SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                   For the quarterly period ended May 31, 2000

                                       OR

[    ]             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from ____________ to ____________

                          Commission file number 1-9466

                              Lehman Brothers Inc.

             (Exact Name of Registrant As Specified In Its Charter)

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

3 World Financial Center

New York, New York                                                   10285
(Address of principal                                             (Zip Code)
executive offices)

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes    X    No ______

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 format contemplated thereby.

As of June 30, 2000,  1,006 shares of the  Registrant's  Common Stock, par value
$0.10 per share, were outstanding.


<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                       FOR THE QUARTER ENDED MAY 31, 2000

                                      INDEX

   Part I.                 FINANCIAL INFORMATION                           Page
                                                                          Number

       Item 1.      Financial Statements - (unaudited)

                        Consolidated Statement of Income -
                        Three and Six Months Ended
                        May 31, 2000 and May 31, 1999..........................3

                        Consolidated Statement of Financial Condition -
                        May 31, 2000 and November 30, 1999.....................5

                        Consolidated Statement of Cash Flows -
                        Six Months Ended
                        May 31, 2000 and May 31, 1999..........................7

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


       Item 2.          Management's Analysis of the Results of Operations... 15

Part II.                OTHER INFORMATION

       Item 1.          Legal Proceedings.................................... 22

       Item 6.          Exhibits and Reports on Form 8-K..................... 24

Signature     ............................................................... 25

EXHIBIT INDEX                                                                 26

Exhibits
<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                        CONSOLIDATED STATEMENT of INCOME
                                   (Unaudited)
                                  (In millions)
<TABLE>
<CAPTION>
                                                                       Three months ended

                                                              -------------------------------------
                                                                  May 31               May 31
                                                                   2000                 1999
                                                              ----------------     ----------------

Revenues

<S>                                                               <C>                 <C>
     Principal transactions                                       $    274            $    240
     Investment banking                                                349                 300
     Commissions                                                       160                 125
     Interest and dividends                                          4,288               3,425
     Other                                                              16                   3
                                                              ----------------     ----------------
         Total revenues                                              5,087               4,093
Interest expense                                                     4,185               3,272
                                                              ----------------     ----------------
         Net revenues                                                  902                 821
                                                              ----------------     ----------------
Non-interest expenses

     Compensation and benefits                                         471                 434
     Brokerage and clearance                                            50                  48
     Technology and communications                                      46                  41
     Management fees                                                    29                  23
     Business development                                               30                  22
     Professional fees                                                  21                  13
     Occupancy                                                          14                   9
     Other                                                              10                  13
                                                              ----------------     ----------------
         Total non-interest expenses                                   671                 603
                                                              ----------------     ----------------
Income before taxes                                                    231                 218
     Provision for income taxes                                         69                  62
                                                              ----------------     ----------------
Net income                                                         $   162            $    156
                                                              ================     ================
</TABLE>
                       See notes to consolidated financial
                                  statements.
<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                        CONSOLIDATED STATEMENT of INCOME
                                   (Unaudited)
                                  (In millions)
<TABLE>
<CAPTION>
                                                                        Six months ended

                                                              -------------------------------------
                                                                  May 31               May 31
                                                                   2000                 1999
                                                              ----------------     ----------------

Revenues
<S>                                                               <C>                 <C>
     Principal transactions                                      $     926            $    581
     Investment banking                                                797                 556
     Commissions                                                       327                 236
     Interest and dividends                                          8,053               6,660
     Other                                                              27                   9
                                                              ----------------     ----------------
         Total revenues                                             10,130               8,042
Interest expense                                                     7,889               6,448
                                                              ----------------     ----------------
         Net revenues                                                2,241               1,594
                                                              ----------------     ----------------
Non-interest expenses

     Compensation and benefits                                       1,167                 810
     Brokerage and clearance                                           100                  98
     Technology and communications                                      91                  79
     Management fees                                                    79                  57
     Business development                                               52                  41
     Professional fees                                                  40                  22
     Occupancy                                                          27                  18
     Other                                                              24                  27
                                                              ----------------     ----------------
         Total non-interest expenses                                 1,580               1,152
                                                              ----------------     ----------------
Income before taxes                                                    661                 442
     Provision for income taxes                                        227                 129
                                                              ----------------     ----------------

Net income                                                        $    434            $    313
                                                              ================     ================
</TABLE>

                       See notes to consolidated financial
                                  statements.


