate, for new or complex products or for positions with significant concentrations. These adjustments are integral components of the mark-to-market process.
Credit-related valuation adjustments represent estimates of expected losses which incorporate business and economic conditions, historical experience, concentrations, and the character, quality and
performance of credit sensitive financial instruments.

Unrealized
gains and losses on derivative contracts are recorded on a net basis on the Consolidated Statement of Financial Condition for those transactions with counterparties executed
under a legally enforceable master netting agreement and are netted across products when such provisions are stated in the master netting agreement. Listed in the following table is the fair value of
the Company's trading-related derivative activities. Assets and liabilities represent net unrealized gains (amounts receivable from counterparties) and net unrealized losses (amounts payable to
counterparties), respectively.

10

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|                                                                                                  |  | Fair Value*
May 31, 2003 |        | Fair Value*
November 30, 2002
|------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | -----------------------------
|
|
|Interest rate, currency and credit default swaps and options (including caps, collars and floors) |  | $                        | 11,036 |                              
|Foreign exchange forward contracts and options                                                    |  |                          | 760    |                              
|Other fixed income securities contracts (including futures contracts, options and TBAs)           |  |                          | 962    |                              
|Equity contracts (including equity swaps, warrants and options)                                   |  |                          | 672    |                              
|                                                                                                  |  |                          |        |                              
|Total                                                                                             |  | $                        | 13,430 |                              
|                                                                                                  |  |                          |        |                              

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*
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 net receivable/payable for derivative financial instruments before consideration of collateral. Included within the
$13,430 million fair value of assets at May 31, 2003 was $12,758 million related to swaps and other
over-the-counter ("OTC") contracts and $672 million related to exchange-traded option and warrant contracts. Included within the $8,746 million fair value of
assets at November 30, 2002 was $8,209 million related to swaps and other OTC contracts and $537 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 $10,213 million at May 31, 2003, representing the fair value of the
Company's OTC contracts in an unrealized gain position, after consideration of collateral. Presented below is an analysis of the Company's net credit exposure at May 31, 2003 for OTC contracts
based upon actual ratings made by external rating agencies or by equivalent ratings established and utilized by the Company's Credit Risk Management Department.

Counterparty
Risk Rating

S&P/Moody's
Equivalent

Net Credit
Exposure1

AAA/Aaa

15%2

AA-/Aa3 or higher

26%3

A-/A3 or higher

42%4

BBB-/Baa3 or higher

12%5

BB-/Ba3 or higher

4%6

B+/B1 or lower

1%


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

11

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For
a further discussion of the Company's derivative related activities, refer to "Management's Analysis of Results of OperationsOff-Balance Sheet
ArrangementsDerivatives" and Notes 1 and 11 to the 2002 Consolidated Financial Statements, included in the Form 10-K.

5.    Securitizations:

The Company is a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with these activities, the
Company utilizes special purpose entities principally for (but not limited to) the securitization of commercial and residential mortgages, home equity loans, government and corporate bonds, and lease
and trade receivables. The Company derecognizes financial assets transferred in securitizations provided that the Company has relinquished control over such assets. The Company may retain an interest
in the financial assets it securitizes ("retained interests"), which may include assets in the form of residual interests in the special purpose entities established to facilitate the securitization.
Any retained interests are included in Securities and other financial instruments owned (principally Mortgages and mortgage-backed) on the Consolidated Statement of Financial Condition. For further
information regarding the accounting for securitization transactions, see Note 1 to the 2002 Consolidated Financial Statements, included in the Form 10-K. During the six
months ended May 31, 2003 and 2002, the Company securitized approximately $68 billion and $53 billion of financial assets, including: $61 billion and $39 billion of
residential mortgages, $2 billion in each period of commercial mortgages, and $5 billion and $12 billion of other asset-backed financial instruments, respectively.

As
of May 31, 2003 and November 30, 2002, the Company had approximately $644 million and $1,050 million, respectively, of non-investment grade
retained interests from its securitization activities (principally junior security interests in securitizations) including $347 million of residential mortgages, $198 million of other
asset-backed financial instruments and $99 million of commercial mortgages as of May 31, 2003; and $350 million of residential mortgages, $200 million of other asset-backed
financial instruments and $500 million of commercial mortgages, as of November 30, 2002. The Company records its trading assets on a mark-to-market basis,
including those assets held prior to securitization, as well as any retained interests post securitization. Mark-to-market gains or losses are recorded in Principal
transactions on the Consolidated Statement of Income. Fair value is determined based upon listed market prices, if available. When market prices are not available, fair value is determined based on
valuation pricing models which take into account relevant factors such as discount, credit and prepayment assumptions, and also considers comparisons to similar market transactions.

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

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

12

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

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

|                       |                              | At May 31, 2003 |   | At November 30, 2002
|---------------------- | ---------------------------- | --------------- | - | --------------------
|
|Prepayment speed:      |                              |                 |   |                     
|                       | Impact of 10% adverse change |                 | $ | 2                   
|                       | Impact of 20% adverse change |                 | $ | 6                   
|Assumed credit losses: |                              |                 |   |                     
|                       | Impact of 10% adverse change |                 | $ | 15                  
|                       | Impact of 20% adverse change |                 | $ | 31                  
|Discount rate:         |                              |                 |   |                     
|                       | Impact of 10% adverse change |                 | $ | 15                  
|                       | Impact of 20% adverse change |                 | $ | 30                  

The
sensitivity analysis in the preceding table is hypothetical and should be used with caution as the above stresses are performed without consideration of the impact of hedges, which
serve to reduce the Company's actual risk. In addition, these results are calculated by stressing a particular economic assumption independent of changes in any other assumption (as required by U.S.
GAAP); in reality, changes in one factor often result in changes in another (for example, changes in discount rates will often impact expected prepayment speeds). Further, changes in the fair value
based upon a 10% or 20% variation in an assumption should not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.

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

|                                          |  | Six months ended May 31, 2003
|----------------------------------------- |  | -----------------------------
|
|Cash flows received on retained interests |  | $                            

13

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6.     Financial Instruments:

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

|(in millions)                                                          |                                                             | May 31
2003 |        | November 30
2002
|---------------------------------------------------------------------- | ----------------------------------------------------------- | ----------- | ------ | ----------------
|Securities and other financial instruments owned:                      |                                                             |             |        |                 
|                                                                       | Mortgages and mortgage-backed                               |             | $      | 7,080           
|                                                                       | Government and agencies                                     |             |        | 27,706          
|                                                                       | Derivatives and other contractual agreements                |             |        | 13,430          
|                                                                       | Corporate debt and other                                    |             |        | 16,750          
|                                                                       | Corporate equities                                          |             |        | 14,783          
|                                                                       | Certificates of deposits and other money market instruments |             |        | 875             
|                                                                       |                                                             |             |        |                 
|                                                                       |                                                             | $           | 80,624 |                 
|                                                                       |                                                             |             |        |                 
|Securities and other financial instruments sold but not yet purchased: |                                                             |             |        |                 
|                                                                       | Government and agencies                                     |             | $      | 32,011          
|                                                                       | Derivatives and other contractual agreements                |             |        | 12,599          
|                                                                       | Corporate debt and other                                    |             |        | 5,249           
|                                                                       | Corporate equities                                          |             |        | 3,882           
|                                                                       |                                                             |             |        |                 
|                                                                       |                                                             | $           | 53,741 |                 
|                                                                       |                                                             |             |        |                 

7.     Securities Pledged as Collateral:

The Company enters into secured borrowing and lending transactions to finance trading inventory positions, obtain securities for settlement and meet customers'
needs. The Company receives collateral in connection with resale agreements, securities borrowed transactions, customer margin loans and certain other loans. The Company is generally permitted to sell
or repledge these securities held as collateral and use the securities to secure repurchase agreements, enter into securities lending transactions or deliver to counterparties to cover short
positions. The Company carries secured financing agreements for financial reporting purposes on a net basis when permitted under the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" ("FIN 41").

