SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                For the quarterly period ended February 28, 1999

                                       OR

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

                          Commission file number 1-6817

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

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

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

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


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

As of March 31, 1999, 1,006 shares of the  Registrant's  Common Stock, par value
$.10 per share, were outstanding.



<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                     FOR THE QUARTER ENDED FEBRUARY 28, 1999

                                      INDEX

 
Part I.      FINANCIAL INFORMATION                                       Page
                                                                        Number

  Item 1.   Financial Statements - (unaudited)

                 Consolidated Statement of Income -
                   Three Months Ended
                   February 28, 1999 and 1998 ..........................  3


                 Consolidated Statement of Financial Condition -
                   February 28, 1999 and November 30, 1998 .............  4

                 Consolidated Statement of Cash Flows -
                  Three Months Ended
                   February 28, 1999 and 1998...........................  6


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

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

Part II.     OTHER INFORMATION

  Item 1.   Legal Proceedings     ...................................... 32

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

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

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

Exhibits


<PAGE>


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


                                                     Three months ended
                                            ------------------------------------
                                              February 28         February 28
                                                 1999                1998
                                            ----------------    ----------------

 Revenues
      Principal transactions                      $  334             $  282
      Investment banking                             263                259
      Commissions                                    111                 95
      Interest and dividends                       3,235              3,460
      Other                                            6                  6
                                            ----------------    ----------------
          Total revenues                           3,949              4,102
 Interest expense                                  3,176              3,356
                                            ----------------    ----------------
          Net revenues                               773                746
                                            ----------------    ----------------
 Non-interest expenses
      Compensation and benefits                      376                364
      Technology and communications                   42                 44
      Brokerage and clearance                         50                 44
      Occupancy                                       11                 13
      Business development                            19                 19
      Professional fees                                9                 15
      Management fees                                 32                 32
      Other                                           10                 13
                                            ----------------    ----------------
          Total non-interest expenses                549                544
                                            ----------------    ----------------
 Income before taxes                                 224                202
      Provision for income taxes                      67                 76
                                            ================    ================
 Net income                                       $  157             $  126
                                            ================    ================



                 See notes to consolidated financial statements.


<PAGE>



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


                                                                                   February 28            November 30
                                                                                      1999                   1998
                                                                                ------------------     ------------------
<S>                                                                                 <C>                      <C>    
ASSETS
Cash and cash equivalents                                                           $    579                 $   460

Cash and securities segregated and on deposit for regulatory  
and other purposes                                                                     1,083                     909

Securities and other financial instruments owned:
     Governments and agencies                                                         20,728                  15,931
     Mortgages and mortgage-backed                                                    10,424                  10,524
     Corporate equities                                                                7,836                   5,694
     Corporate debt and other                                                          4,978                   6,824
     Derivatives and other contractual agreements                                      5,203                   5,580
     Certificates of deposit and other money market instruments                        3,061                   1,392
                                                                                ------------------     ------------------
                                                                                      52,230                  45,945
                                                                                ------------------     ------------------

Collateralized short-term agreements:
     Securities purchased under agreements to resell                                  58,083                  47,913
     Securities borrowed                                                              13,039                  14,760

Receivables:
     Broker, dealers and clearing organizations                                        1,966                   2,154
     Customers                                                                         2,879                   3,148
     Others                                                                            6,475                   4,859

Property, equipment and leasehold improvements (net of
     accumulated depreciation and amortization of $566 in 1999        
     and $559 in 1998)
                                                                                         272                     272

Other assets                                                                             281                     261

Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $110 in 1999 and $108 in 1998)                                           150                     152
                                                                                ------------------     ------------------
     Total Assets                                                                   $137,037                $120,833
                                                                                ==================     ==================

</TABLE>


                 See notes to consolidated financial statements.



<PAGE>


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

<TABLE>
<CAPTION>

                                                                                           February 28           November 30
                                                                                              1999                   1998
                                                                                        ------------------    -------------------
<S>                                                                                      <C>                    <C>       
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt                                                     $      805             $      616
Securities and other financial instruments sold but not yet purchased:
     Governments and agencies                                                                10,148                 12,028
     Corporate equities                                                                       2,535                  1,428
     Derivatives and other contractual agreements                                             3,511                  3,816
     Corporate debt and other                                                                 1,122                  1,761
                                                                                        ------------------    -------------------
                                                                                             17,316                 19,033
                                                                                        ------------------    -------------------
Collateralized short-term financings:
     Securities sold under agreements to repurchase                                          76,222                 58,905
     Securities loaned                                                                       10,348                  5,474
Advances from Holdings and other affiliates                                                  15,681                 21,560
Payables:
     Broker, dealers and clearing organizations                                               3,682                  2,230
     Customers                                                                                4,620                  4,540
Accrued liabilities and other payables                                                        1,407                  1,668
Long-term debt:
     Senior notes                                                                               172                    168
     Subordinated indebtedness                                                                4,099                  4,111
                                                                                        ------------------    -------------------
         Total liabilities                                                                  134,352                118,305
                                                                                        ------------------    -------------------
Commitments and contingencies


STOCKHOLDER'S EQUITY
Preferred stock,  $0.10 par value;  10,000 shares  authorized;  none 
    outstanding
Common stock, $0.10 par value; 10,000 shares authorized; 1,006
    shares issued and outstanding
Additional paid-in capital                                                                    1,759                  1,759
Accumulated other comprehensive income                                                            3                      3
Retained earnings                                                                               923                    766
                                                                                        ------------------    ------------------
         Total stockholder's equity                                                           2,685                  2,528
                                                                                        ==================    ===================
         Total liabilities and stockholder's equity                                        $137,037               $120,833
                                                                                        ==================    ===================

</TABLE>


                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                            Three months ended
                                                                                   --------------------------------------
                                                                                     February 28           February 28
                                                                                         1999                 1998
                                                                                   -----------------     ----------------