<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                  CONSOLIDATED STATEMENT of FINANCIAL CONDITION
                                   (Unaudited)
                                  (In millions)
<TABLE>
<CAPTION>
                                                                                     May 31               November 30
                                                                                      2000                   1999
                                                                                ------------------     ------------------

ASSETS
<S>                                                                                <C>                     <C>
Cash and cash equivalents                                                        $       294             $     1,384

Cash and securities segregated and on deposit for regulatory
     and other purposes                                                                2,215                   1,434

Securities and other financial instruments owned:

     Governments and agencies                                                         20,355                  21,603
     Corporate equities                                                               15,309                   9,144
     Mortgages and mortgage-backed                                                     8,644                   8,457
     Derivatives and other contractual agreements                                      5,638                   5,249
     Corporate debt and other                                                          5,216                   5,331
     Certificates of deposit and other money market instruments                        2,311                   2,123
                                                                                ------------------     ------------------
                                                                                      57,473                  51,907
                                                                                ------------------     ------------------

Collateralized short-term agreements:
     Securities purchased under agreements to resell                                  81,974                  61,365
     Securities borrowed                                                              25,454                  11,243

Receivables:
     Brokers, dealers and clearing organizations                                       1,995                   2,346
     Customers                                                                         4,651                   2,922
     Others                                                                            5,538                   5,920

Property, equipment and leasehold improvements (net of
       accumulated depreciation and amortization of $601 in 2000
       and $588 in 1999)                                                                 278                     280

Other assets                                                                             320                     261

Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $118 in 2000 and $115 in 1999)                                           117                     120
                                                                                ------------------     ------------------

     Total Assets                                                                  $ 180,309               $ 139,182
                                                                                ==================     ==================
</TABLE>

                       See notes to consolidated financial
                                  statements.


                                       1
<PAGE>
                      LEHMAN BROTHERS INC. and SUBSIDIARIES
           CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued)
                                   (Unaudited)
                        (In millions, except share data)
<TABLE>
<CAPTION>
                                                                                               May 31           November 30
                                                                                                2000               1999
                                                                                            --------------    ----------------

LIABILITIES AND STOCKHOLDER'S EQUITY
<S>                                                                                             <C>                <C>
Commercial paper and short-term debt                                                        $     1,014       $        615
Securities and other financial instruments sold but not yet purchased:
     Governments and agencies                                                                    16,484             10,237
     Corporate equities                                                                           2,428              3,207
     Derivatives and other contractual agreements                                                 3,812              3,985
     Corporate debt and other                                                                     2,087              1,218
                                                                                          --------------    ----------------
                                                                                               24,811             18,647
                                                                                           --------------    ----------------
Collateralized short-term financing:
     Securities sold under agreements to repurchase                                              93,758             76,587
     Securities loaned                                                                           27,350              9,809
Advances from Holdings and other affiliates                                                      15,490             16,118
Payables:
     Brokers, dealers and clearing organizations                                                  3,666              2,485
     Customers                                                                                    4,998              5,535
Accrued liabilities and other payables                                                            1,778              2,324
Long-term debt:
     Senior notes                                                                                   196                186
     Subordinated indebtedness                                                                    3,777              3,773
                                                                                            --------------    ----------------

         Total liabilities                                                                      176,838            136,079
</TABLE>
<TABLE>
<CAPTION>


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;
<S>                                                                                           <C>                <C>
     1,006 shares issued and outstanding

Additional paid-in capital                                                                        1,684              1,684
Accumulated other comprehensive income (net of tax)                                                   1                  2
Retained earnings                                                                                 1,786              1,417
                                                                                                              ----------------
                                                                                            --------------
         Total stockholder's equity                                                               3,471              3,103
                                                                                            --------------    ----------------

         Total liabilities and stockholder's equity                                           $ 180,309          $ 139,182
</TABLE>

                       See notes to consolidated financial
                                  statements.



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

<TABLE>
<CAPTION>
                                                                                                Six months ended

                                                                                      --------------------------------------
                                                                                           May 31               May 31
                                                                                            2000                 1999
                                                                                      -----------------     ----------------

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                     <C>                   <C>
Net income                                                                            $       434            $      313
Adjustments to reconcile net income to net cash provided by
         (used in) operating activities:
     Depreciation and amortization                                                             19                    17
     Provisions for losses and other reserves                                                  13                    16
     Other adjustments                                                                         14                    20
Net change in:
     Cash and securities segregated                                                          (781)                  117
     Securities and other financial instruments owned                                      (5,566)               (6,238)
     Securities borrowed                                                                  (14,211)               (4,806)
     Receivables from brokers, dealers and clearing organizations                             351                   671
     Receivables from customers                                                            (1,729)                 (108)
     Securities and other financial instruments sold but not yet purchased                  6,164                 2,617
     Securities loaned                                                                     17,541                11,139
     Payables to brokers, dealers and clearing organizations                                1,181                   597
     Payables to customers                                                                   (537)                 (133)
     Accrued liabilities and other payables                                                  (559)                 (168)
     Other operating assets and liabilities, net                                              321                  (666)
                                                                                      -----------------     ----------------
         Net cash provided by operating activities                                     $    2,655             $   3,388
                                                                                      -----------------     ----------------

CASH FLOWS FROM FINANCING ACTIVITIES

Principal payments for subordinated indebtness                                                                      (199)
Net proceeds from commercial paper and short-term debt                                          399                  (46)
Resale agreements net of repurchase agreements                                               (3,438)               3,664
Decrease in advances from Holdings and other affiliates                                        (628)              (6,878)
Dividends paid                                                                                  (65)                 (45)
                                                                                        ----------------     ----------------
       Net cash used in financing activities                                                 (3,732)              (3,504)
                                                                                        ----------------     ----------------

