<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
(MARK ONE)
     [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2001

                                       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)

<TABLE>
<CAPTION>
<S>                                                <C>
                 DELAWARE                                       13-2518466
(STATE OR OTHER JURISDICTION OF INCORPORATION      (I.R.S. EMPLOYER IDENTIFICATION NO.)
                OR ORGANIZATION)

       3 WORLD FINANCIAL CENTER
           NEW YORK, NEW YORK                                       10285
          (ADDRESS OF PRINCIPAL                                  (ZIP CODE)
            EXECUTIVE OFFICES)
</TABLE>

                                 (212) 526-7000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. Yes |X| No |_|

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

AS OF OCTOBER 15, 2001, 1,006 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$0.10 PER SHARE, WERE OUTSTANDING.


================================================================================
<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES

                                    FORM 10-Q

                      FOR THE QUARTER ENDED AUGUST 31, 2001

                                      INDEX

<TABLE>
<CAPTION>

   PART I.      FINANCIAL INFORMATION                                                                             PAGE
                                                                                                                 NUMBER
<S>             <C>                                                                                               <C>
                Item 1.    Financial Statements - (unaudited)

                                Consolidated Statement of Income -
                                Three and Nine Months Ended
                                August 31, 2001 and August 31, 2000........................................         3

                                Consolidated Statement of Financial Condition -
                                August 31, 2001 and November 30, 2000......................................         5

                                Consolidated Statement of Cash Flows -
                                Nine Months Ended
                                August 31, 2001 and August 31, 2000........................................         7

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

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


   PART II.     OTHER INFORMATION

                Item 1.    Legal Proceedings...............................................................        21

                Item 6.    Exhibits and Reports on Form 8-K................................................        22

   SIGNATURE  .............................................................................................        24

   EXHIBIT INDEX ..........................................................................................        25

   EXHIBITS
</TABLE>

                                       2


<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES

                         PART I - FINANCIAL INFORMATION

ITEM 1                    FINANCIAL STATEMENTS

                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME
                                   (UNAUDITED)
                                  (IN MILLIONS)

<TABLE>
<CAPTION>

                                                                                  Three months ended
                                                                         -------------------------------------
                                                                            August 31            August 31
                                                                              2001                 2000
                                                                         ----------------     ----------------
          <S>                                                               <C>                  <C>
          Revenues
                Principal transactions                                      $    (81)            $    584
                Investment banking                                               278                  438
                Commissions                                                      206                  165
                Interest and dividends                                         3,149                4,134
                Other                                                             15                   10
                                                                         ----------------     ----------------
                    Total revenues                                             3,567                5,331
           Interest expense                                                    2,893                4,028
                                                                         ----------------     ----------------
                    Net revenues                                                 674                1,303
                                                                         ----------------     ----------------
           Non-interest expenses
                Compensation and benefits                                        344                  652
                Brokerage and clearance                                           66                   52
                Technology and communications                                     64                   49
                Business development                                              32                   29
                Professional fees                                                 19                   21
                Occupancy                                                         17                   18
                Management fee                                                     -                   35
                Other                                                              8                    9
                                                                         ----------------     ----------------
                    Total non-interest expenses                                  550                  865
                                                                         ----------------     ----------------
           Income before taxes                                                   124                  438
                Provision for income taxes                                        17                  134
                                                                         ----------------     ----------------
           Net income                                                       $    107             $    304
                                                                         ================     ================
</TABLE>





                See notes to consolidated financial statements.

                                       3
<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME
                                   (UNAUDITED)
                                  (IN MILLIONS)

<TABLE>
<CAPTION>

                                                                                  Nine months ended
                                                                         -------------------------------------
                                                                            August 31            August 31
                                                                              2001                 2000
                                                                         ----------------     ----------------
          <S>                                                              <C>                  <C>
          Revenues
                Principal transactions                                     $   1,198            $   1,629
                Investment banking                                             1,054                1,104
                Commissions                                                      644                  492
                Interest and dividends                                        11,360               12,187
                Other                                                             30                   37
                                                                         ----------------     ----------------
                    Total revenues                                            14,286               15,449
           Interest expense                                                   10,808               11,917
                                                                         ----------------     ----------------
                    Net revenues                                               3,478                3,532
                                                                         ----------------     ----------------
           Non-interest expenses
                Compensation and benefits                                      1,773                1,819
                Technology and communications                                    186                  147
                Brokerage and clearance                                          181                  152
                Business development                                              99                   79
                Professional fees                                                 57                   61
                Occupancy                                                         49                   48
                Management fee                                                    32                   91
                Other                                                             37                   35
                                                                         ----------------     ----------------
                    Total non-interest expenses                                2,414                2,432
                                                                         ----------------     ----------------
           Income before taxes                                                 1,064                1,100
                Provision for income taxes                                       314                  362
                                                                         ----------------     ----------------
           Net income                                                     $      750           $      738
                                                                         ================     ================
</TABLE>






                 See notes to consolidated financial statements.