<S>                                                                                   <C>                   <C>     
CASH FLOWS FROM OPERATING ACTIVITES
Net income                                                                            $    157              $    126
Adjustments to reconcile net income to net cash used in
      operating activities:
     Depreciation and amortization                                                          14                    13
     Provisions for losses and other reserves                                                7                    13
     Other adjustments                                                                      (7)                    8
Net change in:
     Cash and securities segregated                                                       (174)                    6
     Securities and other financial instruments owned                                   (6,285)               (6,409)
     Securities borrowed                                                                 1,721                (3,938)
     Receivables from brokers, dealers and clearing organizations                          188                   767
     Receivables from customers                                                            269                   547
     Securities and other financial instruments sold but not yet
      purchased                                                                         (1,717)                3,095
     Securities loaned                                                                   4,874                 1,992
     Payables to brokers, dealers and clearing organizations                             1,452                 1,555
     Payables to customers                                                                  80                   155
     Accrued liabilities and other payables                                               (268)                 (388)
     Other operating assets and liabilities, net                                        (1,643)               (1,030)
                                                                                   -----------------     ----------------

         Net cash used in operating activities                                         $(1,332)              $(3,488)
                                                                                   -----------------     ----------------


</TABLE>




                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                            Three months ended
                                                                                   -------------------------------------
                                                                                     February 28          February 28
                                                                                        1999                 1998
                                                                                   ----------------     ----------------

<S>                                                                                        <C>                  <C>
CASH FLOWS FROM FINANCING ACTIVITES
Principal payments of senior notes                                                                              (79)
Proceeds from issuance of subordinated indebtedness                                                             300
Principal payments of subordinated indebtedness                                                                (300)
Net proceeds from commercial paper and short-term debt                                     189                  670
Resale agreements net of repurchase agreements                                           7,147                 (669)
Increase in advances from Holdings and other affiliates                                 (5,879)               3,604
                                                                                   ----------------     ----------------
       Net cash provided by financing activities                                         1,457                3,526
                                                                                   ----------------     ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements                                 (6)                  (4)
                                                                                   ----------------     ----------------
       Net cash used in investing activities                                                (6)                  (4)
                                                                                   ----------------     ----------------
       Net change in cash and cash equivalents                                             119                   34
                                                                                   ----------------     ----------------
Cash and cash equivalents, beginning of period                                             460                  220
                                                                                   ================     ================
       Cash and cash equivalents, end of period                                          $ 579               $  254
                                                                                   ================     ================

</TABLE>


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest paid totaled  $4,035 and $3,372 for the three months ended February 28,
1999 and 1998, respectively. Income taxes paid totaled $4 and $139 for the three
months ended February 28, 1999 and 1998, 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, 1998 (the "Form 10-K"). The Consolidated Statement of Financial Condition at
November 30, 1998 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.       Long-Term Debt:

During the three months ended  February 28, 1999,  there were no long-term  debt
issuances or maturities.



<PAGE>
                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS



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 February 28, 1999,  LBI's  regulatory  net
capital,  as defined,  of $1,408  million  exceeded the minimum  requirement  by
$1,314 million.

The Company's "AAA" rated derivatives  subsidiaries,  Lehman Brothers  Financial
Products Inc. ("LBFP") and Lehman Brothers  Derivative  Products Inc.  ("LBDP"),
have established  certain capital and operating  restrictions which are reviewed
by various rating agencies. At February 28, 1999, LBFP and LBDP each had capital
which  exceeded  the  requirement  of  the  most  stringent   rating  agency  by
approximately $167 million and $33 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 investments 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 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



                                       
<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS



volume of activities in these  instruments and changes in the valuation of these
instruments due to variations in market and credit conditions.

<TABLE>
<CAPTION>


                                                                                                  Average Fair Value*
                                                                   Fair Value*                    Three Months Ended
                                                                February 28, 1999                  February 28, 1999
                                                         --------------------------------- ----------------------------------
(in millions)                                               Assets          Liabilities       Assets           Liabilities
-------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
<S>                                                           <C>                <C>            <C>                <C>   
Interest rate and currency swaps and options
(including caps, collars and floors)                          $3,657             $2,108         $4,160             $2,375
Foreign exchange forward contracts and
  options                                                        648                538            951                750
Options on other fixed income securities,
  mortgage-backed securities forward
  contracts and options                                          549                475            288                264
Equity contracts (including equity swaps,
  warrants and options)                                          342                390            260                284
Commodity contracts (including swaps,
  forwards and options)                                            7                                10
                                                         -------------- -- --------------- -------------- --- ---------------
         Total                                                $5,203             $3,511         $5,669             $3,673
                                                         -------------- -- --------------- -------------- --- ---------------

</TABLE>

<TABLE>
<CAPTION>

                                                                                                 Average Fair Value*
                                                                   Fair Value*                   Twelve Months Ended
                                                                November 30, 1998                 November 30, 1998
                                                         --------------------------------- ---------------------------------
(in millions)                                               Assets          Liabilities       Assets          Liabilities
-------------------------------------------------------- -------------- -- --------------- -------------- -- ---------------
<S>                                                           <C>                <C>            <C>                <C>   
Interest rate and currency swaps and options
(including caps, collars and floors)                          $4,491             $2,371         $4,298            $2,283
Foreign exchange forward contracts and
 options                                                         476                752            652               593
Options on other fixed income securities,
 mortgage-backed securities forward
 contracts and options                                           217                211            281               256
Equity contracts (including equity swaps,
 warrants and options)                                           385                473            188               246
Commodity contracts (including swaps,
 forwards and options)                                            11                  9             24                 7
                                                         -------------- -- --------------- -------------- -- ---------------
         Total                                                $5,580             $3,816         $5,443            $3,385
                                                         -------------- -- --------------- -------------- -- ---------------

</TABLE>

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

Assets  included in the tables 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  February  28,  1999  represents  the  Company's  net


                                       2
<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

receivable/payable  for derivative financial instruments before consideration of
collateral.  Included within the $5,203 million fair value of assets at February
28,  1999 was $5,197  million  related to swaps and other OTC  contracts  and $6
million related to exchange-traded option and warrant contracts. Included within
the $5,580  million fair value of assets at November 30, 1998 was $5,333 million
related  to  swaps  and  other  OTC  contracts  and  $247  million   related  to
exchange-traded option and warrant contracts.