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property, equipment and leasehold improvements                                     (13)                 (14)
                                                                                        ----------------     ----------------
       Net cash used in investing activities                                                    (13)                 (14)
                                                                                        ----------------     ----------------
       Net change in cash and cash equivalents                                               (1,090)                (130)
                                                                                        ----------------     ----------------
Cash and cash equivalents, beginning of period                                                1,384                  460
                                                                                        ----------------     ----------------

       Cash and cash equivalents, end of period                                         $       294           $      330
                                                                                        ================     ================

</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest paid totaled $7,883 and $6,443 for the six months ended May 31, 2000
and May 31, 1999, respectively. Income taxes paid/(received)totaled  $413 and
$(3) for the six months  ended May 31, 2000 and May 31,  1999, respectively.

                       See notes to consolidated financial
                                  statements.


<PAGE>


                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation:

The consolidated  financial  statements  include the accounts of Lehman Brothers
Inc., a registered  broker-dealer  ("LBI") and subsidiaries  (collectively,  the
"Company").  LBI is a wholly owned  subsidiary of Lehman Brothers  Holdings Inc.
("Holdings").  LBI is  one  of  the  leading  global  investment  banks  serving
institutional,  corporate,  government and high-net-worth individual clients and
customers.  The Company's worldwide headquarters in New York are complemented by
offices in additional locations in North America, Europe, the Middle East, Latin
America  and the Asia  Pacific  Region.  The  Company is  engaged  in  providing
financial  services.  All material  intercompany  accounts and transactions have
been eliminated in consolidation.  The Company's financial  statements have been
prepared in accordance  with the rules and  regulations  of the  Securities  and
Exchange  Commission  (the "SEC") with  respect to the Form 10-Q and reflect all
normal recurring adjustments which are, in the opinion of management,  necessary
for a fair  presentation  of the  results  for the  interim  periods  presented.
Pursuant to such rules and regulations,  certain footnote  disclosures which are
normally  required under  generally  accepted  accounting  principles  have been
omitted. It is recommended that these consolidated  financial statements be read
in conjunction with the audited  consolidated  financial  statements included in
the Company's  Annual  Report on Form 10-K for the twelve months ended  November
30, 1999 (the "Form 10-K"). The Consolidated Statement of Financial Condition at
November 30, 1999 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.  Capital Requirements:

The Company operates  globally  through a network of subsidiaries,  with several
being  subject to  regulatory  requirements.  In the United  States,  LBI,  as a
registered  broker-dealer,  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, 2000, LBI's regulatory net capital,  as defined,  of $1,281
million exceeded the minimum requirement by $1,152 million.

In addition, 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, 2000,  LBFP and LBDP each had
capital which exceeded the  requirement  of the most stringent  rating agency by
approximately   $61  million  and  $25  million,   respectively.   Repayment  of
subordinated  indebtedness and certain advances and dividend payments by LBI are
restricted  by the  regulations  of the SEC and other  regulatory  agencies.  In
addition,  certain  covenants  governing the  indebtedness of LBI  contractually
limit its ability to pay dividends.


<PAGE>

3.  Derivative Financial Instruments:

In  the  normal  course  of  business,   the  Company  enters  into   derivative
transactions to satisfy the needs of its clients and to manage the Company's own
exposure  to market  and  credit  risk  resulting  from its  trading  activities
(collectively, "Trading-Related Derivative Activities").

Derivative  transactions entered into for Trading-Related  Derivative Activities
are  recorded at market or fair value with  realized  and  unrealized  gains and
losses  recognized  currently  in  Principal  transactions  in the  Consolidated
Statement of Income.  Market or fair value for  trading-related  instruments  is
generally determined by either quoted market prices (for exchange-traded futures
and  options)  or pricing  models  (for  over-the-counter  swaps,  forwards  and
options).

Pricing  models utilize a series of market inputs to determine the present value
of future  cash  flows,  with  adjustments,  as  required  for  credit  risk and
liquidity  risk.  Further  valuation  adjustments  may be  recorded,  as  deemed
appropriate  for new or  complex  products  or for  positions  with  significant
concentrations.  These adjustments are integral components of the mark-to-market
process.  Credit-related valuation adjustments incorporate business and economic
conditions, historical experience, concentrations,  estimates of expected losses
and the  character,  quality  and  performance  of  credit  sensitive  financial
instruments.

Unrealized gains and losses on derivative  contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products when such provisions are stated in the master netting
agreement.  Listed in the  following  table is the fair value and  average  fair
value of the  Company's  Trading-Related  Derivative  Activities.  Average  fair
values of these  instruments were calculated  based upon month-end  statement of
financial condition values, which the Company believes do not vary significantly
from the average  fair value  calculated  on a more  frequent  basis.  Variances
between  average  fair  values and  period-end  values are due to changes in the
volume of activities in these  instruments and changes in the valuation of these
instruments due to variations in market and credit conditions.

