SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                For the quarterly period ended February 29, 2000

                                       OR

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

                          Commission file number 1-9466

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

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

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

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


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

As of March 31, 2000, 1,006 shares of the  Registrant's  Common Stock, par value
$0.10 per share, were outstanding.

<PAGE>



                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                     FOR THE QUARTER ENDED FEBRUARY 29, 2000

                                      INDEX


Part I.             FINANCIAL INFORMATION                              Page
                                                                      Number

       Item 1.  Financial Statements - (unaudited)

                    Consolidated Statement of Income -
                    Three Months Ended
                    February 29, 2000 and February 28, 1999............ 3

                    Consolidated Statement of Financial Condition -
                    February 29, 2000 and November 30, 1999............ 4

                    Consolidated Statement of Cash Flows -
                    Three Months Ended
                    February 29, 2000 and February 28, 1999............ 6

                    Notes to Consolidated Financial Statements......... 7

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

Part II.            OTHER INFORMATION

       Item 1.      Legal Proceedings.................................. 29

       Item 6.      Exhibits and Reports on Form 8-K................... 30

Signature     ......................................................... 31

EXHIBIT INDEX                                                           32

Exhibits


<PAGE>


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

                                                 Three months ended
                                       -------------------------------------
                                          February 29          February 28
                                              2000                 1999
                                       ----------------     ----------------

Revenues
     Principal transactions                 $ 653               $ 342
     Investment banking                       447                 255
     Commissions                              168                 111
     Interest and dividends                 3,765               3,235
     Other                                     10                   6
                                        -------------     ----------------
         Total revenues                     5,043               3,949
Interest expense                            3,705               3,176
                                        -------------     ----------------
         Net revenues                       1,338                 773
                                        -------------     ----------------
Non-interest expenses
     Compensation and benefits                696                 376
     Brokerage and clearance                   50                  50
     Technology and communications             45                  38
     Business development                      22                  19
     Professional fees                         18                   9
     Occupancy                                 13                   9
     Management fee                            49                  35
     Other                                     15                  13
                                        -------------     ----------------
         Total non-interest expenses          908                 549
                                        -------------     ----------------
Income before taxes                           430                 224
     Provision for income taxes               159                  67
                                        =============     ================
Net income                                  $ 271               $ 157
                                        ================   ================




                 See notes to consolidated financial statements.


<PAGE>


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


                                                                                   February 29            November 30
                                                                                      2000                   1999
                                                                                ------------------     ------------------

ASSETS
<S>                                                                                  <C>                     <C>
Cash and cash equivalents                                                            $ 1,526                 $ 1,384

Cash and securities segregated and on deposit for regulatory
and other purposes                                                                     2,437                   1,434

Securities and other financial instruments owned:
     Governments and agencies                                                         18,832                  21,603
     Corporate equities                                                                9,830                   9,144
     Mortgages and mortgage-backed                                                     7,092                   8,457
     Corporate debt and other                                                          6,473                   5,331
     Derivatives and other contractual agreements                                      5,406                   5,249
     Certificates of deposit and other money market instruments                          709                   2,123
                                                                                ------------------     ------------------
                                                                                      48,342                  51,907
                                                                                ------------------     ------------------

Collateralized short-term agreements:
     Securities purchased under agreements to resell                                  68,312                  61,365
     Securities borrowed                                                              18,629                  11,243

Receivables:
     Brokers, dealers and clearing organizations                                       1,549                   2,346
     Customers                                                                         3,942                   2,922
     Others                                                                            4,757                   5,920

Property, equipment and leasehold improvements (net of
     accumulated depreciation and amortization of $593 in 2000
     and $588 in 1999)
                                                                                         276                     280

Other assets                                                                             266                     261

Excess of cost over fair value of net assets acquired (net of
accumulated amortization of $117 in 2000 and $115 in 1999)                               118                     120
                                                                                ------------------     ------------------
     Total Assets                                                                  $ 150,154               $ 139,182
                                                                                ==================     ==================