                                       4
<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
                                   (UNAUDITED)
                                  (IN MILLIONS)


<TABLE>
<CAPTION>
                                                                                   August 31           November 30
                                                                                     2001                  2000
                                                                                ----------------     -----------------
<S>                                                                               <C>                   <C>
ASSETS
Cash and cash equivalents                                                          $     431             $  2,323

Cash and securities segregated and on deposit for regulatory and
     other purposes                                                                    2,132                1,988

Securities and other financial instruments owned:
     Governments and agencies                                                         18,397               18,101
     Corporate equities                                                               19,774               21,278
     Mortgages and mortgage-backed                                                     7,770                8,328
     Corporate debt and other                                                          7,909                7,770
     Derivatives and other contractual agreements                                      5,949                5,285
     Certificates of deposit and other money market instruments                        2,128                3,433
                                                                                ----------------     -----------------
                                                                                      61,927               64,195
                                                                                ----------------     -----------------

Collateralized short-term agreements:
     Securities purchased under agreements to resell                                  75,429               77,808
     Securities borrowed                                                              25,496               18,876

Receivables:
     Brokers, dealers and clearing organizations                                       5,843                2,302
     Customers                                                                         2,518                4,302
     Others                                                                           10,405                7,511

Property, equipment and leasehold improvements (net of accumulated
   depreciation and amortization of $381 in 2001
   and $504 in 2000)                                                                     394                  318

Other assets                                                                             419                  417

Excess of cost over fair value of net assets acquired (net of
  accumulated amortization of $129 in 2001 and $122 in 2000)                             157                  163
                                                                                ----------------     -----------------
     Total assets                                                                  $ 185,151            $ 180,203
                                                                                ================     =================
</TABLE>





                See notes to consolidated financial statements.

                                       5
<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - (CONTINUED)
                                   (UNAUDITED)
                        (IN MILLIONS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                             August 31           November 30
                                                                                                 2001                 2000
                                                                                            ---------------     -----------------
<S>                                                                                          <C>                   <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt                                                         $                     $    741
                                                                                                    826
Securities and other financial instruments sold but not yet purchased:
     Governments and agencies                                                                    19,329               8,542
     Derivatives and other contractual agreements                                                 4,799               3,824
     Corporate equities                                                                           3,033               2,159
     Corporate debt and other                                                                     4,160               2,909
                                                                                            ---------------     -----------------
                                                                                                 31,321              17,434
                                                                                            ---------------     -----------------
Collateralized short-term financing:
     Securities sold under agreements to repurchase                                              85,949             105,611
     Securities loaned                                                                           25,914              24,082
Advances from Holdings and other affiliates                                                      22,421              15,045
Payables:
     Brokers, dealers and clearing organizations                                                  2,121               3,320
     Customers                                                                                    4,850               4,058
Accrued liabilities and other payables                                                            2,317               2,481
Long-term debt:
     Senior notes                                                                                 1,894                 207
     Subordinated indebtedness                                                                    4,202               3,586
                                                                                            ---------------     -----------------
         Total liabilities                                                                      181,815             176,565
                                                                                            ---------------     -----------------

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                                                                        1,683               1,683
Accumulated other comprehensive income                                                                2                   2
Retained earnings                                                                                 1,651               1,953
                                                                                            ---------------     -----------------
         Total stockholder's equity                                                               3,336               3,638
                                                                                            ---------------     -----------------
         Total liabilities and stockholder's equity                                            $185,151           $ 180,203
                                                                                            ===============     =================

</TABLE>



                See notes to consolidated financial statements.

                                       6
<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
                                  (IN MILLIONS)

<TABLE>
<CAPTION>
                                                                                               Nine months ended
                                                                                      --------------------------------------
                                                                                         August 31             August 31
                                                                                            2001                 2000
                                                                                      -----------------     ----------------
<S>                                                                                   <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                            $       750           $       738
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                                                             64                    28
     Other adjustments                                                                        (20)                   40
Net change in:
     Cash and securities segregated                                                          (144)                 (955)
     Securities and other financial instruments owned                                       2,396               (15,636)
     Securities borrowed                                                                   (6,620)              (11,181)
     Receivables from brokers, dealers and clearing organizations                          (3,541)                  350
     Receivables from customers                                                             1,784                  (869)
     Securities and other financial instruments sold but not yet purchased                 13,887                 5,894
     Securities loaned                                                                      1,832                16,356
     Payables to brokers, dealers and clearing organizations                               (1,199)                 (274)
     Payables to customers                                                                    792                   771
     Other operating assets and liabilities, net                                           (3,084)               (1,701)
                                                                                      -----------------     ----------------
         Net cash provided by operating activities                                          6,897                (6,439)
                                                                                      -----------------     ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes                                                      1,765                     -
Principal payments of senior notes                                                           (207)                    -
Proceeds from issuance of subordinated indebtedness                                           800                     -
Principal payments of subordinated indebtedness                                              (194)                    -
Net proceeds from commercial paper and short-term debt                                         85                   221
Resale agreements net of repurchase agreements                                            (17,283)                3,730
Increase in advances from Holdings and other affiliates                                     7,376                 1,548
Dividends paid                                                                             (1,060)                  (65)
                                                                                      -----------------     ----------------
         Net cash used in financing activities                                             (8,718)                5,434
                                                                                      -----------------     ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements                                   (71)                  (40)
                                                                                      -----------------     ----------------
         Net cash used in investing activities                                                (71)                  (40)
                                                                                      -----------------     ----------------
         Net change in cash and cash equivalents                                           (1,892)               (1,045)
                                                                                      -----------------     ----------------
Cash and cash equivalents, beginning of period                                              2,323                 1,384
                                                                                      -----------------     ----------------
         Cash and cash equivalents, end of period                                     $       431           $       339
                                                                                      =================     ================
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)

Interest paid totaled $10,869 and $11,926 for the nine months ended August 31,
2001 and August 31, 2000, respectively. Income taxes paid totaled $571 and $412
for the nine months ended August 31, 2001 and August 31, 2000.