<PAGE>

<TABLE>
<CAPTION>

                                                                                                  Average Fair Value*
                                                                   Fair Value*                     Six Months Ended
                                                                   May 31, 2000                      May 31, 2000
                                                         --------------------------------- ----------------------------------
(in millions)                                               Assets          Liabilities       Assets           Liabilities
-------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
<S>                                                          <C>                <C>             <C>               <C>
Interest rate and currency swaps and options
   (including caps, collars and floors)                      $ 4,244            $ 2,557        $ 4,082            $ 2,697
Foreign exchange forward contracts and
   options                                                       517                289            490                310
Other fixed income securities contracts
   (including options and TBAs)                                  337                344            610                503
Equity contracts (including equity swaps,
   warrants and options)                                         540                622            798                646
                                                         -------------- -- --------------- -------------- --- ---------------
         Total                                               $ 5,638            $ 3,812        $ 5,980            $ 4,156
                                                         -------------- -- --------------- -------------- --- ---------------


                                                                                                  Average Fair Value*
                                                                    Fair Value*                   Twelve Months Ended
                                                                 November 30, 1999                 November 30, 1999
                                                         ---------------------------------- ---------------------------------
(in millions)                                               Assets           Liabilities        Assets         Liabilities
-------------------------------------------------------- -------------- -- ---------------- --------------- - ---------------
Interest rate and currency swaps and options
   (including caps, collars and floors)                      $ 3,409            $ 2,738         $ 3,620           $ 2,388
Foreign exchange forward contracts and
    options                                                      650                424             678               582
Other fixed income securities
    contracts (including options and TBAs)                       256                192             243               232
Equity contracts (including equity swaps,
    warrants and options)                                        934                631             459               406
Commodity contracts (including swaps,
    forwards and options)                                                                             3                 1
                                                         -------------- -- ---------------- --------------- - ---------------

         Total                                               $ 5,249            $ 3,985         $ 5,003           $ 3,609

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

Assets included in the table above represent the Company's unrealized gains, net
of unrealized  losses for  situations in which the Company has a master  netting
agreement. Similarly,  liabilities represent net amounts owed to counterparties.
Therefore, the fair value of assets/liabilities  related to derivative contracts
at May 31, 2000 represents the Company's net  receivable/payable  for derivative
financial  instruments before  consideration of collateral.  Included within the
$5,638 million fair value of assets at May 31, 2000 was $5,188  million  related
to swaps and other OTC  contracts  and $450 million  related to  exchange-traded
option and warrant  contracts. Included within the $5,249 million fair value of
assets at November  30, 1999 was $4,489  million  related to swaps and other OTC
contracts  and $760  million related  to  exchange-traded  option  and  warrant
contracts.
<PAGE>

With respect to OTC contracts, including swaps, the Company views its net credit
exposure to be $3,152 million at May 31, 2000,  representing the fair value of
the  Company's OTC contracts in an  unrealized  gain  position,  after
consideration of amounts due from affiliates of $1,664 million and collateral of
$372  million.
Presented  below is an  analysis  of the  Company's  net  credit exposure at May
31, 2000 for OTC  contracts  based upon actual  ratings  made by external
rating agencies or by equivalent  ratings  established and utilized by
the Company's Credit Risk Management Department.
<TABLE>
<CAPTION>

 Counterparty                     S&P/Moody's           Net Credit
 Risk Rating                      Equivalent             Exposure
 -----------                      ----------             --------
<S>   <C>                           <C>                     <C>
      1                             AAA/Aaa                14%
      2                        AA-/Aa3 or higher           29%
      3                         A-/A3 or higher            37%
      4                       BBB-/Baa3 or higher          16%
      5                        BB-/Ba3 or higher            3%
      6                         B+/B1 or lower              1%
</TABLE>

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

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

4.  Other Commitments and Contingencies:

In  connection  with its  financing  activities,  the  Company  had  outstanding
commitments under certain lending  arrangements of approximately $2.0 billion at
May 31, 2000 and $4.2 billion at November 30, 1999.  These  commitments  require
borrowers to provide acceptable collateral,  as defined in the agreements,  when
amounts are drawn under the lending  facilities.  Advances  made under the above
lending  arrangements  are  typically at variable  interest  rates and generally
provide for over-collateralization based upon the borrowers' creditworthiness.

The  Company,  through  its  high  grade  and  high  yield  sales,  trading  and
underwriting activities,  makes commitments to extend credit in loan syndication
transactions  and  then   participates  out  a  significant   portion  of  these
commitments. The Company had lending commitments to high grade borrowers of $3.2
billion and $2.8 billion at May 31, 2000 and  November  30, 1999,  respectively.
The Company has since arranged for third parties to purchase a majority of these
commitments in the event they are funded.  In addition,  lending  commitments to
high yield  borrowers

<PAGE>
totaled $821 million and $903 million at May 31, 2000 and November  30,  1999,
respectively.  All of these  commitments  and any  related draw-downs of these
facilities  are typically  secured  against the  borrowers'assets,  have fixed
maturity  dates and are generally  contingent  upon certain representations,
warranties  and  contractual  conditions  applicable  to  the Borrower.  Total
commitments  are not  indicative  of  actual  risk or  funding requirements  as
the  commitments  may not be drawn or fully  utilized,  and the Company will
continue to syndicate and/or sell these commitments.

