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 August 31, 1996

                                       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 incorporation)             (I.R.S. Employer
                                                           Identification No.)
          3 World Financial Center
              New York, New York                                 10285
             (Address of principal                             (Zip Code)
                executive offices)

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

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

The Registrant  meets the  conditions set forth in General  Instructions H 1 (a)
and (b) of Form  10-Q and  therefore  is  filing  this  form  with  the  reduced
disclosure format contemplated thereby.

As of October 11, 1996 1,006 shares of the Registrant's  Common Stock, par value
$.10 per share, were issued and outstanding.
                    
<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                      FOR THE QUARTER ENDED AUGUST 31, 1996

                                      INDEX

Part I.    FINANCIAL INFORMATION                                   Page Number

  Item 1.  Financial Statements - (unaudited)

                Consolidated Statement of Operations -
                  Three and Nine Months Ended August 31, 1996
                  and 1995                                                  3


                Consolidated Statement of Financial Condition -
                  August 31, 1996 and November 30, 1995                     5

                Consolidated Statement of Cash Flows -
                  Nine Months Ended August 31, 1996
                  and 1995                                                  7

                       Notes to Consolidated Financial Statements           9

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

Part II.          OTHER INFORMATION

  Item 1.  Legal Proceedings                                               28

  Item 6.  Exhibits and Reports on Form 8-K                                31

Signatures                                                                 32
   
EXHIBIT INDEX                                                              33

Exhibits




<PAGE>


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

                                                          Three months ended
                                                   August 31,         August 31,
                                                     1996                 1995
                                                 -------------       -----------
Revenues
    Principal transactions                            $    85           $   159
    Investment banking                                    189               186
    Commissions                                            65               100
    Interest and dividends                              2,717             2,634
    Other                                                     1               7
                                                       --------        --------
         Total revenues                                 3,057             3,086
     Interest expense                                   2,614             2,525
                                                        -----             -----
         Net revenues                                     443               561
                                                       ------             -----
Non-interest expenses
     Compensation and benefits                            267               306
     Brokerage, commissions and clearance fees             51                47
     Communications                                        24                29
     Occupancy and equipment                               20                20
     Business development                                  17                18
     Professional services                                 16                17
     Depreciation and amortization                         13                15
     Management fees                                        7                24
     Other                                                 38                24
                                                       ------           -------
          Total non-interest expenses                     453               500
                                                        -----            ------
Income (loss) before taxes                                (10)               61
      Provision for (benefit from) income taxes           (10)               22
                                                        -----            ------
Net income (loss)                                     $     0            $   39
                                                      =======            ======





                 See notes to consolidated financial statements.

<PAGE>



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

                                                         Nine months ended
                                                 August 31,           August 31,
                                                    1996                 1995
                                               -------------          ---------
Revenues
    Principal transactions                         $  671              $  498
    Investment banking                                523                 407
    Commissions                                       223                 300
    Interest and dividends                          7,800               7,623
    Other                                              15                  29
                                                   ------             -------
         Total revenues                             9,232               8,857
     Interest expense                               7,567               7,358
                                                    -----               -----
         Net revenues                               1,665               1,499
                                                    -----               -----
Non-interest expenses
     Compensation and benefits                        884                 753
     Brokerage, commissions and clearance fees        150                 146
     Communications                                    74                  93
     Occupancy and equipment                           57                  64
     Business development                              55                  61
     Professional services                             54                  61
     Depreciation and amortization                     40                  48
     Management fees                                   51                 124
     Other                                            137                  98
                                                   ------             -------
          Total non-interest expenses               1,502               1,448
                                                    -----               -----
Income before taxes                                   163                  51
      Provision for income taxes                       63                   7
                                                  -------            --------
Net income                                         $  100             $    44
                                                   ======             =======


                 See notes to consolidated financial statements.

<PAGE>


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

                                     ASSETS

                                                     August 31,     November 30,
                                                          1996           1995
Cash and cash equivalents                             $   357           $   287

Cash and securities segregated and on deposit
 for regulatory and other purposes                        828               785

Securities and other financial instruments owned:
 Governments and agencies                              17,748            14,038
 Corporate obligations and other contractual 
   commitments                                          6,310             8,115
 Certificates of deposit and other money market
   instruments                                          2,575             2,958
 Mortgages and mortgage-backed                          2,338             3,182
 Corporate stocks and options                           2,589             2,856
                                                        -------          -------
                                                       31,560            31,149
                                                       ------             ------
Collateralized short-term agreements:
 Securities purchased under agreements to resell       26,323            25,982
 Securities borrowed                                   23,411            16,562

Receivables:
 Brokers, dealers and clearing organizations            4,738             2,719
 Customers                                              3,112             2,219
 Others                                                 6,835             2,175

Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
 of $492 in 1996 and $455 in 1995)                        293               333
Deferred expenses and other assets                        190               219

Excess of cost  over  fair  value of net  assets 
  acquired (net of  accumulated amortization of $92
  in 1996  and $86 in 1995)                               168               174
                                                      ----------       ---------
                                                       $97,815          $82,604
                                                       =======           =======



                 See notes to consolidated financial statements.

<PAGE>


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

                      LIABILITIES AND STOCKHOLDER'S EQUITY

                                                     August 31,     November 30,
                                                         1996           1995
                                                     -----------      ----------

Commercial paper and short-term debt                    $  4,844       $  1,008
Securities and other financial instruments sold 
  but not yet purchased:
 Governments and agencies                                  7,369          6,477
 Corporate obligations and other contractual 
     commitments                                           3,104          3,403
 Corporate stocks and options                              2,245          1,195
                                                          -------        -------
                                                          12,718         11,075
                                                          ------         ------
Collateralized short-term financings:
 Securities sold under agreements to repurchase           43,449         41,900
 Securities loaned                                         9,508          2,649

Advances from Holdings and other affiliates                8,162          8,418

Payables:
 Brokers, dealers and clearing organizations               4,413          4,467
 Customers                                                 6,760          5,733

Accrued liabilities and other payables                     1,975          1,829
Long-term debt:
 Senior notes                                                212            420
 Subordinated indebtedness                                 3,793          3,077
                                                          -------         ------
          Total liabilities                               95,834         80,576
                                                          ------          ------

Commitments and contingencies

Stockholder's equity:
 Preferred stock,$.10 par value; 10,000 shares
    authorized; none outstanding
 Common stock, $.10 par value; 10,000 shares
    authorized; 1,006 shares issued and outstanding 
    in 1996 and 1995
 Additional paid-in capital                            2,206              2,353
 Foreign currency translation adjustment                   3                  3
 Accumulated deficit                                    (228)              (328)
                                                        --------         -------
     Total stockholder's equity                       1,981               2,028
                                                        --------         -------
     Total liabilities and stockholder's equity          $97,815        $82,604
                                                       =======           =======




                 See notes to consolidated financial statements.