With respect to OTC  contracts,  including  swaps,  the Company  views its third
party  net  credit   exposure  to  be  $4,083  million  at  February  28,  1999,
representing the fair value of the Company's OTC contracts in an unrealized gain
position, after consideration of amounts due from affiliates of $344 million and
collateral  of $770  million.  Presented  below is an analysis of the  Company's
third party net credit  exposure at February  28, 1999 for OTC  contracts  based
upon actual ratings made by external  rating  agencies or by equivalent  ratings
established and utilized by the Company's Credit Risk Management Department.

    Counterparty              S&P/Moody's                      Net Credit
     Risk Rating              Equivalent                        Exposure
     -----------              ----------                        --------
          1                     AAA/Aaa                            17%
          2                AA-/Aa3 or higher                       23%
          3                 A-/A3 or higher                        37%
          4               BBB-/Baa3 or higher                      18%
          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,  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 9 to the Consolidated Financial Statements, included in the Form 10-K.


<PAGE>
                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS



5.       Other Commitments and Contingencies:

In  connection  with its  financing  activities,  the  Company  had  outstanding
commitments under certain lending  arrangements of approximately $4.2 billion at
February  28, 1999 and $3.0  billion at November  30,  1998.  These  commitments
require  borrowers  to  provide  acceptable   collateral,   as  defined  in  the
agreements,  when amounts are drawn under the lending facilities.  Advances made
under the above lending  arrangements  are typically at variable  interest rates
and  generally  provide  for  over-collateralization  based upon the  borrowers'
creditworthiness.

The Company,  through its high yield sales, trading and underwriting activities,
makes  commitments  to  extend  credit  principally  to below  investment  grade
borrowers  and then sells a  significant  portion of these  commitments  through
syndication. These commitments, net of syndications and participations,  totaled
$766  million and $1.5  billion at  February  28, 1999 and  November  30,  1998,
respectively,  and are typically  secured against the borrower's assets and have
fixed maturity dates. The draw down of these facilities is generally  contingent
upon certain  representations,  warranties  and  contractual  conditions  of the
borrower.  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.

The Company also had lending commitments to high grade borrowers of $1.5 billion
and $610 million at February 28, 1999 and November 30, 1998, respectively. These
commitments also are typically secured against the borrower's assets, have fixed
maturity  dates,  and are  generally  contingent  upon certain  representations,
warranties and  contractual  conditions of the borrower.  The Company  generally
sells a significant portion of these commitments through sydication.

At February  28, 1999 and  November 30,  1998,  the Company had  commitments  to
invest up to $241 million and $238 million, respectively, in partnerships, which
in turn will make direct merchant banking related investments. These commitments
will be funded  as  required  through  the end of the  respective  partnerships'
investment periods, principally expiring in 2004.

In  addition to these  specific  commitments,  the  Company  had  various  other
commitments of approximately $305 million at both February 28, 1999 and November
30, 1998, 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


                                       
<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


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 11 to the Consolidated Financial Statements, in the Form 10-K.

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.






<PAGE>


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

Business Environment

The principal business activities of Lehman Brothers Holdings Inc.  ("Holdings")
and  subsidiaries  (collectively,   the  "Company"  or  "Lehman  Brothers")  are
investment  banking and securities  trading and sales, which by their nature are
subject to volatility, primarily due to changes in interest and foreign exchange
rates and security valuations, global economic and political trends and industry
competition.  Revenues  and  earnings  may vary  significantly  from  quarter to
quarter  and from  year to year.  As a  result,  the  Company's  businesses  are
evaluated   across  market  cycles  for   operating   profitability   and  their
contribution  to the  Company's  long-term  strategic  objectives.  The  Company
strives to minimize the effects of economic  downturns  through its  diversified
revenue base,  stringent cost controls,  global  presence,  and risk  management
practices.

Corporate Finance Advisory  Corporate Finance Advisory  activities  continued at
near  record  levels  during  the first  quarter.  Industrywide,  the  volume of
announced  transactions  soared  to  roughly  $900  billion.  The  quarter  also
reflected a steady advance of merger and acquisition activity involving European
companies.  Merger and acquisition activities continued to reflect the trends of
consolidation, deregulation and globalization across industry sectors and across
borders.

Equity In the first fiscal  quarter ended  February  1999,  U.S.  equity markets
continued  to recover  from the lows set in the Fall of 1998 on the heels of the
Russian  default-induced credit crisis. The major market indices achieved record
highs,  with the S&P 500 index rising 6.4% in the quarter.  Continuing the trend
that has been in place for a while,  large  capitalization  companies  performed
better  than  smaller  capitalization  companies.  With  earnings  growth  still
expected to be relatively weaker in the first calendar quarter,  the move in the
equity  markets  was  based  entirely  on  improving   valuations  supported  by
expectations  that  inflation and interest rates would continue to remain stable
alongside good economic growth.

Volatility in the broader market was counterbalanced by strong investor interest
in Technology and Internet stocks. The Nasdaq Composite returned 17.4% while the
Dow  Jones  Industrial  Average  returned  a  relatively  modest  gain of  2.1%.
Similarly,  the equity new issue market was defined by a focus on the Technology
and Internet sectors,  which were characterized by unprecedented  valuations and
returns.  Convertible  underwriting volume was down substantially from the prior
year's fiscal quarter, as issuers outside of the Technology and Internet sectors
were  reluctant  to  access  the  market.  Although  equity  and  equity-related
underwriting volume increased approximately 27% over the fiscal first quarter of
1998,  the number of  transactions  declined by over 35%,  indicating  that,  on
average, transaction size has increased.