At May 31, 2000 and November 30, 1999, the Company had  commitments to invest up
to  $375  million  and  $302   million,   respectively,   directly  and  through
partnerships,  in private equity-related investments.  These commitments will be
funded  as  required  through  the  end of the  respective  investment  periods,
principally expiring in 2004.

In  addition to these  specific  commitments,  the  Company  had  various  other
commitments of approximately  $300 million at both May 31, 2000 and November 30,
1999, respectively.

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

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

5.       Segments:

The Company operates in three business segments: Investment Banking, Capital
Markets, and Other.

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

The Capital Markets Division includes the Company's sales, trading, research and
financing  activities in equity and fixed income cash and derivatives  products.
Through the Division, the


<PAGE>

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

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

The Company's segment  information for the three months and six months ended May
31, 2000 and May 31, 1999 is presented below.
<TABLE>
<CAPTION>

                                             Three Months Ended                            Six Months Ended
                                     -----------------------------------          ------------------------------------
                                         May 31             May 31                    May 31              May 31
                                          2000               1999                      2000                1999
                                     ----------------   ----------------          ----------------    ----------------
<S>                                      <C>                <C>                      <C>                 <C>
Investment Banking:
   Net Revenue                           $   348           $    296                 $     796           $     553
                                     ================   ================          ================    ================
   Earnings before taxes                 $   100           $    115                 $     225           $     193
                                     ================   ================          ================    ================
   Segment assets (billions)             $    .2          $      .1                 $      .2           $      .1
                                     ================   ================          ================    ================

Capital Markets:
   Net Revenue                           $   544           $    519                 $   1,427           $   1,033
                                     ================   ================          ================    ================
   Earnings before taxes                 $   132           $    105                 $     441           $     253
                                     ================   ================          ================    ================
   Segment assets (billions)             $ 176.9           $  145.8                 $   176.9           $   145.8
                                     ================   ================          ================    ================

Other:

   Net Revenue                           $     10          $      6                 $      18           $       8
                                     ================   ================          ================    ================
   Earnings before taxes                 $     (1)         $     (2)                $      (5)           $     (4)
                                     ================   ================          ================    ================
   Segment assets (billions)             $    3.2          $    1.8                 $     3.2           $     1.8
                                     ================   ================          ================    ================

Total:
   Net Revenue                           $    902          $    821                 $   2,241           $   1,594
                                     ================   ================          ================    ================
   Earnings before taxes                 $    231          $    218                 $     661           $     442
                                     ================   ================          ================    ================

   Segment assets (billions)             $  180.3          $  147.7                 $   180.3           $   147.7
                                     ================   ================          ================    ================
</TABLE>


<PAGE>



The following are net revenues by geographic region:
<TABLE>
<CAPTION>

                                        Three Months Ended                             Six Months Ended
                             ------------------------------------------    ------------------------------------------
                                   May 31                 May 31                 May 31                 May 31
                                    2000                   1999                   2000                   1999
                             -------------------    -------------------    -------------------    -------------------
<S>                                  <C>                    <C>                  <C>                    <C>
Americas*                            $ 779                  $ 754                $ 1,977                $ 1,418
Europe                                  66                     33                    162                    130
Asia Pacific                            57                     34                    102                     46
                             -------------------    -------------------    -------------------    -------------------

     Total                           $ 902                  $ 821                $ 2,241                $ 1,594
                             ===================    ===================    ===================    ===================

</TABLE>

* Includes  non-U.S.  revenues of $6.8  million  and $3.7  million for the three
months ended May 31, 2000 and May 31, 1999  respectively,  and includes non-U.S.
revenues of $19.5 million and $7.5 million for the six months ended May 31, 2000
and May 31, 1999, respectively.

6.  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.

During the six months ended May 31, 2000, the Company paid dividends to Holdings
of $65 million.


<PAGE>

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


Results of Operations

For the Three Months Ended May 31, 2000 and May 31, 1999

The Company reported net income of $162 million for the second quarter ended May
31, 2000, compared to $156 million for the second quarter ended May 31, 1999.

Net revenues  increased  10% in the second  quarter of 2000 to $902 million from
$821  million in the second  quarter of 1999.  The  increase in net revenues was
achieved  despite  challenging  market  conditions in the second quarter of 2000
compared to the prior period.

The  Company's  results  have been  segregated  into  three  business  segments:
Investment  Banking,  Capital Markets and Other. Each segment represents a group
of  activities  and  products  with  similar  characteristics.   These  business
activities  result  in  revenues  from  both  institutional  clients  as well as
high-net worth retail clients and are  recognized  within the different  revenue
categories in the Company's  Consolidated  Statement of Income.  Net revenues by
segment contain certain internal allocations, including funding costs, which are
centrally managed.