<PAGE>


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


                                                             Nine months ended
                                                         August 31,   August 31,
                                                            1996         1995
                                                        ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                            $   100        $     44
  Adjustments to reconcile income to net cash (used in)
   provided by operating activities:
    Depreciation and amortization                            40              48
    Provisions for losses and other reserves                 30              22
    Other adjustments                                        15              13
   Net change in:
    Cash and securities segregated                          (43)            626
    Receivables from brokers, dealers and clearing
    organizations                                        (2,019)          1,058
    Receivables from customers                             (893)         (1,032)
    Securities purchased under agreements to resell        (341)          2,388
    Securities borrowed                                  (6,849)         (8,900)
    Securities and other financial instruments owned       (411)            249
    Payables to brokers, dealers and clearing
      organizations                                         (54)           (260)
    Payables to customers                                 1,027           3,675
    Accrued liabilities and other payables                  109            (109)
    Securities sold under agreements to repurchase        1,549             375
    Securities loaned                                     6,859           3,575
    Securities and other financial instruments sold but
        not yet purchased                                 1,643           2,684
    Other operating assets and liabilities, net          (4,625)          1,063
                                                          ------           ----

    Net cash (used in) provided by operating activities   $(3,863)       $5,519
                                                          --------        ------





                 See notes to consolidated financial statements.


<PAGE>


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

                                                              Nine months ended
                                                        August 31,    August 31,
                                                            996          1995
                                                     -----------------  --------
CASH FLOWS FROM FINANCING ACTIVITIES
 Principal payments of senior notes                     $ (210)        $    (97)
 Proceeds from issuance of subordinated indebtedness       975              250
 Principal payments of subordinated indebtedness          (261)             (64)
 Net proceeds from (payments for) commercial paper and
   short-term debt                                       3,835             (500)
 Decrease in advances from Holdings
   and other affiliates                                   (256)          (3,808)
 Capital contributions                                       4
 Dividends and capital distributions paid                 (151)            (475)
                                                         ------          ------
   Net cash provided by (used in) financing activities   3,936           (4,694)
                                                         -----           ------

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchase of property, equipment and
   leasehold improvements                                   (3)             (16)
                                                        --------          ------
 Net cash used in investing activities                       (3)            (16)
                                                        --------          ------
 Net change in cash and cash equivalents                     70             809
                                                         -------          ------
 Cash and cash equivalents, beginning of period             287             361
                                                          ------          ------
 Cash and cash equivalents, end of period                $  357          $1,170
                                                          ======          ======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

             Interest  paid totaled  $7,569 and $7,400 for the nine months ended
August 31, 1996 and 1995,  respectively.  Income  taxes paid totaled $22 and $11
for the nine months ended August 31, 1996 and 1995, 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 (LBI together
with its  subsidiaries,  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 and South America and the Asia Pacific  region.
Holdings provides  investment banking and capital markets services in Europe and
Asia.  The Company is engaged  primarily in providing  financial  services.  The
Company also operates a commodities  trading and sales operation in London.  All
material   intercompany  accounts  and  transactions  have  been  eliminated  in
consolidation.   The  Company's  financial  statements  have  been  prepared  in
accordance  with the  rules  and  regulations  of the  Securities  and  Exchange
Commission  (the  "SEC")  with  respect to the Form 10-Q and  reflect all normal
recurring  adjustments which are, in the opinion of management,  necessary for a
fair presentation of the results for the interim periods presented.  Pursuant to
such rules and  regulations,  certain  footnote  disclosures  which are normally
required under generally accepted accounting  principles have been omitted.  The
Consolidated  Statement of Financial  Condition at November 30, 1995 was derived
from the audited  financial  statements.  It is recommended that these 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, 1995 (the "Form 10-K").

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

2.  Long-Term Debt:

         During the nine months ended August 31, 1996,  the Company  issued $975
million of fixed-rate  subordinated  indebtedness  with maturities  ranging from
2001 to 2026. These issuances have been  effectively  converted to floating rate
obligations,  based on the London Interbank  Offered Rates ("LIBOR") through the
use of interest rate swaps. In addition,  $471 million of long-term debt matured
during the nine months ended August 31, 1996.

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 August 31,  1996,  LBI's  regulatory  net
capital,  as defined,  of $1,708  million  exceeded the minimum  requirement  by
$1,616 million.  The Company's  triple-A rated  derivatives  subsidiary,  Lehman
Brothers Financial Products Inc., has established  certain capital and operating
restrictions which are reviewed by various rating agencies.

         Repayment  of  subordinated   indebtedness  and  certain  advances  and
dividend  payments by LBI are restricted by the regulations of the SEC and other
regulatory agencies. In addition, certain instruments governing the indebtedness
of LBI contractually limit its ability to pay dividends.


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

4.  Derivative Financial Instruments:

         In the normal course of business,  the Company  enters into  derivative
transactions  both in a trading capacity and as an end user. Acting in a trading
capacity,  the Company enters into derivative  transactions to satisfy the needs
of its clients  and to manage the  Company's  own  exposure to market and credit
risks resulting from its trading  activities in cash instruments  (collectively,
"Trading  Related  Derivative  Activities").  For a  further  discussion  of the
Company's derivative related activities,  refer to "Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations - Off-Balance  Sheet
Financial Instruments and Derivatives" and Note 13 to the Consolidated Financial
Statements, included in the Form 10-K.

Trading-Related Derivative Activities

         The Company  records its  Trading-Related  Derivative  Activities  on a
mark-to-market  basis with realized and unrealized gains (losses)  recognized in
principal transactions in the Consolidated Statement of Operations.  The Company
records  unrealized  gains and losses on derivative  contracts on a net basis in
the Consolidated  Statement of Financial  Condition for those  transactions with
counterparties  executed under a legally  enforceable  master netting agreement.
Listed in the  following  table is the fair value and average  fair value of the
Company's Trading Related Derivative Activities (in millions):

                                                             Average Fair Value*
                                                 Fair Value*   Nine Months Ended
                                            August 31, 1996     August 31, 1996
                                             ---------------     ---------------
                                         Assets Liabilities  Assets  Liabilities
-------------------------------------------------------------------------------
Interest rate and currency swaps and options
 (including caps, collars and floors)          $3,527   $1,693    $3,258  $1,675
Foreign exchange forward contracts and options    451      667       632     943
Options on other fixed income securities,
 mortgage-backed securities forward contracts
 and options                                      325      282       242     227
Equity contracts (including equity swaps, 
 warrants and options)                             41       31        52      37
Commodity contracts (including swaps, forwards,
 and options)                                      43       38        40      46
                                               ---------------------------------

Total                                          $4,387   $2,711    $4,224  $2,928
                                               ---------------------------------

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


<PAGE>
                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>


                                                                                                 Average Fair Value*
                                                                      Fair Value*               Twelve Months Ended
                                                                November 30, 1995                     November 30, 1995
                                                                -----------------                     -----------------
                                                                  Assets      Liabilities          Assets       Liabilities
---------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>                <C>           <C>
Interest rate and currency swaps and options
     (including caps, collars and floors)                         $2,672        $2,248             $2,692        $2,060
Foreign exchange forward contracts and options                       893         1,171              1,173         1,226
Options on other fixed income securities,
     mortgage-backed securities forward contracts
     and options                                                     188           151                182           172
Equity contracts (including equity swaps, warrants
     and options)                                                     40            31                 42            17
Commodity contracts (including swaps, forwards,
     and options)                                                     39            51                 67            60
                                                                 ------------------------------------------------------

Total                                                             $3,832        $3,652             $4,156        $3,535
                                                                  -----------------------------------------------------
</TABLE>

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

         Assets included in the table above  represent the Company's  unrealized
gains,  net of  unrealized  losses for which the  Company  has a master  netting
agreement.  Therefore,  the fair value of assets related to derivative contracts
at August 31, 1996  represents  the  Company's  net  receivable  for  derivative
financial  instruments before consideration of collateral.  Included within this
amount was $4,346  million  and $41  million,  respectively,  related to OTC and
exchange-traded contracts.