Fixed  Income  Evidence  that the U.S.  economy was  accelerating  in the fourth
quarter  of 1998,  combined  with the three  earlier  cuts in Fed funds led to a
sharp rise in U.S. bond yields in the first quarter of 1999. U.S.  ten-year bond
yields rose by approximately 50 basis points to 5.3% and U.S. dollar-denominated
spread  sectors  rallied in January and  February.  Robust  primary  markets and
soaring equity valuations contributed to an overall positive market sentiment.



                                       
<PAGE>

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



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



<PAGE>

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

Results of Operations
For the Three Months Ended February 28, 1999 and 1998

The Company  reported  net income of $157  million for the first  quarter  ended
February  28,  1999,  representing  an  increase  of 25% from net income of $126
million for the first quarter ended February 28, 1998.

Net revenues  increased to $773 million for the first  quarter of 1999 from $746
million for the first  quarter of 1998.  The increase in net revenues was driven
by an overall  increase in  customer  flow  activities  across many of the fixed
income and equity product areas.

Compensation  and benefits expense as a percentage of net revenues was 48.6% and
48.8%  for the  first  quarter  of 1999  and  1998,  respectively.  Nonpersonnel
expenses  were $173 million in the first  quarter of fiscal 1999,  down slightly
from the $180  million  in the first  quarter  of  fiscal  1998.  Increased  net
revenues and unchanged expense levels led to an increase in the Company's pretax
operating  margin to 29.0% in the fist  quarter of fiscal 1999 from 27.1% in the
first quarter of fiscal 1998.

In the following  table of net revenues,  the Company has been  segregated  into
four major business units: corporate finance advisory,  equity, fixed income and
merchant  banking.  Net revenues  from the Company's  market-making  and trading
activities  in  equity  and  fixed  income  products  are  recognized  as either
principal  transactions  or net interest  revenues  depending upon the method of
financing and/or hedging related to specific  inventory  positions.  The Company
evaluates  its  trading  strategies  on an  overall  profitability  basis  which
includes  both  principal  transactions  revenues and net  interest.  Therefore,
changes in net interest  should not be viewed in isolation  but should be viewed
in  conjunction  with revenues from principal  transactions.  Each business unit
represents  a  grouping  of  financial  activities  and  products  with  similar
characteristics.   These  business   activities  result  in  revenues  that  are
recognized   in  multiple   revenue   categories   contained  in  the  Company's
Consolidated  Statement of Income. Net revenues by business unit contain certain
internal allocations, including funding costs, which are centrally managed.



<PAGE>

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


<TABLE>
<CAPTION>


Three Months Ended February 28, 1999
------------------------------------

                                            Principal
                                         Transactions and
                                           Net Interest                          Investment
                                                              Commissions          Banking          Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
<S>                                              <C>                 <C>              <C>             <C>          <C>
Corporate Finance Advisory                     $  (4)                               $  82                        $  78
Equity                                            30              $103                 45                          178
Fixed Income                                     372                 5                130             $  2         509
Merchant Banking                                  (5)                                   6                            1
Other                                                                3                                   4           7
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
                                                $393              $111               $263             $  6        $773
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------

</TABLE>


<TABLE>
<CAPTION>


Three Months Ended February 28, 1998

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


Corporate  Finance  Advisory.  Corporate  finance  advisory  net  revenues  from
underwriting,  classified in the Consolidated Statement of Income as a component
of investment banking revenues, result primarily from fees earned by the Company
in its role as strategic advisor to its clients.  This role consists of advising
clients on mergers and acquisitions,  divestitures, leveraged buyouts, financial
restructurings,  and a variety of cross-border  transactions.  Net revenues from
corporate  finance  advisory  activities  increased to $78 million for the first
quarter of 1999, versus $70 million recognized in the first quarter of 1998.

Equity.   Equity  net  revenues  reflect  equity  underwriting,   customer  flow
activities (both institutional and high-net-worth retail), secondary trading and
financing  activities  related  to equity  products.  The  Company's  equity net
revenues  increased  11% to $178 million for the first quarter of 1999 from $161
million for the first quarter of 1998.  Higher revenues  resulted from increased
customer  flow  activities  in cash  products and  increased  revenues from risk
arbitrage  activities.  Investment  Banking  revenues,  as a component of equity
revenues,  decreased  to $45  million  for the  first  quarter  of 1999 from $52
million for the first quarter of 1998, although  underwriting activity picked up
significantly in February.


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



Fixed Income. The Company's fixed income net revenues reflect debt underwriting,
customer  flow  activities  (both  institutional  and  high-net-worth   retail),
secondary  trading and financing  activities  related to fixed income  products.
Fixed income  products  include  dollar- and non-dollar  government  securities,
mortgage-  and  asset-backed  securities,  money  market  products,  dollar- and
non-dollar  corporate debt  securities,  emerging market  securities,  municipal
securities,  financing  (global  access  to  debt  financing  sources  including
repurchase  and reverse  repurchase  agreements),  foreign  exchange,  and fixed
income derivative products.  Fixed income net revenues were $509 million for the
first  quarter of 1999 versus $505  million for the first  quarter of 1998.  The
slight  improvement  in the first quarter  results over the prior year's quarter
reflected  increased  institutional  customer  flow  activity  across many fixed
income  products  and  improved  origination  in the high grade  corporate  bond
sector.  Investment banking revenues from underwriting,  as a component of fixed
income  revenues,  increased to $130 million for the first  quarter of 1999 from
$125 million for the first quarter of 1998.