Three Months Ended May 31, 2000 and May 31, 1999


(in millions)

                                            Three Months Ended

                                     ----------------------------------
                                         May 31             May 31
                                          2000               1999
                                     ---------------    ---------------
Investment Banking                       $ 348              $ 296
Capital Markets                            544                519
Other                                       10                  6
                                     ---------------    ---------------
Total                                    $ 902              $ 821
                                     ===============    ===============

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

The following  discussion provides an analysis of the Company's net revenues for
the periods above.

Investment  Banking This  segment's net revenues  result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities,  raising  capital  and  advising  clients on merger and  acquisition
activities and other services.  Investment  Banking's net revenues increased 18%
to $348  million for the second  quarter of 2000 from $296  million in the prior
period.  This  increase  was  principally  as a result of an  increase in equity
underwriting  activities  partially  offset by a decrease  in debt  underwriting
revenues.

Equity underwriting revenues increased 70% to $143 million in the second quarter
of 2000 from $84  million in the second  quarter of 1999,  despite a slowdown in
the  latter  half of the  quarter  resulting  from  the  market  corrections  in
mid-April.   The  increase  was  attributed  to  significant  issuances  in  the
communications/media   and  technology  sectors.   Debt  underwriting   revenues
decreased  12% from the second  quarter of 1999.  Wider credit  spreads,  higher
interest rates and


<PAGE>

an  uneasiness  over the future  direction  of interest  rates
forced fixed  income  investors  and issuers to the  sidelines
and  led  to  lower  new  issue  volume  in the  fixed  income
sector.  Financial  advisory  revenues increased 11% in
the second  quarter of 2000 compared to the second  quarter of
1999 as a result of increased merger and acquisition activity earlier
in the quarter.

               Investment Banking Net Revenues
      (in millions)               Three Months Ended
                                May 31         May 31
                                 2000           1999
     ---------------------- --------------- --------------
     Equity Underwriting        $ 143            $ 84
     Debt Underwriting            114             130
     Financial Advisory            91              82
     ---------------------- --------------- --------------
                                $ 348           $ 296
     ---------------------- --------------- --------------

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

Net revenues from the equity component of Capital Markets  decreased 28% to $187
million in the second quarter of 2000 from $261 million in the second quarter of
1999 primarily as a result of lower risk arbitrage  revenues  compared to a very
strong 1999 second quarter and marked-to-market losses on certain private equity
investments.

              Capital Markets Net Revenues

   ------------------ ---------------------------------
   (in millions)             Three Months Ended
                          May 31           May 31
                           2000             1999
   ------------------ --------------- -----------------

   Equities               $ 187             $ 261
   Fixed Income             357               258
   ------------------ --------------- -----------------
                          $ 544             $ 519
   ------------------ --------------- -----------------

Net revenues from the fixed income component of Capital Markets increased 38% to
$357  million  in the  second  quarter  of 2000 from $258  million  in the first
quarter of 1999. This increase is primarily  attributable to strong performances
in governments and foreign exchange products.

Other Other revenues  reflect  earnings from the Company's asset  management and
private equity businesses. Other revenues were $10 million in the second quarter
of 2000 from $6 million in the second quarter of 1999.

Non-Interest  Expenses  Non-interest  expenses  were $671 million for the second
quarter of 2000 and $603  million for the second  quarter of 1999.  Compensation
and benefits expense as a percentage of net revenues  increased to 52.2% for the
quarter compared to the prior year's ratio of 52.9%.  Nonpersonnel  expenses
were $200 million for the second quarter of 2000 and $169 million for the second
quarter of 1999,  an increase of 18% that  reflected the impact of the Company's
growth  plan.  Increases in  recruiting  (professional fees),  business
development  and technology  spending were consistent with the Company's planned
growth and also  supported  the  continued  build-out of the Company's
technology and e-commerce platforms.


<PAGE>

Income Taxes The  Company's  income tax provision was $69 million for the second
quarter of 2000  compared  to $62 million  for the second  quarter of 1999.  The
effective  tax rate was 29.9% for the  second  quarter of 2000 and 28.4% for the
second quarter of 1999.  The higher tax rate  reflected the overall  increase in
the level of pre-tax  income,  which lessened the relative impact of certain tax
preference  revenues,  partially  offset by a more  favorable  geographic mix of
earnings.


<PAGE>

Results of Operations
For the Six Months Ended May 31, 2000 and May 31, 1999

The Company  reported record net income of $434 million for the six months ended
May 31,  2000,  representing  an increase of 39% from net income of $313 million
for the six months ended May 31, 1999.

Net Revenues  increased to $2,241 million or 41% for the six months of 2000 from
$1,594 million for the six months of 1999. The Company's emphasis on high margin
businesses  supported an increase in the Company's  operating margin to 29.5% in
the first half of 2000 from 27.7% in the prior period.