                See notes to consolidated financial statements.

                                       7
<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, 2000 (the "Form 10-K"). The Consolidated Statement of Financial Condition at
November 30, 2000 was derived from the audited financial statements.

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

2.   CAPITAL REQUIREMENTS:

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 August 31, 2001, LBI's regulatory net
capital, as defined, of $1,618 million exceeded the minimum requirement by
$1,512 million.

As a clearing broker-dealer, the Company has elected to compute a reserve
requirement for Proprietary Accounts of Introducing Broker-Dealers ("PAIB
calculation"). The PAIB calculation is completed in order for each correspondent
firm that uses the Company as its clearing broker-dealer to classify its assets
held by the Company as allowable assets in the correspondent's net capital
calculation. At August 31, 2001, the Company had a reserve requirement for PAIB
of $6 million. Additionally, the Company had $55 million of qualified securities
or cash on deposit in a Special Reserve Bank Account as of August 31, 2001.

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 August 31, 2001, LBFP and LBDP each had capital
which exceeded the requirement of the most stringent rating agency by
approximately $58 million and $26 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.

                                        8

<PAGE>

                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   DERIVATIVE FINANCIAL INSTRUMENTS:

Effective December 1, 2000, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which requires that all
derivative instruments be reported on the consolidated statement of financial
condition at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The adoption of SFAS No. 133, as of
December 1, 2000, did not have a material effect on the Company's consolidated
statement of financial condition or the results of operations.

Most of the Company's derivative transactions are entered into for trading
related activities for which the adoption of SFAS No. 133 had no impact. The
Company's trading related derivative activities are marked-to-market through
earnings as a component of Principal Transactions revenues. The Company also
utilizes derivatives for non-trading purposes as an end user to modify the
market risk exposures of certain assets and liabilities. In this regard, the
Company primarily enters into fair value hedges utilizing interest rate swaps to
convert a substantial portion of the Company's fixed rate long-term debt and
certain term fixed rate secured financing activities to a floating interest
rate. The ineffective portion of the fair value hedges were included in
"Interest Expense" on the consolidated statement of income and were not material
to the Company's results for the three and nine months ended August 31, 2001.

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 represent estimates of expected losses which incorporate business
and economic conditions, historical experience, concentrations, and the
character, quality and performance of credit sensitive financial instruments.

Unrealized gains and losses on derivative contracts are recorded on a net basis
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 of the Company's
trading-related derivative activities. Assets and liabilities represent net
unrealized gains (amounts receivable from counterparties) and net unrealized
losses (amounts payable to counterparties), respectively.

<TABLE>
<CAPTION>
                                                                   FAIR VALUE*                        FAIR VALUE*
                                                                 AUGUST 31, 2001                   NOVEMBER 30, 2000
                                                         --------------------------------- ----------------------------------
(in millions)                                               ASSETS          LIABILITIES       ASSETS           LIABILITIES
-------------------------------------------------------- --------------    --------------- --------------     ---------------
<S>                                                          <C>                <C>            <C>                <C>
Interest rate and currency swaps and options
  (including caps, collars and floors)                       $ 4,290            $ 3,075        $ 3,918            $ 2,331
Foreign exchange forward contracts and options                   371                365            305                285
Other fixed income securities contracts (including
  options and TBAs)                                              556                621            412                415
Equity contracts (including equity swaps, warrants
  and options)                                                   732                738            650                793
                                                         --------------    --------------- --------------     ---------------
         TOTAL                                               $ 5,949            $ 4,799        $ 5,285            $ 3,824
                                                         --------------    --------------- --------------     ---------------
</TABLE>

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

                                       9
<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Assets included in the table above represent the Company's net receivable/
payable for derivative financial instruments before consideration of collateral.
Included within the $5,949 million fair value of assets at August 31, 2001 was
$5,217 million related to swaps and other OTC contracts and $732 million related
to exchange-traded option and warrant contracts. Included within the $5,285
million fair value of assets at November 30, 2000 was $4,638 million related to
swaps and other OTC contracts and $647 million related to exchange-traded option
and warrant contracts.

With respect to OTC contracts, including swaps, the Company views its net credit
exposure to be $4,328 million at August 31, 2001, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after consideration
of collateral. Presented below is an analysis of the Company's net credit
exposure at August 31, 2001 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                       22%
        2                AA-/Aa3 or higher                  27%
        3                 A-/A3 or higher                   29%
        4               BBB-/Baa3 or higher                 17%
        5                BB-/Ba3 or higher                   3%
        6                 B+/B1 or lower                     2%

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

For a further discussion of the Company's derivative related activities, refer
to Notes 1 and 8 to the Consolidated Financial Statements included in the Form
10-K.