         With  respect  to OTC  contracts,  the  Company's  views its net credit
exposure to be $3,222 million at August 31, 1996, representing the fair value of
the Company's OTC contracts in an unrealized gain position,  after consideration
of collateral of $1,124 million. Presented below is an analysis of the Company's
net credit  exposure  for OTC  contracts  based upon  internal  designations  of
counterparty credit quality.

Counterparty                        S&P/Moody's                 August 31, 1996
 Risk Rating                           Equivalent                    Net Credit
Exposure
       1                         AAA/Aaa                                19%
       2                         AA-/Aa3 or higher                      23%
       3                         A-/A3 or higher                        46%
       4                         BBB-/Baa3 or higher                     9%
       5                         BB-/Ba3 or higher                       2%
       6                         B+/B1 or lower                          1%
--------------------------------------------------------------------------------

         These  designations are based on actual ratings made by external rating
agencies or by  equivalent  ratings  established  and utilized by the  Company's
Corporate Credit Department.

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

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

5.  Other Commitments and Contingencies:

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

         As a leading global investment bank, risk is an inherent part of all of
the  Company's  businesses  and  activities.  The  extent to which  the  Company
properly and effectively identifies,  assesses, monitors and manages each of the
various  types  of  risks  involved  in  its  trading  (including  derivatives),
brokerage,  and  investment  banking  activities  is critical to the success and
profitability  of the  Company.  The  principal  types of risks  involved in the
Company's   activities  are  market  risk,  credit  or  counterparty  risk,  and
transaction risk.  Management has developed a control  infrastructure to monitor
and manage  each type of risk on a global  basis  throughout  the  Company.  For
further  discussion  of  these  matters,  refer  to Note 15 to the  Consolidated
Financial Statements, in the Form 10-K.

6.  Related Party Transactions:

         In the  normal  course of  business,  the  Company  engages  in various
securities  trading,  investment banking and financing  activities with Holdings
and  many of its  affiliates  (the  "Related  Parties").  In  addition,  various
charges, such as compensation, occupancy, administration and computer processing
are allocated among the Related Parties, based upon specific  identification and
allocation methods.

         During the nine months  ended  August 31,  1996,  the Company paid $151
million to Holdings as a return of capital.



<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   Incentive Plans:


         In June 1996, the Compensation  and Benefits  Committee of the Board of
Directors of Holdings  (the  "Compensation  Committee")  approved the 1996 Stock
Award Program (the "1996  Program"),  pursuant to the Lehman  Brothers  Holdings
Inc. Employee Incentive Plan ("EIP"). Under the 1996 Program, eligible employees
of Holdings and the Company are to receive,  subject to vesting  provisions  and
transfer  restrictions,   approximately  five  million  restricted  stock  units
("RSUs").  These RSUs will vest 80% on July 1, 1997 and 20% on July 1,  2001.  A
total of 20 million  shares of common  stock may be subject to awards  under the
EIP.  Through  August 31, 1996,  approximately  eleven  million shares have been
awarded,  consisting  of  approximately  seven  million  RSUs  for both the 1996
Program  and for new hires as part of  Holdings  and the  Company's  recruitment
efforts,  1.4  million  options  granted in 1995 and  approximately  2.7 million
options  granted in 1996 to certain senior  officers.  The Company  controls the
dilutive impact of these awards through open market purchases.


         In addition,  members of the Corporate Management Committee ("CMC") and
certain senior officers are eligible to receive RSUs based on the achievement of
1996  performance  goals,  with  approximately  one million RSUs  expected to be
awarded in total under the 1996 Management  Ownership Plan (the "1996 Plan") and
the EIP.  The 1996 Plan was  approved by  shareholders  of Holdings on April 10,
1996.

         In the  second  quarter of 1996,  Holdings  granted  approximately  0.8
million  options  under the 1996 Plan to  members  of the  Corporate  Management
Committee  ("CMC")  at an average  market  price on the dates of grant of $24.06
(the "1996 Options").  The 1996 Options become  exercisable in four and one half
years and expire  five years after grant  date;  exercisability  is  accelerated
ratably in one-third  increments at such time as the closing price of the common
stock meets, or exceeds,  $28.00,  $30.00 and $32.00 for 30 consecutive  trading
days. If a minimum  target price is not reached and maintained for the specified
period  in the four and one half  year  period  following  issuance,  the  award
recipients  may then  exercise all of their  options  thereafter.  Also,  in the
second quarter, Holdings granted approximately 2.7 million options under the EIP
to  certain  senior  officers  (as  previously  mentioned  in the  1996  Program
discussion  above) at an average  market  price on the dates of grant of $24.19,
with provisions  similar to the 1996 Options.  No compensation  expense has been
recognized  for any of these stock options as all have been issued at the market
price of the common stock on the date of the respective grant.

         Also in the second quarter of 1996,  Holdings awarded performance stock
units  ("PSUs")  under the 1996 Plan to  members of the CMC and under the EIP to
certain senior officers as part of a four-year  long-term  incentive  award. The
number of PSUs which may be earned,  if any, is dependent  upon  achievement  of
certain  performance  levels  within  a  two-year  period.  At  the  end  of the
performance  period, any PSUs earned will convert one-for-one to RSUs which then
vest at the end of the fourth  year.  The  compensation  cost for the  estimated
number of RSUs that may  eventually  become payable in  satisfaction  of PSUs is
accrued over the  combined  performance  and vesting  period and added to common
stock issuable.

<PAGE>



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

Business Environment

         The Company's  principal  business  activities,  investment banking and
securities  trading  and  sales,  are by their  nature  subject  to  volatility,
primarily due to changes in interest and foreign exchange rates, global economic
and  political  trends  and  industry  competition.  As a result,  revenues  and
earnings may vary significantly from quarter to quarter and from year to year.