At
May 31, 2003 and November 30, 2002, the fair value of securities received as collateral and securities owned that have not been sold, repledged or otherwise encumbered
totaled approximately $15 billion and $13 billion, respectively. At May 31, 2003 and November 30, 2002, the gross fair value of securities received as collateral where the
Company was permitted to sell or repledge the securities was approximately $306 billion and $290 billion, respectively. Of this collateral, approximately $301 billion and
$286 billion at May 31, 2003 and November 30, 2002, respectively, has been sold or repledged, generally as collateral under repurchase agreements or to cover securities and other
financial instruments sold but not yet purchased. Included in the $301 billion and $286 billion of collateral pledged at May 31, 2003 and November 30, 2002 were securities,
primarily fixed income having a market value of approximately $26.3 billion and $23.4 billion, respectively, as collateral for securities borrowed having a market value of
$26.0 billion and $23.3 billion, respectively.

14

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The
Company also pledges its own assets, principally to collateralize certain financing arrangements. These pledged securities, where the counterparty has the right, by contract or
custom, to rehypothecate the financial instruments are classified as Securities and other financial instruments owned, pledged as collateral, on the Consolidated Statement of Financial Condition as
required by Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," ("SFAS 140").

The
carrying value of securities and other financial instruments owned that have been pledged to counterparties where those counterparties do not have the right to sell or repledge were
approximately $29 billion and $30 billion at May 31, 2003 and November 30, 2002, respectively.

8.     Other Commitments and Contingencies:

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

Lending Related Commitments

In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $2.1 billion and
$1.1 billion at May 31, 2003 and November 30, 2002, respectively. These commitments require borrowers to provide acceptable collateral, as defined in the agreements, when amounts
are drawn under the lending facilities. Advances made under the above lending arrangements are typically at variable interest rates and generally provide for over-collateralization based
upon the borrowers' creditworthiness. In addition, at May 31, 2003, the Company had commitments to enter into forward starting, secured reverse repurchase and repurchase agreements principally
secured by government and government agency obligations of $39.0 billon and $31.3 billion, respectively, as compared to $68.6 billion and $38.1 billion, respectively, at
November 30, 2002.

The
Company, through its high grade and high yield sales, trading and underwriting activities, makes commitments to extend credit in loan syndication transactions. The Company utilizes
various hedging and funding strategies to actively manage its market, credit and liquidity exposures on these commitments. In addition, total commitments are not indicative of actual risk or funding
requirements, as the commitments may not be drawn or fully utilized. These commitments and any related drawdowns of these facilities typically have fixed maturity dates and are contingent upon certain
representations, warranties and contractual conditions applicable to the borrower.

The
Company had credit risk associated with lending commitments to investment grade borrowers (after consideration of hedges) of $1.9 billion and $2.6 billion at
May 31, 2003 and November 30, 2002, respectively. In addition, the Company had credit risk associated with lending commitments to non-investment grade borrowers (after
consideration of hedges) of $1.3 billion and $1.1 billion at May 31, 2003 and November 30, 2002, respectively. Before consideration of hedges, the Company had commitments
to investment and non-investment grade borrowers of $5.3 billion and $1.4 billion as compared to $6.2 billion and $1.2 billion at May 31, 2003 and
November 30, 2002, respectively. The Company had available undrawn borrowing facilities with third parties of approximately $2.6 billion and $2.8 billion at May 31, 2003
and November 30, 2002, respectively, which can be drawn upon to provide funding for these commitments. These funding facilities contain limits for certain concentrations of counterparty,
industry or credit ratings of the underlying loans.

15

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

At
May 31, 2003 and November 30, 2002, the Company had commitments to invest up to $197 million and $384 million, respectively, directly and through
partnerships in private equity related investments. These commitments will be funded as required, in whole or in part, through the end of the respective investment periods, principally expiring in
2004.

Other Commitments and Guarantees

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

At
May 31, 2003, the maximum payout value of derivative contracts deemed to meet the FIN 45 definition of a guarantee was approximately $247 billion. For purposes of
determining maximum payout, notional values were utilized; however, the Company believes that the fair value of these contracts is a more relevant measure of these obligations. At May 31, 2003,
the fair value of such derivative contracts approximated $6.4 billion. The Company believes that the notional amounts greatly overstate the Company's expected payout. In addition, all amounts
included above are before consideration of hedging transactions. These derivative contracts are generally highly liquid and the Company has substantially mitigated its risk on these contracts through
hedges, such as other derivative contracts and/or cash instruments. The Company manages risk associated with derivative guarantees consistent with the Company's global risk management policies. The
Company records derivative contracts, including those considered to be guarantees under FIN 45, on a fair value basis with related gains/losses recognized in Principal transactions on the Consolidated
Statement of Income.

The
Company had liquidity commitments of approximately $1.9 billion related to trust certificates backed by investment grade municipal securities at May 31, 2003, as
compared to $0.6 billion at November 30, 2002. The Company's obligation under such liquidity commitments is generally less than one year and is typically further limited by the fact that
the Company's obligation ceases if the underlying assets are downgraded below investment grade or default.

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

16

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

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

Litigation

In the normal course of business, the Company has been named a defendant in a number of lawsuits and other legal proceedings. After considering all relevant facts
and established reserves, in the opinion of the Company such litigation will not, in the aggregate, have a material adverse effect on the Company's consolidated financial position or cash flows, but
may be material to the Company's operating results for any particular period, depending on the level of income for such period.

Other Off-Balance Sheet Arrangements

Special purpose entities ("SPEs") are corporations, trusts or partnerships which are established for a limited purpose. SPEs by their nature generally do not
provide equity owners with significant voting powers, as the SPE documents govern all material decisions. The Company's primary involvement with SPEs relates to securitization transactions in which
transferred assets, including mortgages, loans, receivables and other assets, are sold to an SPE and repackaged into securities (i.e., securitized). SPEs may also be utilized by the Company to create
securities with a unique risk profile desired by investors and as a means of intermediating financial risk. In summary, in the normal course of business, the Company may establish SPEs; sell assets to
SPEs; underwrite, distribute and make a market in securities issued by SPEs; transact derivatives with SPEs; own securities or residual interests in SPEs and provide liquidity or other guarantees for
SPEs.

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

Certain
special purpose entities do not meet the QSPE criteria due to their permitted activities not being sufficiently limited, or because the assets are not deemed qualifying financial
instruments (e.g., real estate). In instances in which the Company is either the sponsor of or transferor to a non-qualifying special purpose entity, the Company follows the accounting
guidance provided by Emerging Issues Task Force ("EITF") Topic D-14 and FASB Interpretation No. 46, "Consolidation of Variable Interest
Entitiesan Interpretation of ARB No. 51" ("FIN 46") (for a discussion of FIN 46, see below) to determine whether consolidation is required. Under this
guidance, the Company would not be required to, and does not consolidate such SPE if a third party investor made a substantive equity investment in the SPE, was

17

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subject
to first dollar risk of loss of such SPE, and had a controlling financial interest. The Company's principal involvement with non-QSPEs relates to Collateralized Debt Obligations
("CDOs"), synthetic credit transactions and other structured financing transactions to facilitate customers' investment and/or funding needs.

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

9.     Segments:

The Company operates in three segments: Investment Banking, Capital Markets and Client Services.