</TABLE>


                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                              February 29          November 30
                                                                                                 2000                  1999
                                                                                            ----------------     -----------------

LIABILITIES AND STOCKHOLDER'S EQUITY
<S>                                                                                               <C>                   <C>
Commercial paper and short-term debt                                                              $ 736                 $ 615
Securities and other financial instruments sold but not yet purchased:
     Governments and agencies                                                                    13,878                10,237
     Derivatives and other contractual agreements                                                 3,785                 3,985
     Corporate equities                                                                           3,375                 3,207
     Corporate debt and other                                                                     2,092                 1,218
                                                                                            ----------------     -----------------
                                                                                                 23,130                18,647
                                                                                            ----------------     -----------------
Collateralized short-term financing:
     Securities sold under agreements to repurchase                                              76,833                76,587
     Securities loaned                                                                           13,794                 9,809
Advances from Holdings and other affiliates                                                      17,608                16,118
Payables:
     Brokers, dealers and clearing organizations                                                  2,550                 2,485
     Customers                                                                                    6,168                 5,535
Accrued liabilities and other payables                                                            1,996                 2,324
Long-term debt:
     Senior notes                                                                                   191                   186
     Subordinated indebtedness                                                                    3,774                 3,773
                                                                                            ----------------     -----------------
         Total liabilities                                                                      146,780               136,079
                                                                                            ----------------     -----------------

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                                                                        1,684                 1,684
Accumulated other comprehensive income                                                                2                     2
Retained earnings                                                                                 1,688                 1,417
                                                                                                                 -----------------
                                                                                            ----------------
         Total stockholder's equity                                                               3,374                 3,103
                                                                                            ================     =================
         Total liabilities and stockholder's equity                                           $ 150,154             $ 139,182
                                                                                            ================     =================
</TABLE>



                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                               Three months ended
                                                                                      --------------------------------------
                                                                                        February 29           February 28
                                                                                            2000                 1999
                                                                                      -----------------     ----------------

CASH FLOWS FROM OPERATING ACTIVITES
<S>                                                                                         <C>                   <C>
Net income                                                                                  $ 271                 $ 157
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
     Depreciation and amortization                                                              9                    14
     Provisions for losses and other reserves                                                   9                     7
     Other adjustments                                                                          6                    (7)
Net change in:
     Cash and securities segregated                                                        (1,003)                 (174)
     Securities and other financial instruments owned                                       3,565                (6,285)
     Securities borrowed                                                                   (7,386)                1,721
     Receivables from brokers, dealers and clearing organizations                             797                   188
     Receivables from customers                                                            (1,020)                  269
     Securities and other financial instruments sold but not yet purchased                  4,483                (1,717)
     Securities loaned                                                                      3,985                 4,874
     Payables to brokers, dealers and clearing organizations                                   65                 1,452
     Payables to customers                                                                    633                    80
     Accrued liabilities and other payables                                                  (337)                 (268)
     Other operating assets and liabilities, net                                            1,159                (1,643)
                                                                                      -----------------     ----------------
         Net cash provided by (used in) operating activities                                5,236                (1,332)
                                                                                      -----------------     ----------------

CASH FLOWS FROM FINANCING ACTIVITES
Net proceeds from commercial paper and short-term debt                                        121                   189
Resale agreements net of repurchase agreements                                             (6,701)                7,147
Increase (decrease) in advances from Holdings and other affilitates                         1,490                (5,879)
                                                                                      -----------------     ----------------
         Net cash provided by (used in) financing activities                               (5,090)                1,457
                                                                                      -----------------     ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements                                    (4)                   (6)
                                                                                      -----------------     ----------------
         Net cash used in investing activities                                                 (4)                   (6)
                                                                                      -----------------     ----------------
         Net change in cash and cash equivalents                                              142                   119
                                                                                      -----------------     ----------------
Cash and cash equivalents, beginning of period                                              1,384                   460
                                                                                      =================     ================
         Cash and cash equivalents, end of period                                         $ 1,526                 $ 579
                                                                                      =================     ================

</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest paid totaled  $3,710 and $4,035 for the three months ended February 29,
2000 and February 28, 1999,  respectively.  Income taxes paid totaled $4 for the
three months ended February 28, 1999.