         The favorable market environment  experienced during the second half of
1995 continued  into 1996. The U.S. bond market  rallied,  as  expectations  for
additional  easing by the U.S.  Federal  Reserve Bank and the  possibility  of a
deficit  reduction  package  positively   impacted  the  industry  as  a  whole.
Internationally,  weakness in the major European  economies  produced a round of
interest  rate  cuts  from a number of  central  banks in an  effort to  promote
stronger  economic growth.  These actions led to more positive market conditions
in Europe. The favorable worldwide trend in interest rates also supported strong
performance  in global  equity  markets.  All of these  factors led to continued
strength in debt and equity underwriting volumes.

         By mid February,  1996, investor concerns about stronger economic data,
raising the  possibility  of no further  interest  rate  reductions  by the U.S.
Federal Reserve Bank, caused a significant correction in the U.S. fixed income
market and a general increase in interest rates. Despite this change in interest
rates, the overall market environment in the second quarter remained  reasonably
favorable. Investors were active in purchasing new issue products that offered a
spread to Treasuries, such as corporate, asset-backed and mortgage-backed bonds,
in order to achieve  their  performance  benchmarks.  The  increase  in investor
demand  created a high level of customer  volume in the U.S. debt market,  while
strong customer demand and favorable spreads drove more issuers into the market,
resulting in an extremely high level of debt syndicate activity.

         Late in the second  quarter of 1996,  the tone in the U.S. fixed income
market became  decidedly  more  negative.  Recent  strength in the U.S.  economy
created a more volatile market  environment in terms of heightened  inflationary
expectations and a general increase in interest rates.  Investors  reflected the
uncertainty of a possible Federal Reserve  tightening by becoming less active in
general and more defensive.  Fixed income underwriting continued at a reasonable
pace as issuers  accelerated  financing in anticipation of higher interest rates
later in the year. The equity market,  meanwhile,  continued to exhibit strength
as positive cash flows into mutual funds provided a strong underpinning for both
trading and syndicate  activity.  The second quarter  realized  record levels of
merger and acquisition activity, reflecting strategic purchases, restructurings,
spin-offs and growth in cross-border transactions.

         Investor  defensiveness  continued  into  the  third  quarter  of 1996,
particularly in the months of June and July.  August  experienced a more typical
seasonal  slowdown in capital  markets'  activity.  The U.S. market continued to
reflect  concerns over higher  inflation,  tighter labor markets,  possible wage
pressures and higher  commodity  prices.  A series of indicators on  employment,
price  levels and growth in the  economy  provided  mixed  signals to the market
place, adding to the uncertainty with regard to the direction of interest rates.
Bond investors  reacted to this volatility by becoming cautious and less active.
The equity  markets were also impacted by the interest rate  volatility,  as the
stock market moved lower over concerns about weaker corporate  earnings.  Equity
trading  volumes were lower as flows into mutual funds  slowed;  and the pace of
equity  underwriting  slowed as less liquidity in the marketplace caused issuers
to postpone transactions into the fourth quarter.

         Early in the fourth quarter,  market dynamics  strengthened as concerns
over inflation and economic  growth  diminished.  Customer  activity in the bond
markets  increased,  and the enhanced liquidity  encouraged higher  underwriting
volumes.  Similarly, in the U.S. equity markets, renewed strength in mutual fund
flows also produced higher customer trading activity,  while improved valuations
prompted  increased  equity  syndicate  activity.  In the major global  markets,
prospects for lower  interest  rates to offset  tighter  fiscal  policies and to
encourage stronger economic growth created a favorable market environment.






Note:  Except for the  historical  information  contained  herein,  the Business
       Environment and Specific Business Activities and Transactions sections of
       this  Management's  Discussion  and Analysis of Financial  Condition  and
       Results of Operations contain forward-looking statements that discuss the
       risks and uncertainties involved in the Company's business.


<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 August 31, 1996 and August 31, 1995

         The Company reported a net loss of approximately  $264 thousand for the
third  quarter ended August 31, 1996 and net income of $39 million for the third
quarter  ended August 31, 1995.  The results for 1996 reflect the effects of the
difficult market conditions  throughout the third quarter of 1996,  particularly
in the equity markets.

         Net revenues  decreased  to $443 million for the third  quarter of 1996
from $561 million for the third  quarter of 1995 and $615 million for the second
quarter of 1996. The decrease in net revenues  reflected  reduced  customer flow
activities in governments,  NASDAQ and equity listed businesses partially offset
by more favorable results from fixed income derivatives and mortgages.

         As  part  of  its  market-making  activities,   the  Company  maintains
inventory  positions  of  varying  amounts  across a broad  range  of  financial
instruments  which are  marked-to-market  on a daily  basis  and along  with the
Company's  proprietary  trading positions,  give rise to principal  transactions
revenues.  The Company  utilizes  various  hedging  strategies  to minimize  its
exposure to significant movements in interest and foreign exchange rates and the
equity markets.

         Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest  revenues  depending upon the method of financing and/or hedging
related to  specific  inventory  positions.  The Company  evaluates  its trading
strategies  on an overall  profitability  basis which  includes  both  principal
transactions  revenues  and net  interest.  Therefore,  changes in net  interest
should  not be viewed in  isolation  but  should be viewed in  conjunction  with
revenues from principal  transactions.  Net interest  revenues were $103 million
for the third  quarter of 1996 and $109  million for the third  quarter of 1995.
This decrease was attributed to a change in the mix of the Company's  assets and
a  reduction  of spreads on  certain  U.S.  government  matched  book  financing
transactions.



<PAGE>

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


         The  following   table  of  net  revenues  by  business  unit  and  the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that  reflects the manner in which the Company  manages its
businesses.  For internal management  purposes,  the Company has been segregated
into  five  major  business  units:  Fixed  Income,  Equity,  Corporate  Finance
Advisory, Merchant Banking and Asset Management. 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
Operations.  Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.

Three Months Ended August 31, 1996

                           Principal
                       Transactions and                 Investment
                          Net Interest   Commissions    Banking    Other   Total
--------------------------------------------------------------------------------
Fixed Income                   $232          $  11       $  67             $310
Equity                          (40)            49          53               62
Corporate Finance Advisory                                  50               50
Merchant Banking                 (4)                        19               15
Asset Management                                 5                 $ 1        6
--------------------------------------------------------------------------------
                               $188          $  65        $189     $ 1     $443
--------------------------------------------------------------------------------


Three Months Ended August 31, 1995

                       Principal
                    Transactions and                  Investment
                     Net Interest      Commissions      Banking    Other   Total
--------------------------------------------------------------------------------
Fixed Income                $205         $  21        $ 48        $   3    $277
Equity                        63            73          64                  200
Corporate Finance Advisory     1                        49                   50
Merchant Banking              (2)                       25                   23
Asset Management               1             6                        4      11
--------------------------------------------------------------------------------
                            $268          $100        $186        $   7     $561
--------------------------------------------------------------------------------

         Fixed Income.  The Company's fixed income net revenues reflect customer
flow  activities  (both  institutional  and  high-net-worth  retail),  secondary
trading, debt underwriting,  syndicate and financing activities related to fixed
income products. Fixed income products include 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,  commodities and fixed income
derivative products. Fixed income net revenues increased 12% to $310 million for
the third quarter of 1996 from $277 million for the third  quarter of 1995.  The
improvement  in the third  quarter  results  over the prior year  reflected  the
stronger  syndicate  calendar in 1996 and improved customer flow and net trading
results (principal  transactions and net interest) from a number of fixed income
products  including  mortgages,  fixed income  derivatives,  high yield and firm
financing. Investment banking revenues, as a component of fixed income revenues,
increased  to  $67  million  for  1996  from  $48  million  for  1995  due  to a
strengthening  in  origination  volumes  and an  improved  mix  of  underwriting
revenues.