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

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

Client
Services revenues reflect earnings from the Company's Private Client and Private Equity businesses. Private Client revenues reflect the Company's
high-net-worth
retail customer flow activities as well as asset management fees earned from these clients. Private Equity revenues include the management and incentive fees earned in the Company's role as general
partner for Private equity partnerships.

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



18

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Segments (Three Months Ended):

|(in millions)                         |  | Investment
Banking |     | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | --- | --------------- | - | --------------- |  | -----
|May 31, 2003                          |  |                    |     |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 346 |                 | $ | 2,786           |  | $    
|Interest Expense                      |  |                    |    |                 |   | 1,757           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Net Revenue                           |  |                    | 346 |                 |   | 1,029           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 2   |                 |   | 11              |  |      
|Other Expenses(1)                     |  |                    | 256 |                 |   | 631             |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Income Before Taxes(1)                |  | $                  | 88  |                 | $ | 387             |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.2 |                 | $ | 230.8           |  | $    
|                                      |  |                    |     |                 |   |                 |  |      

---

|(in millions)                         |  | Investment
Banking |     | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | --- | --------------- | - | --------------- |  | -----
|May 31, 2002                          |  |                    |     |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 343 |                 | $ | 2,646           |  | $    
|Interest Expense                      |  |                    |    |                 |   | 2,145           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Net Revenue                           |  |                    | 343 |                 |   | 501             |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 3   |                 |   | 12              |  |      
|Other Expenses                        |  |                    | 256 |                 |   | 353             |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Income Before Taxes                   |  | $                  | 84  |                 | $ | 136             |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.4 |                 | $ | 198.4           |  | $    
|                                      |  |                    |     |                 |   |                 |  |      

19

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Segments (Six Months Ended):

|(in millions)                         |  | Investment
Banking |     | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | --- | --------------- | - | --------------- |  | -----
|May 31, 2003                          |  |                    |     |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 622 |                 | $ | 5,079           |  | $    
|Interest Expense                      |  |                    |    |                 |   | 3,504           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Net Revenue                           |  |                    | 622 |                 |   | 1,575           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 6   |                 |   | 23              |  |      
|Other Expenses(1)                     |  |                    | 466 |                 |   | 1,022           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Income Before Taxes(1)                |  | $                  | 150 |                 | $ | 530             |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.2 |                 | $ | 230.8           |  | $    
|                                      |  |                    |     |                 |   |                 |  |      

---

|(in millions)                         |  | Investment
Banking |     | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | --- | --------------- | - | --------------- |  | -----
|May 31, 2002                          |  |                    |     |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 732 |                 | $ | 5,489           |  | $    
|Interest Expense                      |  |                    |    |                 |   | 4,193           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Net Revenue                           |  |                    | 732 |                 |   | 1,296           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 4   |                 |   | 21              |  |      
|Other Expenses                        |  |                    | 516 |                 |   | 836             |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Income Before Taxes                   |  | $                  | 212 |                 | $ | 439             |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.4 |                 | $ | 198.4           |  | $    
|                                      |  |                    |     |                 |   |                 |  |      

The
following are net revenues by geographic region:

|             |       | Three Months Ended |       | Six Months Ended
|------------ | ----- | ------------------ | ----- | ----------------
|
|U.S.         |       | $                  | 1,402 |                 
|Europe       |       |                    | 131   |                 
|Asia Pacific |       |                    | 57    |                 
|             |       |                    |       |                 
|             | Total |                    | $     | 1,590           
|             |       |                    |       |                 

10.   Related Parties:

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.

20

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LEHMAN BROTHERS INC. and SUBSIDIARIES  MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

ITEM 2

Forward-Looking Statements

Some of the statements contained in this Management's Analysis of Results of Operations, including those relating to the Company's strategy and other statements
that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar
expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are not historical facts but instead represent only the
Company's expectations, estimates and projections regarding future events. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to
predict, which may include, but are not limited to, market fluctuations and volatility, industry competition and changes in the competitive environment, investor sentiment, liquidity risks, credit
ratings changes, credit exposure and legal and regulatory proceedings and changes. (For further discussion of these risks, see "Part I, Item 1BusinessForward-Looking
Statements" in the Form 10-K.) The Company's actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such
forward-looking statements and, accordingly, readers are cautioned not to place undue reliance on such statements. The Company undertakes no obligation to update any forward-looking statements,
whether as a result of new information, future events or otherwise.

Results of OperationsFor the Three Months Ended May 31, 2003 and May 31, 2002

The Company reported net income of $343 million for the quarter ended May 31, 2003, an increase of 73% as compared to $198 million for the
second quarter of 2002. These results included a $31 million
pre-tax real estate charge ($17 million after tax) associated with the Company's previous decision to dispose of certain excess real estate. The Company believes that the
significant increase in net income in the second quarter of 2003 reflects the more positive economic environment experienced in the second quarter of 2003 as well as improvements the Company has
achieved in its market position. The Company continues to maintain its disciplined approach with regard to its core competencies in expense, risk and liquidity management.

Net Revenues

Second quarter 2003 net revenues were a record $1,590 million as compared to $1,042 million for the second quarter 2002, an increase of 53%, and up
61% versus the $989 million for the first quarter of 2003. The Company's second quarter 2003 revenues were driven by strong technicals including historically low interest rates, declining
credit spreads and appreciating equity markets. These market conditions resulted in improved customer flow trading activity in both fixed income and equity products as investors became decidedly more
active following the resolution of the conflict in Iraq. However, mergers and acquisitions ("M&A") and equity origination activity remained weak in 2003 compared to historical norms.

Principal Transactions, Commissions and Net Interest Revenues

The Company evaluates the performance of its Capital Markets and Client Services revenues in the aggregate, including Principal transactions, Commissions and net
interest. Decisions relating to these activities are based on a review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction, including
associated commissions, and the interest and dividends revenue and expense associated with financing or hedging the Company's positions. Therefore, the Company evaluates its Net revenues from
Principal transactions, Commissions and Interest and dividends revenues, offset by Interest expense, in the aggregate. Caution should be used when analyzing these

21

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revenue
categories individually, as they may not be indicative of the performance of the Company's overall Capital Markets and/or Client Services activities.

Principal
transactions, Commissions and net interest revenues increased 80% to $1,236 million for the second quarter of 2003 as compared to $688 million for the second
quarter of 2002 driven by record revenues from fixed income products and a 73% increase in revenues from equity products. The near perfect fixed income market conditions in the second quarter of 2003
resulted in record customer driven volumes and strong performances in virtually all fixed income asset classes. Equity revenues benefited from the overall upward movement in U.S. equity market
indices, which saw increases of 10 to 20% during the second quarter of 2003, and improvements in customer flow activities, primarily in convertibles.

Principal
transactions revenues were $740 million for the second quarter of 2003 as compared to $206 million for the second quarter of 2002. Commissions revenues were
$248 million for the second quarter of 2003 as
compared to $272 million for the second quarter of 2002. Interest and dividend revenues were $2,012 million for the second quarter of 2003 as compared to $2,360 million for the
second quarter of 2002. Interest expense decreased to $1,764 million for the second quarter of 2003 as compared to $2,150 million for the second quarter of 2002.

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

Interest
and dividends revenues and Interest expense are functions of the level and mix of total assets and liabilities, principally financial instruments owned and secured financing
activities, the prevailing level of interest rates, as well as the term structure of the Company's financings. Interest and dividends revenues and Interest expense are integral components of the
Company's overall customer flow activities. The decline in Interest and dividend revenues and Interest expense from the previous year is principally due to an overall decrease in interest rates
between the periods. The 18% increase in net interest revenue to $248 million in the second quarter of 2003 from $210 million in the second quarter of 2002 was principally due to an
increase in total inventory as compared to the prior year.