                 See notes to consolidated financial statements.


<PAGE>


                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


1.  Basis of Presentation:

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

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

2.  Capital Requirements:

The Company operates  globally  through a network of subsidiaries,  with several
being  subject to  regulatory  requirements.  In the United  States,  LBI,  as a
registered  broker-dealer,  is subject to SEC Rule 15c3-1, the Net Capital Rule,
which requires LBI to maintain net capital of not less than the greater of 2% of
aggregate debit items arising from customer  transactions,  as defined, or 4% of
funds required to be segregated for customers' regulated commodity accounts,  as
defined.  At February 29, 2000,  LBI's  regulatory net capital,  as defined,  of
$1,656 million exceeded the minimum requirement by $1,524 million.

In addition, the Company's "AAA" rated derivatives subsidiaries, Lehman Brothers
Financial  Products Inc. ("LBFP") and Lehman Brothers  Derivative  Products Inc.
("LBDP"),  have established certain capital and operating restrictions which are
reviewed by various rating  agencies.  At February 29, 2000,  LBFP and LBDP each
had capital which exceeded the  requirement of the most stringent  rating agency
by approximately $114 million and $30 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.
<PAGE>


                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

3.  Derivative Financial Instruments:

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

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

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

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


<PAGE>

                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>

                                                                                                  Average Fair Value*
                                                                   Fair Value*                    Three Months Ended
                                                                February 29, 2000                  February 29, 2000
                                                         --------------------------------- ----------------------------------
(in millions)                                               Assets          Liabilities       Assets           Liabilities
-------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
Interest rate and currency swaps and options
<S>                                                          <C>                <C>            <C>                <C>
(including caps, collars and floors)                         $ 3,950            $ 2,542        $ 3,904           $ 3,126
Foreign exchange forward contracts and
      options
                                                                 399                328            452                348
Other fixed income securities contracts
     (including options and TBAs)                                127                238            316                268
Equity contracts (including equity swaps,
     warrants and options)                                       930                677            923                677
                                                         -------------- -- --------------- -------------- --- ---------------
         Total                                               $ 5,406            $ 3,785        $ 5,595            $ 4,419
                                                         -------------- -- --------------- -------------- --- ---------------
</TABLE>


<TABLE>
<CAPTION>

                                                                                                  Average Fair Value*
                                                                    Fair Value*                   Twelve Months Ended
                                                                 November 30, 1999                 November 30, 1999
                                                         ---------------------------------- ---------------------------------
(in millions)                                               Assets           Liabilities        Assets         Liabilities
-------------------------------------------------------- -------------- -- ---------------- --------------- - ---------------
Interest rate and currency swaps and options
<S>                                                          <C>                <C>             <C>               <C>
(including caps, collars and floors)                         $ 3,409            $ 2,738         $ 3,620           $ 2,388
Foreign exchange forward contracts and
  options                                                        650                424             678               582
Other fixed income securities contracts
  (including options and TBAs)                                   256                192             243               232
Equity contracts (including equity swaps,
   warrants and options)                                         934                631             459               406
Commodity contracts (including swaps,
   forwards and options)                                                                              3                 1
                                                         -------------- -- ---------------- --------------- - ---------------
         Total                                               $ 5,249            $ 3,985         $ 5,003           $ 3,609
                                                         -------------- -- ---------------- --------------- - ---------------
</TABLE>

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

Assets included in the table above represent the Company's unrealized gains, net
of unrealized  losses for  situations in which the Company has a master  netting
agreement. Similarly,  liabilities represent net amounts owed to counterparties.
Therefore, the fair value of assets/liabilities  related to derivative contracts
at  February  29, 2000  represents  the  Company's  net  receivable/payable  for
derivative financial  instruments before  consideration of collateral.  Included
within the $5,406  million  fair value of assets at February 29, 2000 was $4,640
million  related to swaps and other OTC  contracts  and $766 million  related to
exchange-traded option and warrant contracts. Included within the $5,249 million

<PAGE>


                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

fair value of assets at November  30, 1999 was $4,489  million  related to swaps
and other OTC contracts and $760 million related to  exchange-traded  option and
warrant contracts.