Revenues in each of the Company's three segments grew by over 38% over the first
six months of the prior year.  Non-personnel  expenses increased only 21% in the
first half of 2000,  despite a 41% increase in net  revenues  from first half of
1999.

Six Months Ended May 31, 2000 and May 31, 1999

-------------------------------------------------------------------------------
(in millions)

                                     Six Months Ended

                              --------------------------------
                                 May 31            May 31
                                  2000              1999
                              --------------   ---------------
Investment Banking            $    796            $    553
Capital Markets                  1,427               1,033
Other                               18                   8
                              --------------   ---------------
Total                          $ 2,241             $ 1,594
                              ==============   ===============

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

The following  discussion provides an analysis of the Company's net revenues for
the periods above.

Investment  Banking  Investment  Banking's  net revenues  increased  44% to $796
million in the six months of 2000 from $553  million  in the prior  period.  The
increase  was  principally  a  result  of  a  significant   increase  in  equity
underwriting  and  financial  advisory  revenues  partially  offset by difficult
conditions  in  the  debt  underwriting  market.  Equity  underwriting  revenues
increased  153% to $327  million in the six months of 2000 from $129  million in
the prior year. The results in equity  underwriting  were driven by issuances in
the  communications/media  and technology  sector and a significant  increase in
convertible offerings.



<PAGE>

Debt  underwriting  revenues  decreased  7% to $242 million in
the six months of 2000 from $260  million in the six months of
1999.   The  decrease   resulted   from   challenging   market
conditions  as rising  interest rates led to decreased  underwriting
volume.  Financial  advisory  revenues  increased  38% to $227
million  in the six  months of 2000 from $164  million  in the
prior year's period. This increase was primarily  attributable
to a robust merger and acquisition  environment earlier in the
year.
                Investment Banking Net Revenues

    (in millions)                 Six Months Ended
                               May 31          May 31
                                2000            1999
    ---------------------- --------------- ---------------
    Equity Underwriting        $ 327             $ 129
    Debt Underwriting            242               260
    Financial Advisory           227               164
    ---------------------- --------------- ---------------
                               $ 796             $ 553
    ---------------------- --------------- ---------------

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

Net  revenues  from the  equity  component  of Capital  Markets  doubled to $803
million  in the first  half of 2000 from $400  million  in the  comparable  1999
period.  Revenues benefited from significantly  increased institutional customer
flow activity in cash products where commission  levels grew  approximately  40%
from the same period last year.

Net  revenues  from the fixed  income  component  of Capital  Markets  decreased
slightly  to $624  million  in the first  half of 2000 from $633  million in the
comparable period last year. This was a result of challenging  market conditions
overall and the Y2K induced  slowdown  in the first  quarter of 2000,  offset by
strong  performances in government and foreign  exchange  products in the second
quarter of 2000.

               Capital Markets Net Revenues

  ----------------- ---------------------------------
  (in millions)             Six Months Ended
                        May 31           May 31
                         2000             1999
  ----------------- --------------- -----------------

  Equities              $ 803             $ 400
  Fixed Income            624               633
  ----------------- --------------- -----------------
                      $ 1,427           $ 1,033
  ----------------- --------------- -----------------

Other Other revenues  reflect  earnings from the Company's asset  management and
private equity businesses. Other revenues were $18 million in the second quarter
of 2000 from $8 million in the second quarter of 1999.

Non-Interest  Expenses  Non-interest  expenses  were $1,580  million for the six
months  of  2000  and  $1,152  million  for  the  comparable   period  in  1999.
Compensation and benefits  expense as a percentage of net revenues  increased to
52.1% for the six  months of 2000  compared  to 50.8% in the six months of 1999.
This  increase  reflects the  Company's  continued  expansion of its  investment
banking and equities  franchise as well as its  investments  in  technology  and
e-commerce  capabilities.  Nonpersonnel  expenses  were $413 million for the six
months of 2000


<PAGE>
and $342  million for the six months of 1999,  an increase of 21% that reflected
the impact of the Company's strategic growth plan.

Income Taxes The  Company's  income tax  provision  was $227 million for the six
months  of 2000  compared  to $129  million  for the six  months  of  1999.  The
effective  tax rate was  34.3%  for the  first  half of 2000 and 29.2% for prior
year's  period.  The  increase  reflected  the overall  increase in the level of
pre-tax  income,  which  lessened the relative  impact of certain tax preference
revenues, partially offset by more favorable geographic mix of earnings.



<PAGE>

New Accounting Developments

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

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


<PAGE>


                     LEHMAN BROTHERS INC. and SUSBSIDIARIES
                           PART II - OTHER INFORMATION
ITEM 1   Legal Proceedings

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

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

Bamaodah v. E.F. Hutton & Company Inc.  (Reported in LBI's 1999 Annual Report on
Form 10-K)

                 On April 23,  2000,  the Court of  Cassation  issued  its final
         judgment awarding the Bamaodahs $2,923,000 plus interest.

Actions Relating to First Capital Holdings Inc.