Investment Banking

Investment banking revenues were $346 million for the second quarter of 2003 as compared to $344 million for the second quarter of 2002. Investment
banking revenues result mainly from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, advising clients on M&A activities and other
services. Investment banking revenues remained relatively flat from the second quarter of 2002 reflecting decreased activity in equity origination and mergers and acquisitions. Debt underwriting
activities continued at robust levels reflecting the positive environment.

Non-Interest Expenses

Non-interest expenses were $1,077 million for the second quarter of 2003, up 39% from $773 million for the second quarter of 2002.
Non-interest expenses for the second quarter of 2003 include a $31 million real estate charge ($17 million after-tax). This charge represents an adjustment of the
real estate charge taken in the fourth quarter of 2002 and reflects the further deterioration in the sublease market for properties in New York since the fourth quarter. Compensation and benefits
expense increased to $802 million from $531 million in the second quarter of 2002 with compensation and benefits expense as a

22

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percentage
of revenues essentially unchanged at 50% in the second quarter of 2003 as compared to 51% in the second quarter of 2002.

Non
personnel expenses were $275 million for the second quarter of 2003; essentially flat compared to the $242 million in the second quarter of 2002, excluding the
$31 million real estate charge. During the second quarter of 2003 occupancy costs decreased over the prior year due to the Company's real estate reconfiguration in 2002. This decrease was
offset by slightly higher expenses in almost all other non personnel expense categories.

Income Taxes

The Company recorded a provision for income taxes of $170 million for the second quarter of 2003 as compared to $71 million for the second quarter
of 2002 which resulted in effective tax rates of 33% and 26%, respectively. The increase in the effective tax rate is primarily due to higher levels of income subject to tax at marginal statutory
rates in the second quarter of 2003.

Segment ResultsThree Months Ended May 31, 2003 and May 31, 2002

The Company is segregated into three business segments (each of which is described below): Investment Banking, Capital Markets and Client Services. Each segment
represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional and high-net-worth retail
clients, which are recognized across all revenue categories contained on the Consolidated Statement of Income. (Segment net revenues also contain certain internal allocations, including funding costs,
which are centrally managed. For further discussion of these allocations, see Note 9 to the Consolidated Financial Statements included in this Report.)

|                         |  | Three Months Ended May 31, 2003 |     | Three Months Ended May 31, 2002
|------------------------ |  | ------------------------------- | --- | -------------------------------
|
|Principal transactions   |  | $                               |    |                                
|Investment banking       |  |                                 | 346 |                                
|Commissions              |  |                                 |    |                                
|Interest and dividends   |  |                                 |    |                                
|Other                    |  |                                 |    |                                
|                         |  |                                 |     |                                
|Total revenues           |  |                                 | 346 |                                
|Interest expense         |  |                                 |    |                                
|                         |  |                                 |     |                                
|Net revenues             |  |                                 | 346 |                                
|Non-interest expenses(1) |  |                                 | 258 |                                
|                         |  |                                 |     |                                
|Income before taxes(1)   |  | $                               | 88  |                                
|                         |  |                                 |     |                                

---

In
assessing the performance of Capital Markets and Client Services, the Company evaluates Principal transactions, Commissions and net interest revenues in the aggregate. Decisions
relating to Capital Markets and Client Services activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a
transaction including associated commissions, and the Interest and dividends revenues and Interest expense associated with financing or hedging the Company's positions. Therefore, the Company
evaluates its net revenues from Principal transactions, Commissions and Interest and dividends revenues, offset by related Interest expense, in the aggregate, because the revenue classifications, when
analyzed individually, may not be indicative of the performance of the Company's Capital Markets and Client Services activities.

23

---

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

Investment
Banking's Net revenues remained relatively flat at $346 million for the second quarter of 2003 as compared to $343 million in the second quarter of 2002, as an increase in
debt underwriting activity was offset by reduced equity underwriting.

INVESTMENT BANKING NET REVENUES

|                    |  | Three Months Ended
|------------------- |  | ------------------
|
|Debt Underwriting   |  | $                 
|Equity Underwriting |  |                   
|M&A Advisory        |  |                   
|                    |  |                   
|                    |  | $                 
|                    |  |                   

Debt
underwriting revenues increased to $234 million in the second quarter of 2003 as compared to $214 million in the second quarter 2002, and increased 26% from the first
quarter of 2003. Fixed income originations remained at robust levels, as many issuers continued to take advantage of the low interest rate environment, a flatter yield curve, tight credit spreads and
strong investor demand for new product.

Equity
underwriting revenues were $60 million in the second quarter of 2003, down 26% from the second quarter of 2002, but 58% higher than the first quarter 2003. The decrease in
equity origination compared to the second quarter of 2002 was due to the continued weakness in the equity markets, as industry-wide volumes dropped to their lowest quarterly levels in
several years.

M&A
advisory fees remained relatively flat at $52 million from $48 million in the second quarter 2002.

Investment
Banking pre-tax income of $88 million in the second quarter of 2003 remained relatively flat from $84 million in the second quarter of 2002, as net
revenues and non-interest expenses were essentially unchanged.

Capital MarketsThis segment's earnings reflect institutional customer flow activities and secondary
trading and financing activities related to fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments. This segment also
includes the Company's risk arbitrage business, as well as realized and unrealized gains and losses related to the Company's private equity investments.

CAPITAL MARKETS NET REVENUES

|             |  | Three Months Ended May 31, 2003 |       | Three Months Ended May 31, 2002
|------------ |  | ------------------------------- | ----- | -------------------------------
|
|Fixed Income |  | $                               | 2,239 |                                
|Equities     |  |                                 | 547   |                                
|             |  |                                 |       |                                
|             |  | $                               | 2,786 |                                
|             |  |                                 |       |                                

Capital
Markets net revenues were $1,029 million for the second quarter of 2003, an increase of 105% from the second quarter of 2002, reflecting record performance in fixed income
and improved performance in equities.

24

---

The
fixed income component of Capital Markets in the second quarter of 2003 realized a third consecutive quarter of record results as net revenues increased 121% from the second quarter
of 2002 and 73% over the first quarter of 2003. The increase over the prior year was principally driven by near optimal market conditions which led to record customer driven volumes and strong
performances in virtually all asset classes. The second quarter of 2003 saw a decline in the absolute levels of interest rates as the U.S. Treasury rate hit a 45 year low, and credit spreads
tightened significantly with spreads on U.S. investment grade and high yield bonds decreasing 33 basis points and 153 basis points, respectively, from end of first quarter 2003 levels. These
conditions resulted in increased customer flow trading activity and revenues from mortgage products, interest rate derivatives, high yield and high grade credit, foreign exchange and municipals.
Increased revenues in mortgage related products were driven by continued strength in securitization activity and distribution of various mortgage loan products, particularly in the residential sector.
Interest rate derivatives had a record quarter as origination clients used derivatives to customize a significant volume of refinancings and investors increased their utilization of such products in
response to the higher volatility levels. The volatility in the currency markets during the second quarter of 2003 drove increased customer flow activities. In municipals, state and local deficits
drove a strong issuance calendar, which, in turn, drove increased secondary market trading activity.

Net
revenues from the equities component of Capital Markets were $297 million in the second quarter of 2003, up 75% from the $170 million in the second quarter of 2002.
Equity indices rallied in the second quarter of 2003 as the end of the Iraq conflict and improved corporate earnings brought investors off the sidelines. The increase was principally due to increases
in convertibles, and cash products as well as an improvement in performance in private equity investments. Convertibles benefited from improved credit markets and increased new issuance activity which
led to increased secondary trading as investors sought defensive assets with upside potential. In addition, equity capital markets revenues increased due to improvements in the Company's private
equity portfolio relating to certain publicly traded investments.