With respect to OTC contracts, including swaps, the Company views its net credit
exposure to be $2,969 million at February 29, 2000,  representing the fair value
of  the  Company's  OTC  contracts  in  an  unrealized   gain  position,   after
consideration of amounts due from affiliates of $1,316 million and collateral of
$355  million.  Presented  below is an  analysis  of the  Company's  net  credit
exposure at February 29, 2000 for OTC contracts  based upon actual  ratings made
by external rating agencies or by equivalent ratings established and utilized by
the Company's Credit Risk Management Department.

 Counterparty                  S&P/Moody's                  Net Credit
 Risk Rating                   Equivalent                    Exposure
 -----------                   ----------                    --------
      1                          AAA/Aaa                       18%
      2                     AA-/Aa3 or higher                  20%
      3                      A-/A3 or higher                   36%
      4                    BBB-/Baa3 or higher                 23%
      5                     BB-/Ba3 or higher                   1%
      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,  the exchange  clearinghouse
requires counterparties to futures contracts to post margin upon the origination
of the  contract  and for any changes in the market  value of the  contract on a
daily basis  (certain  foreign  exchanges  provide for  settlement  within three
days).  Therefore,  the  potential for losses from  exchange-traded  products is
limited.

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

4.  Other Commitments and Contingencies:

In  connection  with its  financing  activities,  the  Company  had  outstanding
commitments under certain lending  arrangements of approximately $3.3 billion at
February  29, 2000 and $4.2  billion at November  30,  1999.  These  commitments
require  borrowers  to  provide  acceptable   collateral,   as  defined  in  the
agreements,  when amounts are drawn under the lending facilities.  Advances made
under the above lending  arrangements  are typically at variable  interest rates
and  generally  provide  for  over-collateralization  based upon the  borrowers'
creditworthiness.



<PAGE>


                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


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 $2.3
billion  and  $2.8   billion  at  February  29,  2000  and  November  30,  1999,
respectively.  In addition,  lending commitments to high yield borrowers totaled
$1.2  billion and $903  million at  February  29, 2000 and  November  30,  1999,
respectively.  All of these  commitments  and any  related  draw-downs  of these
facilities  are typically  secured  against the  borrowers'  assets,  have fixed
maturity  dates  and are  generally  contingent  upon  certain  representations,
warranties  and  contractual  conditions  applicable  to  the  borrower.   Total
commitments  are not  indicative of actual risk or funding  requirements  as the
commitments may not be drawn or fully utilized, and the Company will continue to
syndicate and/or sell these commitments.

At February  29, 2000 and  November 30,  1999,  the Company had  commitments  to
invest up to $413 million and $302 million,  respectively,  directly and through
partnerships,  in private equity-related investments.  These commitments will be
funded  as  required  through  the  end of the  respective  investment  periods,
principally expiring in 2004.

In  addition to these  specific  commitments,  the  Company  had  various  other
commitments of approximately $300 million at both February 29, 2000 and November
30, 1999.

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

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

5.       Segments

Lehman Brothers operates in three business segments: Investment Banking, Capital
Markets, and Other.