4.   SECURITIZATIONS:

The Company is a market leader in the mortgage- and asset-backed securitization
market. In connection with these activities, the Company securitizes commercial
and residential mortgages, home equity loans, government and corporate bonds,
and lease and trade receivables. Lehman Brothers may retain an interest in the
financial assets it securitizes ("Retained Interests") which may include assets
in the form of residual interests or one or more subordinate tranches. The
Company records its Securities and Other Financial Instruments Owned, including
Retained Interests, at fair value with changes in fair value reported in
earnings. Fair value is determined based upon listed market prices, if
available. Where listed market prices are not available, fair value is
determined based on other relevant factors, including broker or dealer price
quotations and valuation pricing models which take into account time value and
volatility factors underlying the financial instruments among other factors.
Retained interests in securitized assets were not material as of August 31,
2001. During the third quarter of 2001, the Company securitized approximately
$21.6 billion of financial assets.

                                       10

<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 collateralized lending arrangements of approximately
$2.2 billion, $3.1 billion and $3.0 billion at August 31, 2001, May 31, 2001 and
November 30, 2000, respectively. These commitments require borrowers to provide
acceptable collateral, as defined in the agreements, when amounts are drawn
under the lending facilities. Advances made under the above lending arrangements
are typically at variable interest rates and generally provide for
over-collateralization based upon the borrowers' creditworthiness.

In addition, the Company, through its high grade and high yield sales, trading
and underwriting activities, makes commitments to extend credit in loan
syndication transactions and then participates out a significant portion of
these commitments. The Company had lending commitments to high grade borrowers
of $3.0 billion, $3.2 billion and $2.7 billion at August 31, 2001, May 31, 2001
and November 30, 2000, respectively. In addition, lending commitments to high
yield borrowers totaled $1.1 billion, $918 million and $935 million at August
31, 2001, May 31, 2001 and November 30, 2000, respectively. All of these
commitments and any related draw-downs of these facilities are typically secured
against the borrowers' assets, have fixed maturity dates and are generally
contingent upon certain representations, warranties and contractual conditions
applicable to the borrower. Total commitments are not indicative of actual risk
or funding requirements, as the commitments may not be drawn or fully utilized,
and the Company will continue to syndicate and/or sell these commitments.

At August 31, 2001 and November 30, 2000, the Company had commitments to invest
up to $167 million and $282 million, respectively, directly and through
partnerships in private equity related investments. These commitments will be
funded as required through the end of the respective investment periods,
principally expiring in 2004.

In the normal course of its business, the Company has been named a defendant in
a number of lawsuits and other legal proceedings. Although there can be no
assurances as to the ultimate outcome, the Company has denied, or believes it
has a meritorious defense and will deny, liability in all significant cases
pending against it, and intends to defend vigorously each such case, and based
on information currently available, the Company believes that the eventual
outcome of the actions against it will not, in the aggregate, have a material
adverse effect on the consolidated financial position or results of operations
of the Company.

At August 31, 2001, the net fair value of securities received as collateral that
have not been sold or repledged totaled approximately $5 billion. The gross fair
value of securities received as collateral where the Company was permitted to
sell or repledge the securities was approximately $150 billion. Of this
collateral, approximately $145 billion has been sold or repledged, generally as
collateral under repurchase agreements or to cover securities and other
financial instruments sold but not yet purchased.

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

                                       11
<PAGE>

                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   SEGMENTS:

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

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

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

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

The Company's segment information for the three and nine months ended August 31,
2001 and August 31, 2000 is presented below and was developed consistent with
the accounting policies used to prepare the Company's consolidated financial
statements.

                                       12
<PAGE>

                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                             Three Months Ended                            Nine Months Ended
                                     -----------------------------------          ------------------------------------
                                        August 31          August 31                August 31            August 31
(in millions)                             2001               2000                      2001                2000
                                     ----------------   ----------------          ---------------     ----------------
<S>                                   <C>                <C>                       <C>                 <C>
Investment Banking:
   Net Revenue                        $     255          $     437                 $  1,029            $  1,102
                                     ================   ================          ===============     ================
   Earnings before taxes              $      52          $     119                 $    204            $    235
                                     ================   ================          ===============     ================
   Segment assets (billions)          $     0.7          $     0.6                 $    0.7            $    0.6
                                     ================   ================          ===============     ================

Capital Markets:
   Net Revenue                        $     224          $     695                 $  1,882            $  1,912
                                     ================   ================          ===============     ================
   Earnings before taxes              $      12          $     266                 $    695            $    688
                                     ================   ================          ===============     ================
   Segment assets (billions)          $   180.6          $   175.0                 $  180.6            $  175.0
                                     ================   ================          ===============     ================

Client Services:
   Net Revenue                        $     195          $     171                 $    567            $    518
                                     ================   ================          ===============     ================
   Earnings before taxes              $      60          $      53                 $    165            $    177
                                     ================   ================          ===============     ================
   Segment assets (billions)          $     3.9          $     4.7                 $    3.9            $    4.7
                                     ================   ================          ===============     ================