Capital
Markets pre-tax earnings of $387 million in the second quarter of 2003 increased 185% from pre-tax earnings of $136 million in the second
quarter of 2002 driven by higher net revenues. Capital Markets non-interest expenses increased 76% during the second quarter of 2003 to $642 million from $365 million in the
second quarter of 2002 driven primarily by an increase in compensation and benefits.

Interest and DividendsThe Company evaluates the performance of its Capital Markets business revenues in the aggregate, including
Principal transactions, Commissions and net interest. Substantially all of the
Company's net interest is allocated to its Capital Markets segment. Decisions relating to these activities are based on an overall review of aggregate revenues, which includes an assessment of the
potential gain or loss associated with a transaction, including associated commissions, and the interest revenue and expense associated with financing or hedging the Company's positions; therefore
caution should be utilized when analyzing revenue categories individually.

Interest
and dividends revenues for Capital Markets businesses decreased by 15% from the quarter of 2002, while Interest expense decreased by 18% over this same period, reflecting the
decline in interest rates from the previous year's second quarter of approximately 50 basis points. Net interest revenue increased 19% to $245 million in the second quarter of 2003, benefiting
from the change in inventory mix to higher levels of interest-bearing assets.

25

---

Client ServicesClient Services net revenues reflect earnings from the Company's Private Client and
Private Equity businesses. Private Client net revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees. Private Equity net
revenues include the management and incentive fees earned in the Company's role as general partner for private equity partnerships.

Client
Services net revenues were $215 million in the second quarter of 2003, a 9% increase compared to $198 million in the second quarter of 2002. Customer flow activity in fixed income
products reached record levels as investors in search of yield continued to reallocate assets.

CLIENT SERVICES NET REVENUES

|               |  | Three Months Ended
|-------------- |  | ------------------
|
|Private Client |  | $                 
|Private Equity |  |                   
|               |  |                   
|               |  | $                 
|               |  |                   

Client
Services pre-tax earnings of $69 million increased 41% in the second quarter of 2003 from $49 million in the second quarter of 2002 driven by increased
net revenues. Non-interest expenses remained relatively unchanged as compared to the prior year.

Results of OperationsFor the Six Months Ended May 31, 2003 and May 31, 2002

The Company reported net income of $531 million for the six months ended May 31, 2003, a decrease of 1% as compared to $534 million for the
six months ended May 31, 2002. These results included a $31 million pre-tax real estate charge, ($17 million after-tax) associated with the Company's
previous decision to dispose of certain excess real estate. During the six month period, the Company continued its disciplined approach with regard to its core competencies in expense, risk and
liquidity management.

Net Revenues

Net revenues were $2,583 million for the first six months of 2003 as compared to $2,417 million for the first six months of 2002. Revenues increased
7% compared to the prior year's levels, reflecting a strong performance in what remains a very difficult operating environment.

Principal Transactions, Commissions and Net Interest Revenues

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

Principal
transactions, Commissions and net interest revenues increased 17% to $1,944 million for the first six months of 2003 as compared to $1,666 million for the first
six months of 2002, reflecting robust fixed income customer flow activities, offset by continued weakness in the equities markets. Fixed

26

---

income
products benefited from the rally in U.S. Treasuries and the narrowing of credit spreads, as investors continued to be risk averse. These conditions contributed to strong customer flow activity
and improved results, particularly in interest rate products and high grade and high yield bonds. In addition, there was improved performance from mortgage products driven by continued strength in
securitization activity as a result of historically low interest rate levels. Revenues from equity products improved on stronger customer activity, primarily in convertibles. The Company also
continued to improve its market share in both listed and NASDAQ trading volumes during the first six months of 2003.

Within
these amounts, Principal transactions revenues were $1,040 million for the first six months of 2003 as compared to $734 million for the first six months of 2002.
Commissions revenues were $457 million for the first six months of 2003 as compared to $503 million for the first six months of 2002. Interest and dividend revenues were
$3,961 million for the first six months of 2003 as compared to $4,634 million for the first six months of 2002. Interest expense was $3,514 million for the first six months of
2003 as compared to $4,205 million for the second quarter of 2002.

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

Interest
and dividend revenues and Interest expense are functions of the level and mix of total assets and liabilities, principally financial instruments owned and secured financing
activities, the prevailing level of interest rates, as well as the term structure of the Company's financings. Interest and dividends revenues and Interest expense are integral components of the
Company's overall customer flow activities. The decline in Interest and dividends revenues and Interest expense from the previous year is principally due to a decline in interest rates over the
period. The increase in net interest revenue of 4% to $447 million in the first six months of 2003 from $429 million in the first six months of 2002 was due to a change in inventory mix
to higher levels of interest bearing assets in response to continued shifts in customer asset preferences.

Investment Banking

Investment banking revenues were $623 million for the first six months of 2003 as compared to $733 million for the first six months of 2002.
Investment banking revenues result mainly from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, advising clients on M&A activities and
other services. Investment banking revenues decreased 15% from the first six months of 2002 reflecting the continued market weakness in equity underwriting, partially offset by stronger debt
underwriting levels.

Non-Interest Expenses

Non-interest expenses were $1,825 million for the first six months of 2003, up 10% from $1,661 million for the first six months of 2002.
Non-interest expenses for the first six months of 2003 include a $31 million real estate charge ($17 million after-tax). This charge represents an adjustment of
the real estate charge taken in the fourth quarter of 2002 and reflects the further deterioration in the sublease market for properties in New York since the fourth quarter. Compensation and benefits
expense of $1,306 million increased 7% from $1,218 million in the first six months of 2002 as a result of the 7% increase in net revenues over the same period.

Nonpersonnel
expenses were $519 million for the first six months of 2003, up 17% compared to the first six months of 2002. Technology and communication expense increased to
$120 million for the first six

27

---

months
of 2003 from $89 million for the first six months of 2002, primarily due to amortization of new technology assets at the Company's new facilities and increased spending associated with
the enhancement of the Company's capital markets trading platforms and technology infrastructure. Brokerage and clearance fees increased 7% in the first six months of 2003 as a result of higher
volumes across many fixed income products. Professional fees increased 31% in the first six months of 2003 as a result of legal and accounting and audit fees.

Income Taxes

The Company recorded a provision for income taxes of $227 million for the first six months of 2003 versus $222 million for the first six months of
2002. This provision resulted in effective tax rates of 30% and 29% respectively. The increase in the effective tax rate is primarily due to a higher level of income subject to marginal statutory
rates in the first six months of 2003.

Segment ResultsSix Months Ended May 31, 2003 and May 31, 2002

The Company is segregated into three business segments (each of which is described below): Investment Banking, Capital Markets and Client Services. Each segment
represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional and high-net-worth retail
clients, which are recognized across all revenue categories contained on the Consolidated Statement of Income. (Segment net revenues also contain certain internal allocations, including funding costs,
which are centrally managed. For further discussion of these allocations, see Note 9 to the Consolidated Financial Statements included in this Report.)

|                         |  | Six Months Ended May 31, 2003 |     | Six Months Ended May 31, 2002
|------------------------ |  | ----------------------------- | --- | -----------------------------
|
|Principal transactions   |  | $                             |    |                              
|Investment banking       |  |                               | 622 |                              
|Commissions              |  |                               |    |                              
|Interest and dividends   |  |                               |    |                              
|Other                    |  |                               |    |                              
|                         |  |                               |     |                              
|Total revenues           |  |                               | 622 |                              
|Interest expense         |  |                               |    |                              
|                         |  |                               |     |                              
|Net revenues             |  |                               | 622 |                              
|Non-interest expenses(1) |  |                               | 472 |                              
|                         |  |                               |     |                              
|Income before taxes(1)   |  | $                             | 150 |                              
|                         |  |                               |     |                              

---

In
assessing the performance of Capital Markets and Client Services, the Company evaluates Principal transactions, Commissions and net interest revenues in the aggregate. Decisions
relating to Capital Markets and Client Services activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a
transaction including associated commissions, and the Interest and dividends revenues and Interest expense associated with financing or hedging the Company's positions. Therefore, the Company
evaluates its net revenues from Principal transactions, Commissions and Interest and dividends revenue, offset by related Interest expense, in the aggregate, because the revenue classifications, when
analyzed individually, may not be indicative of the performance of the Company's Capital Markets and Client Services activities.