         The Virginia Commissioner of Insurance Action. (Reported in LBI's 1999
         Annual Report on Form 10-K)

                 On June 30,  2000,  the United  States Court of Appeals for the
         Fourth  Circuit  affirmed  the Judgment  Order  entered by the Virginia
         Court dismissing the complaint.

Actions Relating to Bre-X Minerals Ltd.

         McNamara et al. v. Bre-X Minerals Ltd et al. (Reported in LBI's 1999
         Annual Report on Form 10-K)

                 While defendants' motion to dismiss was pending, the plaintiffs
         obtained leave from the Court to file a Fourth Amended Complaint, which
         was filed on June 14, 2000.



<PAGE>


                     LEHMAN BROTHERS INC. and SUSBSIDIARIES
                           PART II - OTHER INFORMATION

ITEM 1   Legal Proceedings - continued

         Klassen v. Lehman Brothers Inc. (Reported in LBI's 1999 Annual Report
         on Form 10-K)

                  The action was  dismissed  without  prejudice  to  plaintiffs'
         right  to  refile  it nunc pro  tunc to the  date of its  dismissal  on
         January 12, 1999.

Bowser v. First Alliance Mortgage Company, et al.

         On May 1, 2000,  a purported  class action  complaint  was filed in the
United  States  Bankruptcy  Court in the Central  District of  California in the
bankruptcy  of First  Alliance  Mortgage  Company  and its parent and  affiliate
companies  (the  "Debtors").  The  complaint  names the Debtors and  Holdings as
defendants.  As to Holdings,  the complaint alleges common law fraud. This claim
against Holdings and the other defendants is based on alleged misrepresentations
or omissions of material  facts in connection  with  consumer loan  transactions
entered  into by all  persons,  during the four years prior to the filing of the
complaint,  who entered into mortgage loans with Debtors. The complaint's stated
basis for naming  Holdings is that its  affiliates  are alleged to have provided
financing to Debtors,  to have underwritten the securitization of their mortgage
loans,  to hold a warrant for one percent of First  Alliance  shares and to have
approved of or  acquiesced  in First  Alliance's  purported  fraudulent  lending
practices.  The plaintiffs seek class certification and unspecified compensatory
and punitive damages as to the claims against Holdings.



<PAGE>

                     LEHMAN BROTHERS INC. and SUSBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 6   Exhibits and Reports on Form 8-K

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

(a)      Exhibits:

         12       Computation in Support of Ratio of Earnings to Fixed Charges

         27       Financial Data Schedule

(b)      Reports on Form 8-K:

         None



<PAGE>


                                    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 17, 2000     By:                   /s/ David Goldfarb
                                ------------------------------------------------
                                             Chief Financial Officer


<PAGE>



                                  EXHIBIT INDEX

Exhibit No.                Exhibit

Exhibit 12                 Computation in Support of Ratio of Earnings to Fixed
                           Charges and Combined Fixed Charges
                           and Preferred Dividends

Exhibit 27                 Financial Data Schedule




<PAGE>


                                                                     Exhibit 12

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

                                  For the          For the           For the           For the          For the           For the
                                   Twelve           Twelve            Twelve           Twelve            Twelve             Six
                                   Months           Months            Months           Months            Months        Months Ended
                                   Ended            Ended             Ended             Ended            Ended            May 31
                                November 30      November 30       November 30       November 30      November 30          2000
                                    1995             1996              1997             1998              1999
                                -------------    -------------     -------------    --------------    -------------    -------------
<S>                                  <C>             <C>               <C>               <C>              <C>                <C>
Pre-tax earnings from continuing
  operations                            $ 78           $  309            $  593            $  847          $ 1,013             $ 661

Add:   Fixed charges (excluding
       capitalized interest)           9,980           10,140            12,233            14,746           12,552             7,897
                                -------------    -------------     -------------    --------------    -------------    -------------

Pre-tax earnings before fixed
charges                               10,058           10,449            12,826            15,593           13,565             8,558
                                =============    =============     =============    ==============    =============    =============

Fixed charges:
       Interest                        9,954           10,121            12,216            14,730           12,535             7,889
       Other(a)                           27               25                19                20               17                 8
                                -------------    -------------     -------------    --------------    -------------    -------------


       Total fixed charges           $ 9,981         $ 10,146          $ 12,235          $ 14,750         $ 12,552           $ 7,897
                                =============    =============     =============    ==============    =============    =============


RATIO OF EARNINGS TO FIXED
CHARGES                                 1.01             1.03              1.05              1.06             1.08              1.08

</TABLE>




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


<PAGE>

                                                                     Exhibit 27

                      LEHMAN BROTHERS INC. and SUBSIDIARIES

This  schedule  contains  summary  financial   information  extracted  from  the
Company's  Consolidated  Statement  of  Financial  Condition  at  May  31,  2000
(Unaudited)  and the  Consolidated  Statement of Income for the six months ended
May 31, 2000  (Unaudited)  and is qualified in its entirety by reference to such
financial statements.

1,000,000