Merchant  Banking.  The Company is the general  partner for five active merchant
banking  partnerships  and  also  invests  directly  in other  merchant  banking
transactions.  Current merchant banking investments include both publicly traded
and  privately  held  companies.  Merchant  banking net revenues  represent  net
unrealized  gains and losses from the  revaluation  of these  investments.  Such
amounts are classified in the Consolidated Statement of Income as a component of
investment banking revenues.  Merchant banking net revenues also reflect the net
interest  expense  relating to the financing of the Company's  investment in the
partnerships.  Merchant  banking net revenues for the first quarter of 1999 were
relatively flat versus the first quarter of 1998.

Non-Interest  Expenses.  Non-interest  expenses  were $549 million for the first
quarter of 1999 and $544 million for the first quarter of 1998.  Management fees
represent the allocation of various charges,  such as compensation and benefits,
occupancy, administration and computer processing between the Company, Holdings,
and other affiliates based upon specific allocation methods.

 Income Taxes.  The Company's income tax provision was $67 million for the first
quarter of 1999  compared  to $76  million  for the first  quarter of 1998.  The
effective  tax rate was 29.9% for the  first  quarter  of 1999 and 37.6% for the
first quarter of 1998. The decrease in the effective tax rate relates  primarily
to an increase in tax benefits  attributable to income and transactions  subject
to preferential tax treatment.




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



Capital Resources, Funding and Liquidity

Balance  Sheet.  The  Company's  total  assets  increased  to $137.0  billion at
February  28,  1999 from $120.8  billion at November  30,  1998.  The  Company's
adjusted  total  assets,  defined as total  assets less the lower of  securities
purchased  under  agreements  to resell or securities  sold under  agreements to
repurchase  was $79.0  billion at February 28, 1999 compared to $72.9 billion at
November  30,  1998.  The  Company  believes  adjusted  total  assets  is a more
effective  measure  of  balance  sheet  usage when  comparing  companies  in the
securities industry.  The increase in adjusted total assets reflects an increase
in government  and agency  inventory  levels  associated  with increased flow in
these liquid products.

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

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

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

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

(2)   Finance the Company's assets,  primarily on a secured basis. Together with
      Total Capital,  secured funding provides a stable funding base and enables
      the Company to minimize its reliance on short-term unsecured debt.

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

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


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



Total Capital.  The Company's  Total Capital base at February 28, 1999 increased
to $7.0  billion  from $6.8  billion  at  November  30,  1998  primarily  due to
retention of earnings.

                                        February 28             November 30
(in millions)                            1999                      1998
--------------------------------------------------------------------------------
Long-term Debt

     Senior Notes                        $  172                      $  168
     Subordinated Indebtedness            4,099                       4,111
                                      ---------                     -------
                                          4,271                       4,279

Stockholders' Equity                      2,685                       2,528

--------------------------------------------------------------------------------
Total Capital                            $6,956                      $6,807
--------------------------------------------------------------------------------

During the first  three  months of 1999,  the Company  had no new  issuances  or
maturities.  Long-term debt decreased to $4.27 billion at February 28, 1999 from
$4.28  billion at November 30,  1998,  with a  weighted-average  maturity of 4.4
years at February 28, 1999 and 4.6 years at November 30, 1998.

Secured  Funding.  The Company  strives to maximize the portion of the Company's
balance sheet that is funded on a secured basis.  Secured Funding  includes cash
market securities and other financial instruments sold but not yet purchased, as
well as collateralized  short-term financings,  defined as securities sold under
agreements  to  repurchase  ("repos") and  securities  loaned.  Because of their
secured  nature,  OECD  government  repos and other  investment  grade  types of
collateralized borrowings are less credit-sensitive and have historically been a
stable financing source irrespective of market conditions.  At February 28, 1999
and  November  30, 1998,  $100  billion and $80  billion,  respectively,  of the
Company's  total  balance sheet of $137 billion and $121 billion at February 28,
1999 and November 30, 1998, respectively, were financed on a secured basis.

By maximizing its use of secured funding,  the Company minimizes its reliance on
unsecured funding. As of February 28, 1999 and November 30, 1998 short-term debt
outstanding  was $805  million  and $616  million,  respectively.  There  was no
commercial paper outstanding as of February 28, 1999 or November 30, 1998.



<PAGE>

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



Credit Ratings  

The Company, like other companies in the securities industry, relies on external
sources  to finance a  significant  portion of its  day-to-day  operations.  The
Company's  access to and cost of funding is generally  dependent upon its short-
and long- term debt  ratings.  As of February 28, 1999 the short- and  long-term
senior debt ratings of LBI were as follows:

                                                          LBI
                                    -------------------------------------------
                                      Short-term          Long-term**
-------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co.          D-1                  A/A-
Fitch IBCA, Inc.                         F-1                  A/A-
Moody's                                   P2                A3*/Baa1
S&P                                      A-1                 A+*/A
Thomson BankWatch                       TBW-1                A+/A

*   Provisional ratings on shelf registration
 ** Senior/subordinated

Other

High Yield Securities and Lending Activities. The Company underwrites,  trades,
invests and makes markets in high yield corporate debt  securities.  The Company
also  syndicates,  trades and invests in loans to below  investment  grade-rated
companies.  For purposes of this  discussion,  high yield debt  instruments  are
defined as  securities or loans to companies  rated BB+ or lower,  or equivalent
ratings by recognized credit rating agencies, as well as non-rated securities or
loans  which,  in  the  opinion  of  management,   are   non-investment   grade.
Non-investment  grade securities generally involve greater risks than investment
grade securities due to the issuer's  creditworthiness  and the liquidity of the
market for such  securities.  In addition,  these  issuers have higher levels of
indebtedness,   resulting  in  an  increased  sensitivity  to  adverse  economic
conditions.  The Company  recognizes  these risks and aims to reduce  market and
credit risk through the diversification of its products and counterparties. High
yield debt  instruments  are carried at market value,  and  unrealized  gains or
losses  for  these  securities  are  reflected  in  the  Company's  Consolidated
Statement of Income. The Company's portfolio of such instruments at February 28,
1999 and November 30, 1998  included  long  positions  with an aggregate  market
value of approximately  $1.6 billion and $1.2 billion,  respectively,  and short
positions with an aggregate market value of approximately  $108 million and $200
million,  respectively.  The Company  may,  from time to time,  mitigate its net
exposure to any single issuer through the use of derivatives and other financial
instruments.