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



<PAGE>

                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

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

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

The  Company's  segment  information  for the first  quarter of 2000 and 1999 is
presented below and was developed  consistent with the accounting  policies used
to prepare the Company's consolidated financial statements.
<TABLE>
<CAPTION>


                                       Investment             Capital
                                         Banking              Markets             Other                   Total
                                    ------------------     --------------    -----------------     ---------------------

February 29, 2000

<S>                                             <C>                <C>              <C>                         <C>
Net revenue                                     $ 447              $ 883            $    8                      $ 1,338
                                    ==================     ==============    =================     =====================
Earnings before taxes                           $ 125              $ 309            $   (4)                       $ 430
                                    ==================     ==============    =================     =====================
Segment assets (billions)                       $ 1.1            $ 144.3             $ 4.8                      $ 150.2
                                    ==================     ==============    =================     =====================


February 28, 1999

Net revenue                                     $ 257              $ 514           $    2                         $ 773
                                    ==================     ==============    =================     =====================
Earnings before taxes                            $ 78              $ 148           $   (2)                        $ 224
                                    ==================     ==============    =================     =====================
Segment assets (billions)                        $0.8            $ 133.8            $ 2.4                       $ 137.0
                                    ==================     ==============    =================     =====================

</TABLE>



<PAGE>

                      LEHMAN BROTHERS INC and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

The following are net revenues by geographic region:

                                  February 29           February 28
                                     2000                   1999
                               ------------------    -------------------

Americas*                            $ 1,197                 $ 665
Europe                                    96                    96
Asia Pacific                              45                    12
                               ------------------    -------------------

      Total                          $ 1,338                 $ 773
                               ==================    ===================

*    Includes  non-U.S.  revenues  of $13  million  and $4  million in the first
     quarter of 2000 and 1999, respectively.

The  following   information  describes  the  Company's  methods  of  allocating
consolidated net revenues to geographic regions. Net revenues,  if syndicated or
trading-related, have been distributed 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; if  commission-related,  by the location
of the  salespeople.  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.

6.       Related Parties

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





<PAGE>


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


Business Environment

The principal business activities of Lehman Brothers Holdings Inc.  ("Holdings")
and  subsidiaries  (collectively,   the  "Company"  or  "Lehman  Brothers")  are
investment  banking and securities  trading and sales, which by their nature are
subject to volatility, primarily due to changes in interest and foreign exchange
rates and security valuations, global economic and political trends and industry
competition.  As a result,  revenues and earnings  may vary  significantly  from
quarter to quarter and from year to year.

Financial  Advisory  activities  on a global basis  continued at record  levels.
Industrywide, the volume of announced merger and acquisition transactions in the
first  quarter  soared  to $1.1  trillion.  The  first  quarter  also  reflected
continued activity  involving  European  companies and cross-border  mergers and
acquisitions.  Merger and acquisition activities continued to reflect the trends
of  consolidation,  deregulation and  globalization  across industry sectors and
across borders. Equity new issuance this quarter was at record levels worldwide,
more than  doubling as compared to the same period last year.  In the U.S.,  new
equity  issuance  more than tripled as compared to the first  quarter last year.
Fueling the domestic  market was  increased  IPO activity and  continued  equity
raising  in the  technology,  telecommunications  and new  media  sectors.  Debt
issuance  was  initially  dampened  by the  outward  shift in the yield curve in
January and later by the  inversion of the yield curve and the  anticipation  of
future interest rate hikes by the Federal Reserve and the European Central Bank.

At the same time,  economic  growth in the United  States  remained  very strong
during the first quarter of 2000,  and equity  trading  volumes  continued to be
healthy.  New  economy  stocks,  as  measured  by the NASDAQ rose 40% during the
quarter to a new high, but have since corrected. In anticipation of further rate
hikes, the price of old economy stocks,  as measured by the Dow Jones Industrial
Index,  declined by 7% over the  quarter,  through the 10,000  level,  but later
recovered.  In the fixed income  markets,  the 10-year U.S.  Treasury bond yield
initially rose during the quarter,  reaching 6.78% in mid-January.  However,  as
the Dow slid and the U.S.  Treasury  announced plans for the early retirement of
certain Treasury  borrowings,  bond yields fell-back to end the quarter at 6.4%,
just 20 basis points  above where they had started.  In response to the strength
of  continued  growth,  the Fed, as expected,  raised the Federal  Funds rate on
February  2nd by 25 basis points to 5.75%,  the fourth 25 basis point  increase
since June 1999.