28

---



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

Investment
Banking's net revenues decreased 15% during the first half of 2003 to $622 billion from $732 million in the first half of 2002 due principally to lower equity underwriting
activity.

INVESTMENT BANKING NET REVENUES

Six Months Ended(in millions)

May 31
2003

May 31
2002Debt Underwriting

$
418

$
401Equity Underwriting


99


214M&A Advisory


105


117$
622

$
732


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

Equity
underwriting revenues were $99 million in the first six months of 2003, down 54% from the first six months of 2002. The decrease in equity origination was due to the
continued weakness in the global equity markets, as industry-wide volumes dropped to their lowest quarterly levels in several years. Industry-wide global equity market volumes
decreased 45% during the first six months of 2003 as compared to the first six months of 2002, with particular weakness in the IPO sector as corporations delayed deals amid the slumping equity
markets.

M&A
advisory fees decreased 10% in first six months 2003 compared to the first six months of 2002. M&A activity continued to be hampered by lackluster economic data and geopolitical
concerns, resulting in industry wide market volume for completed transactions in the first six months of 2003 at its lowest in over five years. M&A completed volume was down 19% from the first six
months of 2002.

Investment
Banking pre-tax earnings of $150 million in the first six months of 2003 decreased 29% from $212 million in the first six months of 2002, as a 15%
decrease in net revenues was only partially offset by a 9% decrease in non-interest expenses. The decrease in non-interest expenses primarily reflected reduced compensation and
benefits associated with lower revenue levels and reduced headcount. Nonpersonnel expenses were down slightly as compared to the first half of 2002 as the Company continued to focus on minimizing
discretionary spending in the current market environment.

Capital MarketsThis segment's earnings reflect institutional customer flow activities and secondary
trading and financing activities related to fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments. This segment also
includes the Company's risk arbitrage business, as well as realized and unrealized gains and losses related to the Company's private equity investments.

CAPITAL MARKETS NET REVENUES

|             |  | Six Months Ended May 31, 2003 |       | Six Months Ended May 31, 2002
|------------ |  | ----------------------------- | ----- | -----------------------------
|
|Fixed Income |  | $                             | 4,162 |                              
|Equities     |  |                               | 917   |                              
|             |  |                               |       |                              
|             |  | $                             | 5,079 |                              
|             |  |                               |       |                              

29

---

Capital
Markets net revenues were $1,575 million for the first six months of 2003, an increase of 22% from the second quarter of 2002, reflecting record performance in fixed
income and improved performance in equities. Institutional customer flow activity increased in fixed income products as spreads tightened causing the market to pursue high yields. In equity products,
increases in convertibles and in U.S. listed market share helped drive the net revenue increase.

Net
revenues for the fixed income component of Capital Markets in the first six months of 2003 exceeded the first six months of 2002 by 10%. The increase was principally driven by a
strong level of institutional customer flow activity, as historically low interest rates and narrowing credit spreads contributed to increased trading activity and revenues from interest rate, high
grade, high yield and mortgage products. Revenues
from the mortgage business continued to be bolstered by a strong volume of refinancings and heavy investor demand for secondary products. Credit and interest rate derivative products were also strong
as investors sought to diversify and hedge their risks.

Net
revenues from the equities component of Capital Markets were $415 million in the first six months of 2003, up 73% from the first six months of 2002. U.S. equity indices
increased slightly from year end 2002, while European and Asian indices have declined. Favorable performance in convertibles contributed to the increase in revenues, driven by improved credit markets
and strong customer activity on the heels of increased new issuance activity.

Capital
Markets pre-tax earnings of $530 million in the first six months of 2003 increased 21% from pre-tax earnings of $439 million in the first
six months of 2002, driven by a 22% increase in net revenues. Capital Markets non-interest expenses increased 22% during the first six months of 2003 to $1,045 million from
$857 million in the first six months of 2002, primarily due to an increase in compensation and benefits expense associated with the increase in net revenues. In addition, nonpersonnel expenses
increased principally due to higher brokerage and clearance costs associated with higher volumes in certain fixed income products.

Interest and DividendsThe Company evaluates the performance of its Capital Markets business revenues in the aggregate, including
Principal transactions, Commissions and net interest. Substantially all of the Company's net interest is allocated to its Capital Markets segment. Decisions relating to these activities are based on
an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction, including associated commissions, and the interest revenue and
expense associated with financing or hedging the Company's positions; therefore caution should be utilized when analyzing revenue categories individually.

Interest
and dividend revenues for Capital Markets businesses decreased by 15% from the first six months of 2002, while Interest expense decreased by 16% over this same period,
reflecting the decline in interest rates from the previous year. Net interest revenue increased 5% to $440 million in the first six months of 2003, benefiting from the steepening yield curve
environment, which reduced short-term financing costs, coupled with a change in inventory mix to higher levels of interest-bearing assets and lower equity inventory levels.

Client ServicesClient Services net revenues reflect earnings from the Company's Private Client and
Private Equity businesses. Private Client net revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees. Private Equity net
revenues include the management and incentive fees earned in the Company's role as general partner for private equity partnerships.

30

---

Client
Services net revenues were $386 million in the first six months of 2003, compared to $389 million in the first six months of 2002. Private Client net revenues remained relatively
flat at $385 million in the first
six months of 2003 from the $388 in the first six months of 2002 as record fixed income activity was offset by lower equity sales.

CLIENT SERVICES NET REVENUES

Six Months Ended(in millions)

May 31
2003

May 31
2002Private Client

$
385

$
388Private Equity


1


1$
386

$
389


Client
Services pre-tax earnings of $109 million increased in the first six months of 2003 up from $105 million in the first six months of 2002. Client services
net revenue and non-interest expenses of $386 million and $277 million were relatively flat in the first six months of 2003 as compared to $389 million and
$284 million in the first six months of 2002.

Contingencies, Commitments and Other Guarantees

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

Lending Related Commitments

In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $2.1 billion and
$1.1 billion at May 31, 2003 and November 30, 2002, respectively. These commitments require borrowers to provide acceptable collateral, as defined in the agreements, when amounts
are drawn under the lending facilities. Advances made under the above lending arrangements are typically at variable interest rates and generally provide for over-collateralization based
upon the borrowers' creditworthiness. In addition, at May 31, 2003 the Company had commitments to enter into forward starting secured reverse repurchase and repurchase agreements, principally
secured by government and government agency collateral of $39.0 billon and $31.3 billion, respectively, as compared to $68.6 billion and $38.1 billion, respectively, at
November 30, 2002.

The
Company, through its high grade and high yield sales, trading and underwriting activities, makes commitments to extend credit in loan syndication transactions. The Company utilizes
various hedging and funding strategies to actively manage its market, credit and liquidity exposures on these commitments. In addition, total commitments are not indicative of actual risk or funding
requirements, as the commitments may not be drawn or fully utilized. These commitments and any related draw downs of these facilities typically have fixed maturity dates and are contingent upon
certain representations, warranties and contractual conditions applicable to the borrower.