<PAGE>

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



         Equity.  Equity net revenues  reflect  customer flow  activities  (both
institutional   and   high-net-worth   retail),    secondary   trading,   equity
underwriting,  equity finance and arbitrage activities. The Company's equity net
revenues  decreased  to $62  million  for  1996  from  $200  million  for  1995,
reflecting reduced customer flow activities and lower equity underwriting due to
concerns about U.S. interest rates and corporate earnings.  Declining valuations
and  less  liquidity  in the  marketplace  prompted  many  issuers  to  postpone
transactions that had been planned for the third quarter.

         Corporate  Finance  Advisory.  Corporate finance advisory net revenues,
classified  in the  Consolidated  Statement  of  Operations  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 primarily  consists of
advising clients on mergers and acquisitions,  divestitures,  leveraged buyouts,
financial restructurings,  and a variety of cross-border  transactions.  The net
revenues for corporate finance advisory were $50 million in 1996 and 1995. These
results  reflect  continued  strength  in  the  merger  and  acquisition  market
environment.

         Merchant Banking. The Company is the general partner for four merchant
banking partnerships, including three institutional funds and one employee
investment vehicle.  Current merchant banking investments held by the 
partnerships include both publicly traded and privately held companies 
diversified  on a geographic  and industry  basis.  At August 31, 1996 the 
Company's investment in such merchant banking  partnerships, for which the 
Company acts as a general partner,  was $86 million.  There are no funding
commitments to these partnerships.

         Merchant  banking  net  revenues  primarily   represent  the  Company's
proportionate share of net realized and net unrealized gains and losses from the
sale and revaluation of investments held by the  partnerships.  Such amounts are
classified  in the  Consolidated  Statement  of  Operations  as a  component  of
investment  banking  revenues.  Merchant  banking net revenues  also reflect the
related  net  interest  expense  relating  to the  financing  of  the  Company's
investment in the partnerships.  Merchant banking revenues for the third quarter
of 1996 were $15  million  versus  $23  million  for the third  quarter of 1995,
reflecting  a  reduction  in the net gains  recognized  on the  publicly  traded
investments held by the partnerships.

         Asset Management.  Revenues from asset management  activities decreased
to $6 million  for 1996 from $11  million for 1995.  Asset  management  revenues
primarily consist of fees from the management of various funds, commissions from
the sale of funds to customers and fees from the management of certain  accounts
for institutions and high-net-worth individuals.

         Non-Interest Expenses.  Non-interest expenses were $453 million for the
third  quarter  of  1996  and  $500  million  for the  third  quarter  of  1995.
Compensation and benefits expense was $267 million for the third quarter of 1996
and $306 million for the third quarter of 1995  consistent  with lower levels of
business activities in the current year quarter.


<PAGE>

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


         Non-compensation  and benefits  expenses were $186 million for 1996 and
$194 million for 1995.  Non-compensation  and benefits expenses in 1996 and 1995
includes management fees of $7 million and $24 million, respectively, which have
been allocated by Holdings to the Company.

         Income Taxes.  For the third quarter of 1996, the Company's  income tax
benefit was $10 million on a pretax loss of $10 million.  For the third  quarter
of 1995, the Company  reported a tax provision of $22 million on pretax earnings
of $61  million.  The  effective  tax rates for these  periods  differ  from the
statutory  U.S.  federal  income  tax rate as a result  of state  taxes  and tax
benefits attributable to income subject to preferential treatment.


<PAGE>

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


Results of Operations
For the Nine Months Ended August 31, 1996 and August 31, 1995

         The  Company  reported  net income of $100  million for the nine months
ended  August 31, 1996 and net income of $44  million for the nine months  ended
August 31, 1995.  The improved  results for 1996 reflect  stronger  earnings and
enhanced margins, amid a period of generally improved market conditions.

         Net revenues  increased  to $1,665  million for the nine months of 1996
from $1,499  million for the nine months of 1995.  The  increase in net revenues
reflected continued strengthening in the customer flow and trading activities in
a number of fixed  income  and  equity  product  areas and  improved  investment
banking  results.  The  increase in  revenues  from  investment  banking in 1996
reflected a  significant  strengthening  in  underwriting  volumes and  improved
corporate finance advisory revenues partially offset by reduced merchant banking
revenues.

         Net interest revenues were $233 million for the nine months of 1996 and
$265 million for the nine months of 1995. Changes in net interest revenue should
not be viewed in isolation,  as the results of the Company's trading  activities
can fluctuate  between either  principal  transactions or net interest  revenues
depending  upon the method of  financing  and/or  hedging  related  to  specific
inventory  positions.  The  decrease  in  net  interest  revenues  was  due to a
reduction  of  spreads  on  certain  U.S.   government  matched  book  financing
transactions and an increase in interest-bearing  liabilities,  partially offset
by a slight increase in total interest-earning assets.

         The  following   table  of  net  revenues  by  business  unit  and  the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that  reflects the manner in which the Company  manages its
businesses.  Net revenues by business unit contain certain internal allocations,
including costs, which are centrally managed.

Nine Months Ended August 31, 1996

                         Principal
                       Transactions and              Investment
                       Net Interest    Commissions   Banking    Other     Total
--------------------------------------------------------------------------------
Fixed Income                $ 902        $   42     $  198     $   3     $1,145
Equity                         12           167        154         4        337
Corporate Finance Advisory                             137                  137
Merchant Banking              (10)                      34                   24
Asset Management                             14                    8         22
--------------------------------------------------------------------------------
                            $ 904         $ 223      $ 523      $ 15     $1,665
--------------------------------------------------------------------------------



<PAGE>

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


Nine Months Ended August 31, 1995

                        Principal
                    Transactions and               Investment
                       Net Interest   Commissions    Banking      Other    Total
--------------------------------------------------------------------------------
Fixed Income              $674         $  66        $110        $  12   $   862
Equity                     100           215         109            3       427
Corporate Finance Advisory   2                       123                    125
Merchant Banking           (11)                       65            2        56
Asset Management            (2)           19                       12        29
--------------------------------------------------------------------------------
                          $763          $300        $407         $ 29    $1,499
--------------------------------------------------------------------------------

         Fixed Income. Fixed income net revenues increased 33% to $1,145 million
for the nine months  ended August 31, 1996 from $862 million for the nine months
ended  August 31, 1995,  reflecting  the general  strengthening  of the business
environment  in 1996.  Fixed  income  revenues  for 1996  improved  versus  1995
primarily  as a result  of  increased  customer  trading  volumes  reflecting  a
strengthening  in the U.S. economy with a reduced federal deficit and relatively
low  levels  of  inflation.   The  improved  market  conditions  resulted  in  a
significant  increase in investment  banking  results and greater  contributions
from customer flow and trading  activities in a number of fixed income  products
including  governments,  mortgages,  fixed  income  derivatives  and high yield.
Investment banking revenues, as a component of fixed income revenues,  increased
to $198  million for 1996 from $110 million for 1995 due to a  strengthening  in
origination volumes and an improved mix of underwriting revenues.