<PAGE>

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



Additional  information  about the Company's  High Yield  Securities and Lending
Activities,  including  related  commitments,  can  be  found  in  Note 5 to the
Consolidated Financial Statements (Other Commitments and Contingencies).

Merchant  Banking.  At February 28, 1999,  the Company's  investment in merchant
banking  partnerships  totaled $60 million and direct  investments  totaled $185
million.  The Company's merchant banking activities include  investments in five
partnerships,  for which the Company acts as general partner,  as well as direct
investments.  The Company's  policy is to carry its  investments,  including its
partnership interests,  at fair value based upon the Company's assessment of the
underlying  investments.  Additional  information  about the Company's  Merchant
banking activities,  including related commitments, can be found in Note 5 to be
Consolidated Financial Statements (Other Commitments and Contingencies)



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


Risk Management

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

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

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

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

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



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



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

Valuation   adjustments  for  credit  risk  incorporate  business  and  economic
conditions, historical experience, concentrations,  estimates of expected losses
and the  character,  quality  and  performance  of  credit  sensitive  financial
instruments.

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

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

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



<PAGE>

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


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

The Company incurs  short-term  interest rate risk when facilitating the orderly
flow  of  customer  transactions  through  the  maintenance  of  government  and
high-grade  corporate bond inventories.  Market-making in high yield instruments
exposes the Company to  additional  risk due to potential  variations  in credit
spreads.  Trading in  international  markets  exposes the Company to spread risk
between  the  term   structure  of  interest   rates  in  differing   countries.
Mortgage-related  securities  are subject to prepayment  risk and changes in the
level of interest rates.  Trading in derivatives and structured products exposes
the  Company to changes  in the level and  volatility  of  interest  rates.  The
Company  actively  manages  interest  rate risk through the use of interest rate
futures,  options,  swaps,  forwards,  and offsetting  cash market  instruments.
Inventory holdings, concentrations, and agings are monitored closely and used by
management to selectively hedge or liquidate undesirable exposures.

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

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

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

<PAGE>

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



computed  in this  manner was $15.9  million  and $13.5  million for the periods
ended February 28, 1999 and November 30, 1998, respectively.

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

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




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



 Impact of EMU

As of January 1, 1999, 11 European  countries entered into the European economic
and monetary union (the "EMU") and replaced their local currencies with a single
currency,  the euro. The countries  currently in the EMU are: Austria,  Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
and Spain.  During a three-year  transition period, the national currencies will
continue to circulate but only as fixed denominations of the euro. On January 1,
1999, the euro became the predominant  currency to settle non-cash  transactions
previously  denominated in the participating  national  currencies.  The Company
needed to convert  certain of its  systems and  processes  to  accommodate  this
currency change.

To date Lehman has experienced no material post conversion problems, either with
internal or external systems. The Company has incurred expenses for the internal
technology  staff,  as well as  costs  for  outside  consultants,  in  order  to
implement its EMU conversion plan. The total cost of its EMU conversion  program
was approximately $7 million,  of which approximately $6 million was incurred in
fiscal 1998 and $1 million was incurred in the first quarter of fiscal 1999.


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



Year 2000 Readiness Disclosure

The year 2000 issue  originates from computer  programs and imbedded chips using
two digits rather than four to define the calendar year.  Computer programs that
have  date-sensitive  software  may  recognize a date using "00"as the year 1900
rather than the year 2000.

If not  addressed  and  completed on a timely  basis,  failure of the  Company's
computer  systems to  process  year 2000  related  data  correctly  could have a
material  adverse effect on the Company's  operations  and financial  condition.
Failures of this kind could,  for  example,  lead to  incomplete  or  inaccurate
accounting,  settlement  failures,  trade  processing  or  recording  errors  in
securities,  currencies,  commodities  or other  assets.  It could  also lead to
uncertainty  regarding  risk,  exposures and liquidity.  If not  addressed,  the
potential  risks  to  the  Company  include  financial  loss,  legal  liability,
interruption of business and regulatory actions.

The  Company  established  a team in 1996 to modify or replace and then test the
appropriate  software  and  equipment  to  ensure  that year  2000  issues  were
addressed.  The Company presently  believes that, with modifications to existing
software and  conversions to new software,  the year 2000 issue will be resolved
for all the Company's own systems worldwide.

In its approach to the year 2000 problem,  Lehman  Brothers has been guided by a
three-step methodology. The steps are:

o         Inventory and Assessment
o         Remediation
o         Testing

Inventory and assessment  consisted of initial technical and functional analysis
across the  Company's  applications.  Initial  analysis  identified  systems and
applications.  Each  application  was then  reviewed  and  classified  as highly
critical, critical or non-critical. This process is complete.

Remediation  is divided into three phases.  Applications  specified as year 2000
non-compliant  have been  analyzed to determine  business  impact and those that
have been  deemed  critical  were  targeted  for  remediation.  Selected  Lehman
Brothers mainframe  applications were sent to an outside vendor for remediation,
while the remaining applications have been repaired internally.  Remediation was
99% completed by the end of the first quarter of 1999.

All  remediated  applications  are tested for  non-year  2000  functionality  to
confirm  they still run  correctly  prior to year 2000  testing.  At the time of
remediation,  applications are logged into a change management system to further
ensure  any  additional  changes  are  monitored  and  re-tested  for year  2000
compliance.