Total:
   Net Revenue                        $     674          $   1,303                 $  3,478            $  3,532
                                     ================   ================          ===============     ================
   Earnings before taxes              $     124          $     438                 $  1,064            $  1,100
                                     ================   ================          ===============     ================
   Segment assets (billions)          $   185.2          $   180.3                 $  185.2            $  180.3
                                     ================   ================          ===============     ================
</TABLE>

The following are net revenues by geographic region:

<TABLE>
<CAPTION>

                                                   Three Months Ended                        Nine Months Ended
                                              ------------------------------          --------------------------------
                                               August 31        August 31              August 31         August 31
(in millions)                                     2001             2000                   2001              2000
                                              -------------    -------------          -------------    ---------------
<S>                                               <C>             <C>                    <C>               <C>
Americas                                          $ 585           $1,192                 $ 3,065           $ 3,131
Europe                                               65               71                     349               245
Asia Pacific                                         24               40                      64               156
                                              -------------    -------------          -------------    ---------------
      Total                                       $ 674           $1,303                 $ 3,478           $ 3,532
                                              =============    =============          =============    ===============
</TABLE>

The following information describes the Company's methods of allocating
consolidated net revenues to geographic regions. Net revenues, if syndicate,
trading or sales related, have been allocated based upon the location where the
primary or secondary position was fundamentally risk managed; if fee-related, by
the location of the senior coverage banker. In addition, certain revenues
associated with domestic products and services which resulted from relationships
with international clients and customers have been reclassified as international
revenues using an allocation consistent with the Company's internal reporting.

                                       13

<PAGE>


                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   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.

8.   SUBSEQUENT EVENTS:

As a result of damage sustained from the September 11, 2001, terrorist attacks
on the World Trade Center in New York, the Company's workforce located in the
World Financial Center complex and the World Trade Center was displaced.

Key business activities and necessary support functions were quickly relocated
to the Company's back-up facilities in Jersey City, New Jersey, and to various
other temporary sites. The Company has been informed that its offices in the
World Financial Center complex can be repaired, although no timetable has yet
been established for completion. In October 2001, the Company signed a letter of
intent to acquire a new one million square foot building at 745 Seventh Avenue
in New York City. The Company intends to relocate its principal executive
offices to this site.

The displacement and relocation of the Company's workforce, the closure of
certain markets for certain periods following the terrorist attacks and other
issues directly related to the September 11th tragedy have impacted the
Company's business and may affect the business for the fourth quarter. The
Company has substantial insurance in place covering the loss of its offices at
the World Trade Center and damages to facilities at the World Financial Center
complex, as well as for losses resulting from business interruption and for
extra expenses associated with the Company's temporary relocation efforts.




                                       14

<PAGE>


ITEM 2                LEHMAN BROTHERS INC. AND SUBSIDIARIES
                 MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Management's Analysis of Results of
Operations, including those relating to the Company's strategy and other
statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates" and similar expressions, are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. These statements are not historical facts but instead
represent only the Company's expectations, estimates and projections regarding
future events. These statements are not guarantees of future performance and
involve certain risks and uncertainties that are difficult to predict, which may
include market, credit or counterparty, liquidity, legal and operational risks.
Market risks include changes in interest and foreign exchange rates and
securities valuations, global economic and political trends and industry
competition. The Company's actual results and financial condition may differ,
perhaps materially, from the anticipated results and financial condition in any
such forward-looking statements. The Company undertakes no obligation to update
any forward-looking statements, whether as a result of new information, future
events or otherwise.

RECENT EVENTS

The September 11, 2001, terrorist attacks on the World Trade Center and the
Pentagon caused securities market and other business closures and disruptions
and forced the Company to temporarily relocate its New York headquarters and
operations. The terrorist attacks, the allied military response and subsequent
developments may impact the global economy. All of these factors may affect the
Company's future results of operations. In October of 2001, Lehman Brothers
signed a letter of intent to acquire a new building at 745 Seventh Avenue in New
York City, which contains approximately one million square feet of space and is
not expected to be ready for occupancy until sometime in fiscal 2002. The
Company intends to relocate its principal executive offices to this site.

RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 2001 AND AUGUST 31, 2000

The Company reported net income of $107 million for the quarter ended August 31,
2001, a decrease of 65% from the third quarter of 2000 as a result of extremely
difficult market conditions. Throughout the quarter, the Company continued to
maintain its discipline toward managing expenses, risk and liquidity as well as
capital deployment and utilization. For the quarter, non-personnel expenses
decreased 3% from the third quarter of 2000 and 7% from the second quarter of
2001.

The Company is segregated into the following three business segments (each of
which is described below): Investment Banking, Capital Markets and Client
Services. Each segment represents a group of activities and products with
similar characteristics. These business activities result in revenues from both
institutional and high-net-worth retail clients which are recognized across the
different revenue categories contained in the Company's Consolidated Statement
of Income. (Net revenues by segment also contain certain internal allocations,
including funding costs, which are centrally managed.)