         Equity. The Company's equity net revenues decreased 21% to $337 million
for 1996 from  $427  million  for 1995.  Equity  revenues  decreased  in 1996 as
significantly  improved  underwriting  results  were more than offset by reduced
profitability  from the Company's equity customer flow activities.  The improved
underwriting  volumes reflected the favorable economic  environment in 1996 with
generally  increased  trading  volumes on listed  exchanges  and record flows of
capital into equity mutual funds.

         Corporate  Finance  Advisory.  The net revenues for  corporate  finance
advisory were $137 million in 1996 and $125 million in 1995. The environment for
merger and acquisition activity during 1996 was strong as a result of heightened
industry and cross-border consolidation.

         Merchant  Banking.  Merchant banking net revenues for the 1996 were $24
million  versus $56 million for 1995,  reflecting  a reduction  in the net gains
recognized on the publicly traded investments held by the partnerships.

         Asset Management.  Revenues from asset management  activities decreased
to $22  million for 1996 from $29 million  for 1995.  These  revenues  primarily
consist of fees from the management of various funds,  commissions from the sale
of funds to  customers  and fees from the  management  of certain  accounts  for
institutions and high-net-worth individuals.



<PAGE>

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


         Non-Interest  Expenses.  Non-interest  expenses were $1,502 million for
the nine  months  of 1996  and  $1,448  million  for the  nine  months  of 1995.
Compensation and benefits expense was $884 million for the 1996 and $753 million
for 1995  consistent  with higher  levels of business  activities in the current
year quarter.

         Non-compensation  and benefits  expenses were $618 million for 1996 and
$695 million for 1995.  Non-compensation  and benefits expenses in 1996 and 1995
includes  management fees of $51 million and $124 million,  respectively,  which
have been allocated by Holdings to the Company.

         Income Taxes.  For the nine months ended August 31, 1996, the Company's
income  tax  provision  was $63  million  on pretax  earnings  of $163  million,
resulting  in an  effective  tax rate of 39%.  For the nine months of 1995,  the
Company  reported  a tax  provision  of $7  million  on pretax  earnings  of $51
million. The effective tax rate for these periods differ from the statutory U.S.
federal income tax rate as a result of state taxes and tax benefits attributable
to income subject to preferential treatment.


<PAGE>


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

Liquidity and Capital Resources


The  Company's  total assets  increased to $97.8 billion at August 31, 1996 from
$82.6  billion at November 30,  1995.  The increase in total assets is primarily
attributable to an increase in fixed income and equity financing activities.

         The Company's balance sheet is highly liquid and consists  primarily of
cash and cash  equivalents,  securities and other  financial  instruments  owned
which  are  marked-to-market  daily  and  collateralized   short-term  financing
agreements.  As the  Company's  primary  activities  are based on customer  flow
transactions,  the Company experiences a rapid asset turnover rate. In addition,
the highly liquid nature of these assets  provides the Company with  flexibility
in financing and managing its business.  The overall size of the Company's total
assets and  liabilities  fluctuates  from time to time and at specific points in
time (such as calendar quarter ends) may be higher than fiscal quarter ends.

Funding and Capital Policies

         The Firm's Finance  Committee  which includes  senior officers from key
areas of the Company,  is responsible for  establishing and managing the capital
funding and liquidity policies of the Company. This includes recommendations for
balance  sheet size as well as the  allocation of balance sheet to product areas
as determined by internal  profitability  models  including  cost of capital and
return on equity targets.  The primary goal of the Company's funding  principles
as  set  by the  Finance  Committee  are to  provide  sufficient  liquidity  and
availability of funding sources across a wide range of market environments.

         As a policy,  the Company attempts to maintain  sufficient  capital and
funding to finance itself on a fully secured basis. The Company attempts to meet
its funding  requirements  through a combination  of  collateralized  short-term
financings and short-term  secured debt and Total Capital,  (long-term debt plus
stockholder's  equity).  In conjuction with this policy,  the Company's  overall
liquidity  objectives include  maintaining a combination of excess  unencumbered
securities,  unutilized  bank lines and capital which would be available to fund
less liquid assets and meet current maturities of short- and long-term unsecured
borrowings.

         The Company's liquidity  contingency plans are continually reviewed and
updated as the Company's  asset/liability mix and liquidity requirements change.
Additionally,  the Company  periodically  tests its secured and unsecured credit
facilities  to ensure  availability  and  operational  readiness.  The Company's
liquidity and Total Capital policies are designed to ensure that the Company can
meet  its  funding  needs  over a wide  range of  economic,  credit  and  market
environments.



<PAGE>

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


Short-Term Funding

         Each of the  Company's  businesses  is  required  to fund its  products
primarily  through  global  collateralized  financings.  There are two principal
business areas which are responsible for these efforts,  Lehman  Brothers' Fixed
Income  Financing   ("Financing")   and  Equity  Finance.   Financing  works  in
conjunction with the institutional fixed income sales and trading  professionals
to provide  financing  to  customers  and the  Company  through  the  repurchase
markets.  Equity  Finance  provides a similar  function  in the  equity  markets
typically  through  securities  loaned/securities  borrowed  transactions.   The
ability of the Company to leverage its global market  expertise and distribution
capabilities  are  key to a  successful  financing  effort.  The  amount  of the
Company's  collateralized  borrowing  activities will vary reflecting changes in
the mix and overall levels of securities and other financial  instruments  owned
and global  market  conditions.  However,  at all  times,  the  majority  of the
Company's assets are funded with collateralized borrowing sources.

         The Company's  treasury  area works  closely with  Financing and Equity
Finance to develop  funding plans to support the business  areas,  as well as to
execute daily funding activities.  On a daily basis, treasury is responsible for
meeting any funding needs not met through Financing and Equity Finance. Treasury
funding is managed  globally  through  regional centers which have access to the
capital  markets though the issuance of commercial  paper, as well as, access to
bank credit lines and other short- and long-term debt instruments.