Testing for year 2000  compliance  has also been  organized  into three  phases.
Phase one involves testing individual  applications or groups of applications on
mainframe or on distributed

<PAGE>

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


platforms.  Consultants  were engaged to assist with the testing of  distributed
applications classified as highly critical. Phase two involves real-time testing
across   platforms   (integration   testing).   Phase  three  involves   testing
applications between firms (external testing).

Each of these phases has been pursued in a worldwide  effort  coordinated in New
York,  London and Tokyo where project teams and segregated lab environments have
been established.

External  testing  itself is being  performed in three  steps.  "Point-to-point"
testing confirms that application  interfaces between the Company and individual
services and  utilities  function  correctly.  Point-to-point  testing  began in
February 1998. "Beta" testing for a product follows  Point-to-point  testing and
is a dress rehearsal for industrywide testing. Beta testing is only performed in
the U.S. Many of the markets are not providing  Industrywide  testing,  but they
are providing  some amount of end-to-end  testing,  where data is passed to more
than one exchange or utility.  Industrywide  testing follows Beta testing as the
final external testing step.

In 1998, the Company participated in two Beta tests in the U.S., for the SIA and
for the Futures Industry Association (FIA). The Company has also participated in
the  SIA  Money  Market  Beta  Test,  the  Mortgage-Backed  Securities  Clearing
Corporation Test, the Participant Trust Company Mortgage Test and the Government
Securities  Clearing  Corporation Test, the SIA Market Data Beta Test.  Overseas
tests in which the Company has  participated  include the Central  Gilts  Office
(CGO) and CREST in the United Kingdom and the Singapore  International  Monetary
Exchange (SIMEX) test in Singapore.

The Company is currently participating in the SIA Industrywide Test. The company
is scheduled to participate in the SIA Money Market Test and the Stock Loan Test
in May, as well as the SIA Market Data Test in May. The Company has participated
in a variety of oversees  tests in Hong Kong and Tokyo,  with more  scheduled in
the second  quarter.  The Company plans to participate in European tests as they
are announced. Industrywide testing is currently expected to be completed in the
third quarter.

The  Company  has taken a lead in the  industry's  efforts to deal with the year
2000 issue by actively  participating and in some cases,  leading,  industrywide
testing efforts.  Lehman Brothers chairs the Participants'  Industrywide Testing
Subcommittee of the Securities  Industry  Association (SIA) which, with partners
such as exchanges,  depositories,  market data vendors and buy-side firms,  sets
up,  refines  and  coordinates   industrywide  testing  in  the  United  States.
Industrywide  testing is the forum in which firms within the financial  industry
test the  applications  that transfer data between them.  These tests started in
March 1999.

In addition to its leadership in U.S. testing efforts, through membership in the
Executive  Committee of Global 2000, a group of  international  financial firms,
the Company is  participating  in the coordination of global year 2000 readiness
in the  financial  community.  The Company is also pursuing  separate  point-to-
point  testing with firms not  participating  in  industrywide  testing.  Lehman
Brothers also serves as a member of the Custody 2000 Working Group whose goal is
to assist the financial  community in the  assessment of year 2000  readiness of
custodians in a variety of global  markets.  The Custody 2000 Working Group will
also conduct  proxy  testing of selected  sub-custodians  in a number of markets
globally.



                                   
<PAGE>

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


Year 2000 also  affects  building  and  infrastructure  systems.  The Company is
engaged in a global effort to address facilities issues.  Critical areas include
facilities  components such as building management systems,  elevators,  heating
systems,  security  and  fire  alarm  systems,  electrical  and  other  building
services.  Facilities  staff is surveying and testing  equipment and  components
and,  with the Third Party  Vendor  team,  is working to ensure that vendors and
suppliers are year 2000 ready.

However, even if these changes are successful,  the Company remains at risk from
year 2000 failures caused by third parties. Externally, the Company is an active
participant in the SIA Third Party Vendor Committee.  Internally, the Company is
evaluating efforts of key counterparties,  banks, exchanges, agencies, utilities
and suppliers,  among others, to assess and remediate their year 2000 issues. As
part of this effort,  the Third Party Vendor team has  inventoried  and has sent
surveys to vendors  whose  software and  hardware  products the Company uses and
whose services the Company employs to determine  their year 2000 readiness.  The
team is also testing critical software and hardware products to ensure year 2000
readiness.  To  date  the  Company  has  received  information  from 95 % of its
vendors,  including  overseas vendors whose year 2000 awareness seems to be less
advanced than in the United States.

Examples of problems  that could  result from the failure by third  parties with
whom the Company interacts to remediate year 2000 bugs include:  (i) in the case
of  exchanges  and clearing  agents,  funding  disruptions,  failure to trade in
certain markets and settlement failures;  (ii) in the case of counterparties and
clients,  accounting and financial difficulties to those parties that may expose
the Company to  increased  credit risk and lost  business;  (iii) in the case of
vendors, service failures such as power, telecommunications, elevator operations
and  loss of  security  access  control;  (iv) in the case of  banks  and  other
lenders, the potential for liquidity stress due to disruptions to funding flows;
and, (v) in the case of data  providers,  inaccurate or out of date  information
that would impair the Company's  ability to perform  critical  functions such as
pricing securities and currencies.

Additionally, general uncertainty regarding the success of remediation may cause
many market  participants to reduce their market activities  temporarily as they
address  and assess  their year 2000  efforts  in 1999.  This could  result in a
general  reduction in market  activities and revenue  opportunities in late 1999
and early 2000. Management cannot predict the magnitude of any such reduction or
its impact on the Company 's financial  results.  However,  the  Company's  Risk
Management  Department has undertaken a comprehensive  review of third party and
credit  risks  posed by year  2000.  Recognizing  the  uncertainty  of  external
dependencies,  the Company is also preparing a contingency  plan that identifies
potential  problems,  actions to minimize the  likelihood of them  occurring and
action plans to be invoked  should they occur.  These plans will include  backup
processes  that  do  not  rely  on  computer  systems,  where  appropriate.  The
contingency plan will be complete by the end of April 1999.