The
Company had credit risk associated with lending commitments to investment grade borrowers (after consideration of hedges) of $1.9 billion and $2.6 billion at
May 31, 2003 and November 30, 2002, respectively. In addition, the Company had credit risk associated with lending commitments to non-investment grade borrowers (after
consideration of hedges) of $1.3 billion and $1.1 billion at May 31, 2003 and November 30, 2002, respectively. Before consideration of hedges, the Company had commitments
to investment and non-investment grade borrowers of $5.3 billion and $1.4 billion as compared to $6.2 billion and $1.2 billion at May 31, 2003 and
November 30, 2002, respectively. The Company had available undrawn borrowing facilities with third parties of approximately $2.6 billion at May 31, 2003 and $2.8 billion at
November 30, 2002, which can be drawn upon to provide funding for

31

---

these
commitments. These funding facilities contain limits for certain concentrations of counterparty, industry or credit ratings of the underlying loans.

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

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

|                     |                                                                                           |  |   | Amount of Commitment Expiration Per Period
|-------------------- | ----------------------------------------------------------------------------------------- |  | - | ------------------------------------------
|
|Lending commitments: |                                                                                           |  |   |                                           
|                     | High grade                                                                                |  | $ | 5,302                                     
|                     | High yield                                                                                |  |   | 1,421                                     
|                     | Contingent acquisition facilities                                                         |  |   | 1,616                                     
|                     | Secured lending transactions, including forward starting resale and repurchase agreements |  |   | 72,380                                    

Other Commitments and Guarantees

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

At
May 31, 2003, the maximum payout value of derivative contracts deemed to meet the FIN 45 definition of a guarantee was approximately $247 billion. For purposes of
determining maximum payout, notional values were utilized; however, the Company believes that the fair value of these contracts is a more relevant measure of these obligations. At May 31, 2003,
the fair value of such derivative contracts approximated $6.4 billion. The Company believes that these notional amounts greatly overstate the Company's expected payout. In addition, all amounts
included above are before consideration of hedging transactions. These derivative contracts are generally highly liquid and the Company has substantially mitigated its risk on these contracts through
hedges, such as other derivative contracts and/or cash instruments. The Company manages risk associated with derivative guarantees consistent with the Company's global risk management policies. The
Company records derivative contracts, including those considered to be guarantees under FIN 45, on a fair value basis with related gains/losses recognized in Principal transactions on the Consolidated
statement of income.

32

---

The
Company had liquidity commitments of approximately $1.9 billion related to trust certificates backed by investment grade municipal securities at May 31, 2003, as
compared to $0.6 billion at November 30, 2002. The Company's obligation under such liquidity commitments is generally less than one year and is typically further limited by the fact that
the Company's obligation ceases if the underlying assets are downgraded below investment grade or default.

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

As
of May 31, 2003 and November 30, 2002, the Company had commitments to invest up to $197 million and $384 million, respectively, directly and through
partnerships in private equity related investments. These commitments will be funded, in whole or in part, as required through the end of the respective investment periods, principally expiring in
2004.

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

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

Other
Commitments and Guarantees as of May 31, 2003 are as follows:

|                                                   |  |   |         | Expiration Period
|-------------------------------------------------- |  | - | ------- | -----------------
|
|Derivative contracts                               |  | $ | 246,886 |                  
|Municipal securities related liquidity commitments |  |   | 1,858   |                  
|Standby letters of credit                          |  |   | 784     |                  
|Private equity investments                         |  |   | 197     |                  
|Long-term debt maturities                          |  |   | 7,904   |                  

Off-Balance Sheet Arrangements

For a discussion of the Company's use of derivative instruments and the risks related thereto, see Note 11 to the 2002 Consolidated Financial Statements
(Derivative Financial Instruments) and the Off-Balance Sheet Arrangements section of Management's Analysis of Results of Operations included in the Form 10-K.

33

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

The
majority of the Company's involvement with SPEs relates to securitization transactions meeting the SFAS 140 definition of a qualifying special purpose entity ("QSPE"). A QSPE
can generally be described as an entity with significantly limited powers which are intended to limit it to passively holding financial assets and distributing cash flows based upon
pre-set terms. Based upon the guidance in SFAS 140, the Company is not required to and does not consolidate such QSPEs. Rather, the Company accounts for its involvement with QSPEs
under a financial components approach in which the Company recognizes only its retained involvement with the QSPE. The Company accounts for such retained interests at fair value with changes in fair
value reported in earnings.

The
Company is a market leader in mortgage (both residential and commercial), municipal and other asset-backed securitizations which are principally transacted through QSPEs. During the
six months ended May 31, 2003 and 2002, the Company securitized approximately $68 billion and $53 billion of financial assets, including: $61 billion and $39 billion
of residential mortgages, $2 billion and $2 billion of commercial mortgages, and $5 billion and $12 billion of other asset-backed financial instruments, respectively. As of
May 31, 2003 and November 30, 2002, the Company had approximately $644 million and $1.1 billion, respectively, of non-investment grade retained interests from
its securitization activities. The Company records its trading assets, including retained interests, on a mark-to-market basis, with related gains or losses recognized in
Principal transactions on the Consolidated Statement of Income. (See Note 5 to the Consolidated Financial Statements included in this Report.)

Critical Accounting Policies

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

Use of EstimatesThe Company's financial statements are prepared in conformity with generally accepted accounting principles, many of
which require the use of estimates and assumptions. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from
these estimates particularly in light of the industry in which the Company operates.

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

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

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|(in millions)                                                         |  | May 31, 2003 |         |  |    
|--------------------------------------------------------------------- |  | ------------ | ------- |  | ---
|Assets                                                                |  |              |         |  |    
|Securities and other financial instruments owned                      |  | $            | 80,624  |  | 34 
|Secured financings                                                    |  |              | 123,155 |  | 53 
|Receivables and other assets                                          |  |              | 30,545  |  | 13 
|                                                                      |  |              |         |  |    
|Total Assets                                                          |  | $            | 234,324 |  | 100
|                                                                      |  |              |         |  |    
|Liabilities and Equity                                                |  |              |         |  |    
|Securities and other financial instruments sold but not yet purchased |  | $            | 53,741  |  | 23 
|Secured financings                                                    |  |              | 134,507 |  | 57 
|Payables and other liabilities                                        |  |              | 34,439  |  | 15 
|Total capital                                                         |  |              | 11,637  |  | 5  
|                                                                      |  |              |         |  |    
|Liabilities and Equity                                                |  | $            | 234,324 |  | 100
|                                                                      |  |              |         |  |    

A
significant majority of the Company's assets and liabilities are recorded at amounts for which significant management estimates are not utilized. The following balance sheet
categories, comprising 66% of total
assets and 77% of liabilities and equity, are valued at either historical cost or at contract value (including accrued interest), which, by their nature, do not require the use of significant
estimates: Secured financings, Receivables/Payables and Other assets/liabilities and Total capital. The remaining balance sheet categories, comprised of Securities and other financial instruments
owned and Securities and other financial instruments sold but not yet purchased (long and short inventory positions, respectively), are recorded at market or fair value, the components of which may
require, to varying degrees, the use of estimates in determining fair value.

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

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

OTC DerivativesThe fair value of the Company's OTC derivative assets and liabilities at May 31, 2003 were $12.8 billion and
$11.7 billion, respectively. OTC derivative assets represent the Company's unrealized gains, net of unrealized losses for situations in which the Company has a master netting agreement.
Similarly, liabilities represent net amounts owed to counterparties.