                                       15
<PAGE>

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

THREE MONTHS ENDED AUGUST 31, 2001 AND AUGUST 31, 2000

(in millions)                                      Net Revenues
                                                      For the
                                                Three Months Ended
                                         ----------------------------------
                                            August 31          August 31
                                               2001               2000
                                         ---------------    ---------------
Investment Banking                           $  255           $    437
Capital Markets                                 224                695
Client Services                                 195                171
                                         ---------------    ---------------
Total                                        $  674            $ 1,303
                                         ===============    ===============


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

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

Investment Banking's net revenues decreased 42% during the third quarter to $255
million from $437 million in the third quarter of 2000, as strong fixed income
underwriting activity was more than offset by a decrease in equity origination
activity and merger and acquisition fees.


              INVESTMENT BANKING NET REVENUES
--------------------------------------------------------
(in millions)                      Three Months Ended
                                 August 31   August 31
                                    2001        2000
-------------------------------- ----------- -----------
Debt Underwriting                   $ 182       $ 125
Equity Underwriting                    29         144
Merger and Acquisition Advisory        44         168
-------------------------------- ----------- -----------
                                    $ 255       $ 437
-------------------------------- ----------- -----------

Debt underwriting revenues totaled $182 million for the third quarter of 2001, a
46% increase over last year's third quarter. Fixed income origination benefited
this quarter as issuers continued to move to raise lower-coupon long-term debt
to replace short-term financing. Also, contributing to these results was an
increase in the Company's global market share for debt origination, which grew
to 6.7% for the first nine calendar months of 2001 from 5.9% for calendar year
2000, according to Thompson Financial Securities Data Corp ("TFSD").

Equity origination revenues were down significantly compared to the year-ago
period, as industry-wide equity underwriting declined. However, during the
quarter the Company continued to grow its equity underwriting market share.
Global equity origination volume share increased more than 60% to 5.4% through
August 31, 2001 year-to-date versus full calendar year 2000, according to TFSD.

Merger and acquisition advisory fees decreased 74% compared to last year's third
quarter as volume for completed deals has decreased almost 60% during that
period.

CAPITAL MARKETS This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to fixed
income and equity products. These products include a wide range of cash,
derivative, secured financing and structured instruments.

                                       16

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

Capital Markets' net revenues were $224 million for the third quarter of 2001,
down 68% from the third quarter of 2000 as difficult economic conditions led to
lower revenues. Overall, the Company continued to have strong institutional
customer flow activity across a wide range of products. This customer flow
business provides the Company with a relatively stable form of revenues as
customers continually rebalance their portfolios across market cycles with the
full array of capital market products that are provided by the Company

             CAPITAL MARKETS NET REVENUES
--------------------------------------------------------
(in millions)                      Three Months Ended
                                 August 31   August 31
                                    2001        2000
-------------------------------- ----------- -----------
Fixed Income                        $ 177       $ 338
Equities                               47         357
-------------------------------- ----------- -----------
                                    $ 224       $ 695
-------------------------------- ----------- -----------

Net revenues from the fixed income and the equities component of Capital Markets
decreased significantly during the third quarter of 2001, as a slowdown in the
growth of the U.S. economy and a decrease in market volatility resulted in weak
market conditions.

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

Client Services' net revenues were $195 million in the third quarter of 2001, up
14% from the third quarter of 2000. Although retail market activity declined
significantly during the quarter, the high-net-worth sector in which the Company
operates was less affected. For the third quarter, high-net-worth sales
increased slightly compared to the third quarter of 2000, as a result of strong
fixed income activity as investors adjusted their portfolios to compensate for
the volatile market environment. Private equity revenues increased principally
due to a $20 million incentive fee recognized from the Company's general partner
interest in a single Merchant Banking investment.


               CLIENT SERVICES NET REVENUES
--------------------------------------------------------
(in millions)                      Three Months Ended
                                 August 31   August 31
                                    2001        2000
-------------------------------- ----------- -----------
Private Client                      $ 171       $ 168
Private Equity                         24           3
-------------------------------- ----------- -----------
                                    $ 195       $ 171
-------------------------------- ----------- -----------


Non-Interest Expenses Non-interest expenses were $550 million for the third
quarter of 2001 compared to $865 million for the third quarter of 2000.
Compensation and benefits expense as a percentage of net revenues was 51% for
the quarter. The compensation accrual percentage is consistent with the
Company's fiscal 2000 level. Non-personnel expenses were $206 million for the
third quarter of 2001, relatively flat compared to the third quarter of 2000 as
increased technology and brokerage and clearance costs were offset by lower
management fees incurred.

Income Taxes The Company's income tax provision was $17 million for the third
quarter of 2001 versus $134 million for the third quarter of 2000. The decrease
in the tax rate reflects a greater impact of tax preference revenues on a lower
pre-tax income base.

                                       17

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


RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 31, 2001 AND AUGUST 31, 2000

The Company reported net income of $750 million for the nine months ended August
31, 2001, an increase of 2% from the nine months ended August 31, 2000.

These results reflect the Company's continued ability to execute its strategy of
growing its high margin investment banking and equities businesses while at the
same time maintaining a strict discipline with regard to its expenses, all
during an extremely difficult market environment. Net revenues were $3,478
million for the first nine months of 2001 compared to $3,532 million for the
first nine months of 2000.