However,  as stated  above,  there can be no  guarantee  or  assurance  that the
systems  of  other  companies  on  which  the  Company's  systems  rely  will be
remediated in a timely manner. This or a failure to remediate by another company
or a remediation  that is incompatible  with the Company's  systems could have a
material adverse effect on the Company.


                                       
<PAGE>

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


The Company has  established  an internal  auditing  plan to record  results and
ensure  ongoing  compliance  of tested  applications.  It  should be noted  that
efforts focused on addressing EMU have delayed the  finalization of internal and
industrywide testing in Europe.

The  Company's  total year 2000  project  cost is based on  presently  available
information.  The total  remaining cost of the year 2000 project is estimated at
approximately $4 million,  which will be funded through  operating cash flow and
expensed  as  incurred  over the next one and  one-half  years.  The Company has
incurred and expensed  approximately $2 million in 1997, $4 million in 1998, and
$1 million through February 28, 1999, related to the year 2000 project.

The costs of year 2000 testing,  modifications  and/or replacements and the date
on which the  Company  plans to complete  the project are based on  management's
best  estimates.  These  estimates  were derived using  numerous  assumptions of
future events including the continued  availability of certain resources,  third
party modification plans and other factors.

Accounting Standards Not Yet Adopted by the Company

In June 1997,  the  Financial  Accounting  Standard  Board (the  "FASB")  issued
Statement of Financial  Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise  and Related  Information."  SFAS No. 131 is effective
for the Company in Fiscal 1999 and establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
will adopt SFAS No. 131 in its 1999 Annual Report.

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.  SFAS No. 133 is  effective  for
fiscal years  beginning  after June 15, 1999. The expected impact of adoption on
the Company's  results of operations has not yet been determined,  however it is
not likely to be material since most of the Company's derivatives are carried at
fair value.

<PAGE>



                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 1   Legal Proceedings

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

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

     Actions  Relating  to the  Sales  and  Marketing  of  Limited  Patnerships.
     (Reported in LBI's Annual Report on Form 10-K)

     In re Lehman Brothers Limited  Partnership  Litigation.  On March 29, 1999,
     the Court signed a Stipulation  and Order signed by the parties  dismissing
     the action without prejudice.

     Harold Gillet,  et al. v. Goldman Sachs & Co., et al., Yakov Prager, et al.
     v. Goldman  Sachs & Co. et al.,  David  Holzman,  et al. v. Goldman Sachs &
     Co., et al.  (Reported  in LBI's  Annual  Report on Form 10-K).  Plaintiffs
     filed a Consolidated Amended Complaint on March 15, 1999.

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:

         12.1     Computation in Support of Ratio of Earnings to Fixed Charges

         27       Financial Data Schedule

(b)      Reports on Form 8-K:

         None

<PAGE>



                                   SIGNATURES



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



                                               LEHMAN BROTHERS INC.
                                               --------------------
                                                   (Registrant)








Date:    April 14, 1999                     By:  /s/ David Goldfarb
                                                 --------------------------
                                                 Chief Financial Officer
                                                 (Principal Financial Officer)






<PAGE>


                                  EXHIBIT INDEX



Exhibit No.       Exhibit

Exhibit 12.1      Computation in Support of Ratio of Earnings to Fixed Charges

Exhibit 27        Financial Data Schedule






<PAGE>




                                                                  Exhibit 12.1



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


<TABLE>
<CAPTION>


                                        For the        For the          For the         For the          For the         For the
                                         Eleven         Twelve           Twelve          Twelve           Twelve          Three
                                      Months Ended   Months Ended     Months Ended    Months Ended     Months Ended    Months Ended
                                        November 30    November 30      November 30     November 30      November 30     February 28
                                           1994           1995             1996            1997             1998            1999
                                           ----           ----             ----            ----             ----            ----
<S>                                     <C>           <C>              <C>            <C>             <C>              <C>        
Fixed Charges:
  Interest expense:
     Subordinated indebtedness          $  184        $    204         $    221       $     236       $      239       $     59
     Bank loans and other
borrowings*                              5,661           9,750            9,900          11,980           14,491          3,967
     Interest component of rentals
    of office and equipment                 27              25               18              16               16              4
  Other adjustments**                       53               2                7               3                4
                                      ============   ============     =============   ==============   =============   =============
   TOTAL (A)                            $5,925          $9,981          $10,146         $12,235          $14,750        $ 4,030
                                      ============   ============     =============   ==============   =============   =============

Earnings:
   Pretax income (loss) from
continuing operations                 $      1       $      78         $    309       $     593        $     847       $    224
   Fixed charges                         5,925           9,981           10,146          12,235           14,750          4,030
   Other adjustments***                    (52)             (1)              (6)             (2)              (4)
                                      ============   ============     =============   ==============   =============   =============
   TOTAL (B)                            $5,874         $10,058          $10,449         $12,826          $15,593        $ 4,254
                                      ============   ============     =============   ==============   =============   =============
(B/A)                                     ****            1.01             1.03            1.05             1.06           1.06

</TABLE>

*        Includes amortization of long-term debt discount.

**       Other  adjustments  include  capitalized  interest and debt issuance 
         costs and  amortization  of capitalized interest.

***      Other adjustments  include adding the net loss of affiliates  accounted
         for  at  equity  whose  debt  is not  guaranteed  by  the  Company  and
         subtracting   capitalized   interest  and  debt   issuance   costs  and
         undistributed net income of affiliates accounted for at equity.

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