The
majority of the Company's OTC derivatives are transacted in liquid trading markets for which fair value is determined utilizing pricing models with readily observable market inputs.
Examples of such derivatives include: interest rate swaps contracts, TBA's, foreign exchange forward and option contracts in G-7 currencies and equity swap and option contracts on listed
securities. However, the determination of fair value for certain less liquid derivatives requires the use of significant estimates and include: certain credit derivatives, equity option contracts
greater than 5 years, and certain other complex derivatives utilized by the Company in providing clients with hedging alternatives to unique exposures.

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The
Company strives to limit the use of significant judgment by using consistent pricing assumptions between reporting periods and utilizing observed market data for model inputs whenever possible.
As the market for complex products develops, the Company refines its pricing models based upon market experience in order to utilize the most current indicators of fair value.

Private Equity InvestmentsThe Company's private equity investments of $385 million at May 31, 2003 include both public and
private equity positions. The determination of fair value for these investments may require the use of estimates and assumptions as these investments are generally less liquid and often contain
trading restrictions. The determination of fair value for private equity investments is based on estimates
incorporating valuations which take into account expected cash flows, earnings multiples and/or comparison to similar market transactions. Valuation adjustments are an integral part of pricing these
instruments, reflecting consideration of credit quality, concentration risk, sale restrictions and other liquidity factors.

High YieldAt May 31, 2003, the Company had high yield long and short positions of $2.5 billion and $0.6 billion,
respectively. The majority of these positions are valued utilizing broker quotes or listed market prices. In certain instances, when broker quotes or listed prices are not available the Company
utilizes prudent judgment in determining fair value which may involve the utilization of analysis of credit spreads associated with pricing of similar instruments, or other valuation techniques.

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

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

In
addition, the Company held approximately $644 million of non-investment grade retained interests at May 31, 2003, down from $1.1 billion at
November 30, 2002. As these interests primarily represent the junior interests in commercial and residential mortgage securitizations, for which there are not active trading markets, estimates
are generally required to be utilized in determining fair value. The Company values these instruments using prudent estimates of expected cash flows, and considers the valuation of similar
transactions in the market.

New Accounting Developments

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

In
November 2002, the FASB issued FIN 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45") This interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. It also provides additional guidance on the disclosure of guarantees. The recognition and measurement provisions are effective for guarantees made or modified after
December 31, 2002. The disclosure provisions are effective for fiscal periods ending after

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December 15,
2002. The Company adopted FIN 45 during the first quarter of 2003, and the adoption did not have a material impact to the Company's financial condition or results of operations.

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

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

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ITEM 4. Controls and Procedures

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

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

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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 generally has denied, or believes it has a meritorious defense and will deny, liability in all significant
cases pending against it including the matters described below, and it intends to defend vigorously each such case. Based on information currently available and established reserves, the Company
believes that the eventual outcome of the actions against it, including the matters described below, will not, in the aggregate, have a material adverse effect on the consolidated financial position
or cash flows of the Company but may be material to the Company's operating results for any particular period, depending on the level of the Company's income for such period.

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

Research Analyst Independence Investigations(reported in the Form 10-K)

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

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

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

39

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

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

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

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

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

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

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

In
April 2003, Westboro Properties LLC and Stonehurst Capital, Inc. filed a complaint against LBI, Holdings and other commercial or investment banks in the United States
District Court for the Southern

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

First Alliance Mortgage Company Matters(reported in the Form 10-K)

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

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

In re Fleming Securities Litigation

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

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

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Actions Regarding Frank Gruttadauria(reported in the Form 10-K 862 President and the Form 10-Q for the quarter
ended February 28, 2003)

Two
more cases have been settled: one of the cases on appeal from the United States District Court for the Northern District of Ohio, and one of the cases in the United States District
Court for the Northern District of Illinois. The two remaining cases in the Northern District of Illinois have been submitted for arbitration before the New York Stock Exchange by agreement of the
parties. Another case has been filed against Lehman Brothers and SG Cowen in the United States District Court for the Northern District of Ohio alleging generally the same claims and seeking generally
the same relief as in the pending cases. Lehman Brothers intends to file a motion to stay the suit pending arbitration, based on the plaintiff's contractual agreement to arbitrate claims
against the defendants.

In re Metricom Securities Litigation(reported in the Form 10-K)

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

Regulatory Investigations Relating to IPO Allocations

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

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

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

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PART IIOTHER INFORMATION

ITEM 6    Exhibits and Reports on Form 8-K

(a)   Exhbits

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

| |  |       |  |                                                                                                                                                                                                                                            
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3.01  |  | Restated Certificate of Incorporation of the Registrant dated September 3, 1981(incorporated by reference to Exhibit 3.01 to the Registrant's Annual Report on Form 10-K for the year ended November 30,
2001)                             
| |  | 3.02  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant dated May 11, 1984(incorporated by reference to Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for the year ended
November 30, 2001)      
| |  | 3.03  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated March 6, 1985(incorporated by reference to Exhibit 3.03 to the Registrant's Annual Report on Form 10-K for the year
ended November 30, 2001)    
| |  | 3.04  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated August 31, 1987(incorporated by reference to Exhibit 3.04 to the Registrant's Annual Report on Form 10-K for the year
ended November 30, 2001)) 
| |  | 3.05  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated January 28, 1988(incorporated by reference to Exhibit 3.05 to the Registrant's Annual Report on Form 10-K for the year
ended November 30, 2001))
| |  | 3.06  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated July 19, 1990.(incorporated by reference to Exhibit 3.06 to the Registrant's Annual Report on Form 10-K for the year
ended November 30, 2001)   
| |  | 3.07  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated August 2, 1993(incorporated by reference to Exhibit 3.07 to the Registrant's Annual Report on Form 10-K for the year
ended November 30, 2001)   
| |  | 3.08  |  | Certificate of Designations of Floating Rate Preferred Stock, filed April 30, 1996(incorporated by reference to Exhibit 3.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1996)                           
| |  | 3.09  |  | By-Laws of the Registrant, amended as of January 30, 1997(incorporated by reference to Exhibit 3.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996)                                                    
| |  | 12.01 |  | Computation of Ratio of Earnings to Fixed Charges(filed herewith)                                                                                                                                                                          
| |  |       |  |                                                                                                                                                                                                                                            

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| |  | 99.01 |  | Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(included herewith) (This statement accompanies this Report in accordance with the Sarbanes-Oxley Act of 2002 and Commission
Release No. 34-47551 and shall not be deemed "filed" with the Commission for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 99.02 |  | Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(included herewith) (This statement accompanies this Report in accordance with the Sarbanes-Oxley Act of 2002 and Commission
Release No. 34-47551 and shall not be deemed "filed" with the Commission for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)

(b)   Reports on Form 8-K

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

None

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SIGNATURE

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, 2003 |  | By:                              | /s/DAVID GOLDFARBChief Financial Officer
(principal financial and accounting officer)

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CERTIFICATIONS

I,
Richard S. Fuld, Jr., certify that:

Date:
July 15, 2003

| |  | /s/RICHARD S. FULD, JR.Richard S. Fuld, Jr.
Chairman and Chief Executive Officer
| |  | --------------------------------------------------------------------------------

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I, David Goldfarb, certify that:

Date:
July 15, 2003

| |  | /s/DAVID GOLDFARBDavid Goldfarb
Chief Financial Officer
| |  | -------------------------------------------------------

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EXHIBIT INDEX

|Exhibit No.   |  | Exhibit                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------
|Exhibit 12.01 |  | Computation of Ratio of Earnings to Fixed Charges                                             
|Exhibit 99.01 |  | Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|Exhibit 99.02 |  | Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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