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

NINE MONTHS ENDED AUGUST 31, 2001 AND AUGUST 31, 2000

----------------------------------------------------------------------------
(in millions)                                   Net Revenues
                                                   for the
                                              Nine Months Ended
                                      ----------------------------------
                                         August 31          August 31
                                            2001               2000
                                      ---------------    ---------------
Investment Banking                       $ 1,029            $ 1,102
Capital Markets                            1,882              1,912
Client Services                              567                518
                                      ---------------    ---------------
Total                                    $ 3,478            $ 3,532
                                      ===============    ===============

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

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

INVESTMENT BANKING This segment's net revenues result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities, and advising clients on merger and acquisition activities and other
services. Investment Banking's net revenues of $1,029 million decreased 7% in
the first nine months of 2001 when compared to $1,102 million for the first nine
months of 2000. The decrease was primarily due to a decrease in equity
underwriting and merger and acquisition advisory revenues partially offset by
strong results in debt underwriting.


Debt underwriting revenues increased 75% to $582 million in the first nine
months of 2001 from $332 million for the first nine months of 2000. The increase
was primarily due to an increase in fixed income issuances combined with a
increase in the Company's market share to 6.7% for the nine months ended August
31, 2001 compared to 5.9% for calendar year 2000, according to TFSD.

--------------------------------------------------------
            INVESTMENT BANKING NET REVENUES
--------------------------------------------------------
(in millions)                      Nine Months Ended
                                 August 31   August 31
                                    2001        2000
-------------------------------- ----------- -----------
Debt Underwriting                 $   582     $   332
Equity Underwriting                   224         422
Merger and Acquisition Advisory       223         348
-------------------------------- ----------- -----------
                                   $1,029      $1,102
-------------------------------- ----------- -----------

                                       18

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

Equity underwriting revenues were $224 million for the first nine months of 2001
compared to $422 million for the first nine months of 2000. Although the
Company's market share for the first nine months of 2001 was up over 12% from
the first nine months of 2001, according to TFSD, results decreased as
industry-wide equity underwriting activities were down over 25%.

Merger and acquisition advisory revenues for the first nine months of 2001
decreased 36% when compared to the first nine months of 2000 driven by a 32%
industry-wide decrease in completed market volume.

CAPITAL MARKETS This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to fixed
income and equity products. These products include a wide range of cash,
derivative, secured financing and structured instruments.


Capital Markets' net revenues were $1,882 million for the first nine months of
2001, down 2% from the first nine months of 2000, as an extremely weak market
environment was partially offset by strong institutional customer flow activity.

---------------------------------------------------------
              CAPITAL MARKETS NET REVENUES
---------------------------------------------------------
(in millions)                       Nine Months Ended
                                  August 31   August 31
                                    2001         2000
-------------------------------- ------------ -----------
Fixed Income                      $ 1,124      $   909
Equities                              758        1,003
-------------------------------- ------------ -----------
                                  $ 1,882      $ 1,912
-------------------------------- ------------ -----------


Net revenues from the fixed income component of Capital Markets increased to
$1,124 million for the first nine months of 2001 compared to $909 million for
the first nine months of 2000. These record results were driven by strong
institutional customer flow activity as clients moved into interest-rate based
products.

Net revenues from the equity component of Capital Markets decreased 24% to $758
million for the first nine months of 2001 compared to $1,003 million for the
first nine months of 2000. This decrease was driven by reduced volatility levels
versus the same period last year, spread compression beginning in the second
quarter of 2001 from NASDAQ decimalization and declines in revenues from both
private equity and risk arbitrage investments from year-ago levels, partially
offset by stronger results in institutional customer flow activity and
convertible securities.

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

Client Services' net revenues were $567 million for the first nine months of
2001 compared to $518 million for the first nine months of 2000. Client
Services' results improved primarily due to strong fixed income activity as the
Company's high-net-worth investors adjusted their portfolios to compensate for
volatile equity market environment. In addition, private equity revenues
increased from the year-ago period due to a $20 million incentive fee recognized
from the Company's general partner interest in a single Merchant Banking
investment.

--------------------------------------------------------
               CLIENT SERVICES NET REVENUES
--------------------------------------------------------
(in millions)                      Nine Months Ended
                                August 31    August 31
                                   2001        2000
------------------------------- ----------- ------------
Private Client                    $  541      $  512
Private Equity                        26           6
------------------------------- ----------- ------------
                                  $  567      $  518
------------------------------- ----------- ------------

                                       19
<PAGE>
                      LEHMAN BROTHERS INC. AND SUBSIDIARIES
                 MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS


Non-Interest Expenses    Non-interest expenses were $2,414 million for the first
nine months of 2001 and $2,432 million for the comparable period of 2000.
Compensation and benefits expense as a percentage of net revenues were 51%,
which is consistent with the Company's fiscal 2000 level. Non-personnel expenses
were $641 million for the first nine months of 2001 and $613 million for the
first nine months of 2000, an increase of approximately 5% reflecting the
Company's strategic growth plan.