         At August 31,  1996 and at  November  30,  1995,  $66  billion  and $56
billion,  respectively,  of the Company's total balance sheet was financed using
collateralized borrowing sources. The remainder of the financing for the balance
sheet was comprised of commercial paper and short-term debt,  payables and Total
Capital.  As of August 31, 1996 and  November  30,  1995,  commercial  paper and
short-term  debt  was $4.8  billion  and $1.0  billion,  respectively.  Of these
amounts,  commercial paper outstanding at August 31, 1996 was $5 million with an
average maturity of 31 days. At November 30, 1995, there was no commercial paper
outstanding.

         The Company maintains uncommitted lines of credit with a broad range of
banks and  financial  institutions  from  which it draws  funds in a variety  of
currencies.  Uncommitted  lines consist of facilities  that the Company has been
advised are available but for which no contractual lending obligation exist.



<PAGE>

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


Total Capital

         Long-term assets are financed with Total Capital. The Company maintains
Total Capital in excess of its long-term assets to provide additional liquidity,
which the Company uses to meet its short-term funding requirements and to reduce
its reliance on commercial paper and short-term debt.

         At August 31, 1996 and November 30, 1995,  Total  Capital  consisted of
the following:

                                        August 31,         November 30,
Long-term debt:                            1996                1995
                                      --------------        ----------
     Senior notes                         $  212              $  420
     Subordinated indebtedness             3,793               3,077
                                           -----               -----
                                           4,005               3,497
                                           -----               -----
Stockholder's equity:
     Common equity                         1,981               2,028
                                           -----               -----
Total Capital                             $5,986              $5,525
                                          ======              ======

         During the nine months ended August 31, 1996,  the Company  issued $975
million in  long-term  debt,  which was $504  million in excess of its  maturing
debt. These issuances were primarily  utilized to refinance  current and prefund
expected maturities of long term debt in 1996 and 1997.

         At  August  31,  1996,  the  Company  had  approximately  $1.6  billion
available for issuance of debt securities under various shelf registrations.

         The Company's common  stockholder's  equity decreased by $47 million to
$1,981  million at August 31, 1996 from $2,028  million at November 30, 1995 due
to the payment of dividends  to Holdings  partially  offset by the  retention of
earnings.

Dependence on Credit Ratings

         The Company relies on external sources to finance a significant portion
of its day-to-day  operations.  Access to global capital  markets for short-term
financing,  such as  commercial  paper and  short-term  debt,  senior  notes and
subordinated  indebtedness  are dependent on the Company's  short- and long-term
debt ratings.  The current short- and long-term senior and subordinated  ratings
of the Company are as follows:
                                                         LBI
                                            Short-term           Long-term**
--------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co.                 D-1                A/A-
Fitch Investors Service Inc.                    F-1                A/A-
IBCA                                            A1                 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
+  Long term ratings outlook revised to negative on September 21, 1994


<PAGE>

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


 Specific Business Activities and Transactions

         The  following  sections  include   information  on  specific  business
activities of the Company which affect overall liquidity and capital resources:

         High Yield Securities.  The Company  underwrites,  trades,  invests and
makes  markets  in high  yield  corporate  debt  securities.  The  Company  also
syndicates, trades and invests in loans to below investment grade companies. For
purposes  of  this  discussion,  high  yield  debt  securities  are  defined  as
securities or loans to companies rated as BB+ or lower, or equivalent ratings by
recognized  credit  rating  agencies,  as well as non-rated  securities or loans
which, in the opinion of management,  are non-investment  grade.  Non-investment
grade  securities   generally   involve  greater  risks  than  investment  grade
securities due to the issuer's  creditworthiness and the liquidity of the market
for  such  securities.   In  addition,  these  issuers  have  higher  levels  of
indebtedness,   resulting  in  an  increased  sensitivity  to  adverse  economic
conditions.  The Company  recognizes  these risks and aims to reduce  market and
credit risk through the diversification of its products and counterparties. High
yield debt securities are carried at market value and unrealized gains or losses
for these  securities are reflected in the Company's  consolidated  statement of
operations.  The Company's  portfolio of such  securities at August 31, 1996 and
November 30, 1995  included  long  positions  with an aggregate  market value of
approximately $768 million and $940 million,  respectively,  and short positions
with an aggregate  market value of  approximately  $140 million and $72 million,
respectively.  The portfolio may from time to time contain concentrated holdings
of selected  issues.  The Company's  largest high yield position was $44 million
and $47 million at August 31, 1996 and at November 30, 1995, respectively.

         Westinghouse.  In May  1993,  the  Company  and  Westinghouse  Electric
Corporation  ("Westinghouse")  entered  into a  partnership  to  facilitate  the
disposition  of  Westinghouse's  commercial  real  estate  portfolio,  valued at
approximately   $1.1  billion,   to  be   accomplished   substantially   through
securitizations,  asset sales and  mortgage  remittances.  In 1995,  the Company
purchased the partnership  interest owned by Westinghouse and sold an additional
interest to an  affiliate  of Lennar  Inc.,  (Lennar),  a third  party  mortgage
servicer. Currently, the Company and Lennar hold 75% and 25% of the partnership,
respectively.  Following the increase in ownership  percentage,  the partnership
has been  consolidated  in the Company's  Statement of Financial  Position.  The
Company's net  investment in the  partnership at August 31, 1996 is $57 million.
The partnership expects to substantially  liquidate the remaining real estate by
the end of 1996.  The  Company's  original  investment  in the  partnership  was
approximately $136 million. The Company also advanced approximately $750 million
of financing to the partnership in 1993, which has  subsequently  been repaid in
its entirety from proceeds related to the disposition of the real estate assets.




<PAGE>


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

         Noncore  Activities  and  Investments.   In  March  1990,  the  Company
discontinued the origination of limited partnership  syndications (the assets of
which are  primarily  real estate) and  investments  in real estate.  Currently,
Holdings and the Company act as a general partner for  approximately  $4 billion
of  partnership   investment  capital  and  manage  the  remaining  real  estate
investment  portfolio.  At August  31,  1996,  the  Company  had $8  million  of
commitments and contingent liabilities under guarantees and credit enhancements,
net of applicable reserves. In certain circumstances, the Company has elected to
provide  financial  and other  support and  assistance  to such  investments  to
maintain investment values. There is no contractual requirement that the Company
continue to provide this support.

         Non-core  activities and  investments  have declined 87% since November
30, 1995. It is  management's  intention to prudently  liquidate  noncore assets
when possible.



<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 LBI
and others with respect to  transactions in which LBI acted as an underwriter or
financial advisor, actions arising out of LBI'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 of which LBI is one.

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

Actions Relating to First Capital  Holdings Inc.  (Reported in LBI's Annual
Report on Form 10-K and First Quarter Report on Form 10-Q)

         FCH  Shareholder  and Agent  Actions.  The  parties to this action have
agreed  to a  settlement  in  principle,  subject  to  documentation  and  court
approval.

         American Express  Shareholder  Action and American  Express  Derivative
Action.  On July 29 and August 5, 1996,  the Court entered  final  judgments and
orders approving the settlements and dismissing the American Express  Derivative
Action and the American Express Shareholder Action, respectively.

Warren D. Chisum, et al. v. Lehman Brothers Inc. et al. (Reported in LBI's First
Quarter Report on Form 10-Q)

         On July 11,  1996,  the Court  issued a  memorandum  opinion  and order
dismissing plaintiffs' RICO claim.

Lehman Brothers Commercial  Corporation and Lehman Brothers Special Financing
Inc. v. China International  United Petroleum and Chemical Co., Ltd. (Reported 
in LBI's Annual Report on Form 10-K)

         In September,  1996, the parties settled this action. The case has been
dismissed.

Leetate  Smith et al. v. Merrill Lynch at al.  (Reported in LBI's Annual  Report
on Form 10-K and First  Quarter  Report on Form 10-Q)

         On August 8, 1996, the State Court filed an order granting  preliminary
approval  of the  settlement,  subject  to notice to the class and a hearing  on
final approval.

Actions  relating  to  National  Association  of  Securities  Dealers  Automated
Quotations System  "(NASDAQ")  Market Maker Antitrust and Securities  Litigation
(Reported in LBI's Annual Report on Form 10-K )

         LBI entered into a Stipulation  and Order  resolving a civil  complaint
filed by the U.S.  Department  of Justice  alleging that LBI and 23 other Nasdaq
market makers  violated  Section 1 of the Sherman Act in connection with certain
market making practices.  In entering into the Stipulation and Order the parties
agreed that the  defendants  would not engage in certain  types of market making
activities and the defendants  undertook  specified  steps to assure  compliance
with their  agreement.  The Stipulation and Order are subject to approval by the
United States  District Court for the Southern  District of New York following a
public  hearing,  and if the Court  approves  the  Stipulation  and  Order,  the
complaint will be dismissed with prejudice

MCC Proceeds Inc. v. Merrill Lynch et al. (Reported in LBI's Annual Report on   
Form 10-K)

         MCC Proceeds appealed the dismissal, and LBIE has responded.

1993 New York Stock Exchange Audit

         In September,  1996,  LBI  consented,  without  admitting or denying 
guilt,  to findings  by a New York  Stock  Exchange  Hearing  Panel  that it 
failed to meet certain  requirements  concerning  operations,  reporting  , 
recordkeeping  and supervision in August 1993. LBI consented to a censure and a
fine of $125,000.

Securities and Exchange Commission Administrative Proceeding

         On September  12,  1996,  LBI, as successor  to Shearson  Lehman  
Brothers  Inc.("Shearson"), was named as a Respondent in an administrative 
proceeding pursuant to Sections  15(b) and 21C of the  Securities  Exchange  
Act of 1934  ("Exchange Act").  The SEC alleged  that  Shearson  (1) failed
reasonably  to  supervise a registered  representative,  with a view to
preventing  his charging two clients excessive  markups  on fixed  income
securities;  (2) sent  erroneous  customer confirmations in violation of 
Section 10(b) of the Exchange Act and Rule 10b-10; and (3) failed to maintain
certain required books and records. Without admitting or denying the
allegations, LBI consented to (1) a censure; (2) a requirement to cease and 
desist from future violations of the relevant Exchange Act provisions; and (3)
payment of a civil penalty of $50,000.

CBOE Proceeding

     The Chicago  Board of Options  Exchange  reported that the Company had
failed to submit exercise  advices to the Exchange when two proprietary
trading  accounts exercised  7200 OEX calls in September  1994.  Without 
admitting or denying the allegations, the Company paid a fine of $25,000 to
settle this matter.


<PAGE>


EXHIBITS AND REPORTS ON FORM 8-K

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

(a)      Exhibits:

           12.    Computation in Support of Ratio of Earnings to Fixed Charges

           27.    Financial Data Schedule


(b)      Reports on Form 8-K:

         None


<PAGE>



                                   SIGNATURES




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



                                                          LEHMAN BROTHERS INC.
                                                              (Registrant)





Date:  October 15, 1996             By          /s/ Richard S. Fuld, Jr.
                                             ---------------------------
                                                    Richard S. Fuld, Jr.
                                                    Chairman of the Board and
                                                    Chief Executive Officer
                                                   (Principal Executive Officer)




Date:    October 15, 1996           By          /s/ Charles B. Hintz
                                             -----------------------
                                                    Charles B. Hintz
                                                    Chief Financial Officer
                                                   (Principal Financial Officer)

<PAGE>




                                  EXHIBIT INDEX


Exhibit No.                   Exhibit



Exhibit 12.       Computation in Support of Ratio of Earnings to Fixed Charges

Exhibit 27.       Financial Data Schedule





<PAGE>



                                                                   Exhibit 12


<PAGE>


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


                                                                                   For the           For the         For the
                                                     For the Year               Eleven Months     Twelve Months   Nine Months
                                                         Ended                      Ended             Ended           Ended
                                                    December 31,                 November 30,     November 30,    August 31,
                                        ------------------------------------     ------------     ------------    ----------
                                         1991           1992            1993         1994             1995            1996

<S>                                      <C>            <C>            <C>            <C>            <C>             <C>            
Fixed charges:
  Interest expense:
    Subordinated indebtedness           $   231        $   210        $   192         $  184         $   204        $   160
    Bank loans and other
      borrowings*                         4,068          4,363          4,393          5,661           9,750          7,407
    Interest component of
rentals of office and equipment              64             64             62             27              25             14
  Other adjustments**                        88            127                            53                              6
                                       --------        -------           ----           --------      --------        ---------
                                                                          101                              2
                                                                                                           -
    TOTAL (A)                            $4,451         $4,764         $4,748         $5,925          $9,981         $7,587
                                         ======         ======         ======         ======          ======         ======

Earnings:
  Pre-tax income (loss) from
    continuing operations               $   283        $   319       $              $      1      $                 $   163
                                                                         (146)                            78
  Fixed charges                           4,451          4,764          4,748          5,925           9,981          7,587
  Other adjustments***                      (69)           (68)           (68)           (52)                            (5)
                                       --------       --------       --------       --------      ------           --------
     
    TOTAL (B)                            $4,665         $5,015         $4,534         $5,874         $10,058         $7,745
                                         ======         ======         ======         ======         =======         ======
(B / A)                                    1.05           1.05         ****           ****              1.01             1.02
                                                                                                     
</TABLE>

*        Includes amortization of long-term debt discount.

**      Other adjustments include capitalized  interest and debt issuance costs,
        amortization of capitalized  interest and preferred stock dividends of a
        wholly owned subsidiary.

***     Other  adjustments  include adding the net loss of affiliates  accounted
        for  at  equity  whose  debt  is  not  guaranteed  by  the  Company  and
        subtracting  capitalized  interest costs and undistributed net income of
        affiliates  accounted for at equity and preferred  stock  dividends of a
        wholly owned subsidiary.

****    Earnings  were  inadequate  to cover fixed charges and would have had to
        increase  approximately  $214 million in 1993 and $51 million in 1994 in
        order to cover the deficiencies.


<PAGE>


                                                                  Exhibit 27