Income Taxes    The Company's income tax provision was $314 million for the nine
months of 2001 compared to $362 million for the nine months of 2000. The
effective tax rate was 29.5% for the first nine months of 2001 compared to 32.9%
for the first nine months of 2000. The decrease in the tax rate reflects a
greater impact of tax preference revenues on a lower pre-tax income base.

NEW ACCOUNTING DEVELOPMENTS

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB No. 125" ("SFAS 140"). SFAS 140 carries over the fundamental control
premise of SFAS No. 125, which requires an entity to recognize only assets it
controls and to derecognize assets only when control has been surrendered. SFAS
140 amends the control framework of SFAS 125 by revising the criteria to be used
for evaluating whether a financial asset is controlled and providing new
criteria necessary to meet the definition of a Qualifying Special Purpose Entity
("QSPE"). A QSPE is a limited-purpose vehicle often used for asset
securitizations.

SFAS 140 will also change the accounting for collateral. SFAS 140 will no longer
require entities to recognize controlled collateral as an asset on the balance
sheet. Rather, SFAS 140 will require entities to separately classify financial
assets owned and pledged. SFAS 140 also requires new disclosures for collateral
and retained interests in securitizations.

SFAS 140 has multiple effective dates. The accounting for new transfers of
financial assets began on March 31, 2001 and the collateral disclosure rules
began this quarter. The collateral accounting rules will be effective for the
Company's year-end financial statements. The adoption of SFAS 140 is not
expected to have a material impact to the Company's financial position or
results of operations.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangibles Assets". SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under SFAS No. 142, intangible assets with indefinite lives and
goodwill will no longer be required to be amortized. Instead, these assets will
be tested annually for impairment. The Company will adopt the provisions of SFAS
No. 142 at the beginning of fiscal year 2002 and does not expect the adoption to
have a material impact to the Company's financial position or results of
operations.


                                       20

<PAGE>



                      LEHMAN BROTHERS INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 1   LEGAL PROCEEDINGS

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

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

Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. Minmetals International Non-Ferrous Metals Trading Company (Reported in
LBI's 2000 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the
quarter ended May 31, 2001)

         The trial date has been postponed to December 10, 2001.



                                       21




<PAGE>


                 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION


ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K


(a)      Exhibits:

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

         3.1      Restated Certificate of Incorporation of the Registrant dated
                  September 3, 1981 (Incorporated by reference to Exhibit 3.1 to
                  the Registrant's Annual Report on Form 10-K for the year ended
                  December 31, 1987)

         3.2      Certificate of Amendment to Restated Certificate of
                  Incorporation of the Registrant dated May 11, 1984
                  (Incorporated by reference to Exhibit 3.2 to the Registrant's
                  Annual Report on Form 10-K for the year ended December 31,
                  1988)

         3.3      Certificate of Amendment to Restated Certificate of
                  Incorporation of the Registrant, dated March 6, 1985
                  (Incorporated by reference to Exhibit 3.3 to the Registrant's
                  Annual Report on Form 10-K for the year ended December 31,
                  1985)

         3.4      Certificate of Amendment to Restated Certificate of
                  Incorporation of the Registrant, dated August 31, 1987
                  (Incorporated by reference to Exhibit 3.4 to the Registrant's
                  Annual Report on Form 10-K for the year ended December 31,
                  1987)

         3.5      Certificate of Amendment to Restated Certificate of
                  Incorporation of the Registrant, dated January 28, 1988
                  (Incorporated by reference to Exhibit 3.5 to the Registrant's
                  Annual Report on Form 10-K for the year ended December 31,
                  1987)

         3.6      Certificate of Amendment to Restated Certificate of
                  Incorporation of the Registrant, dated July 19, 1990.
                  (Incorporated by reference to Exhibit 3.6 to the Registrant's
                  Annual Report on Form 10-K for the year ended December 31,
                  1990)

         3.7      Certificate of Amendment to Restated Certificate of
                  Incorporation of the Registrant, dated August 2, 1993
                  (Incorporated by reference to Exhibit 3 to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  1993)

         3.8      Certificate of Designations of Floating Rate Preferred Stock,
                  filed April 30, 1996 (Incorporated by reference to Exhibit 3.8
                  to the Registrant's Annual Report on Form 10-K for the year
                  ended December 31, 1996)

         3.9      By-Laws of the Registrant, amended as of January 30, 1997
                  (Incorporated by reference to Exhibit 3.9 to the Registrant's
                  Annual Report on Form 10-K for the year ended December 31,
                  1996)

         12.1     Computation of Ratio of Earnings to Fixed Charges (Filed
                  herewith)

                                       22

<PAGE>


                 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION


(b)      Reports on Form 8-K:

         The following reports on Form 8-K were filed during the quarter for
which this Quarterly Report is filed:

         None


                                       23
<PAGE>



                                    SIGNATURE



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



                                               LEHMAN BROTHERS INC.
                                                        (Registrant)




Date:    October 15, 2001                   By:      /s/ David Goldfarb
                                                 -----------------------------
                                                    Chief Financial Officer
                                                 (Principal Financial Officer)







                                       24






<PAGE>


                                  EXHIBIT INDEX



EXHIBIT NO.                EXHIBIT
-----------                -------
Exhibit 12.1               Computation of Ratio of Earnings to Fixed Charges


                                       25