In February,  while European  business and consumer  confidence had risen to new
cyclical and all-time highs, inflationary pressures also started to rise. Pushed
up by higher oil  prices and a weaker  euro,  European  inflation  rose to 2% in
January  from  1.5% in  November,  while  core  inflation  also  inched  higher.
Responding  to rising  inflationary  pressures  and a weaker euro,  the European
Central  Bank raised its key  two-week  repo rate by 25 basis points on February
3rd. Although the rate hike by the ECB matched that by the Federal Reserve,  the
euro  continued to fall against the dollar,  hitting a new low of  $0.94/euro on
February 28th, but later stabilizing at around  $0.97/euro.  For the period as a
whole, European markets outperformed the broad U.S. index with a return of 8% in
local currency  terms (FTSE World Europe),  but all of this gain was achieved by
the end of  December.

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



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

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


Results of Operations
For the Three Months Ended February 29, 2000 and February 28, 1999

The Company  reported  record net income of $271  million for the first  quarter
ended February 29, 2000, representing an increase of 73% from net income of $157
million for the first quarter ended February 28, 1999.

These results reflect the ongoing successful execution of the Company's strategy
to grow its high margin investment banking and equities  businesses and maintain
a strict discipline with regard to its expenses. The Company's strategy is based
on the belief  that:  (1) these  businesses  generate  higher  returns on equity
because they are less capital intensive;  and (2) their rapid growth accelerates
the  Company's  overall  rate of  growth;  and (3)  they  help  reduce  earnings
volatility by diversifying the Company's revenue base. The Company's emphasis on
these high margin businesses  helped to increase the Company's  operating margin
to 32.1% in the first quarter of 2000 from 29.0% in the first quarter of 1999.

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



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



Three Months Ended February 29, 2000 and February 28, 1999
(in millions)
                                                Three Months Ended
                                         ----------------------------------
                                             Feb 29             Feb 28
                                               2000               1999
                                         ---------------    ---------------
Investment Banking                            $ 447              $ 257
Capital Markets                                 883                514
Other                                             8                  2
                                         ===============    ===============
Total                                       $ 1,338              $ 773
                                         ===============    ===============


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

Investment  Banking This  segment's net revenues  result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities,  raising  capital  and  advising  clients on merger and  acquisition
activities and other services.  Investment  Banking's net revenues increased 74%
in the first  quarter  of 2000 to $447  million  from $257  million in the first
quarter of 1999,  principally as a result of an increase in equity  underwriting
and financial advisory services.  The increased net revenues are an outgrowth of
the Company's  ongoing  efforts to grow its Investment  Banking  franchise.  The
record  results  in  equity   underwriting  were  driven  by  issuances  in  the
communications/media sector and a significant increase in convertible offerings.


Debt underwriting  revenues remained relatively unchanged from the first quarter
of 1999  despite  challenging  market  conditions  resulting  from  yield  curve
volatility.


Investment Banking Net Revenues
------------------------ ------------------------------
(in millions)                 Three Months Ended
                           February 29     February 28
                               2000           1999
 ----------------------- --------------- --------------
 Equity Underwriting          $ 183          $   45
 Debt Underwriting              128             130
 Financial Advisory             136              82
 ------------------------ --------------- --------------
                              $ 447           $ 257
 ----------------------- --------------- --------------




<PAGE>


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

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

Capital  Markets' net revenues  were $883 million for the first  quarter of 2000
and $514 million for the first quarter of 1999.  Customer flow sales and trading
volumes  continued to increase at healthy rates,  significantly  contributing to
this increase.

Net revenues from the equity component of Capital Markets increased 343% to $616
million in the first  quarter of 2000 from $139 million in the first  quarter of
1999.  Revenues  benefited  in the  first  quarter  of 2000  from  significantly
increased  institutional customer flow activity in cash and derivative products.
In  addition,  the Company  realized  gains of  approximately  $150 million on a
principal investment it had in VerticalNet, Inc.

 Capital Markets Net Revenues
 ---------------------- ---------------------------------
 (in millions)                 Three Months Ended
                           February 29      February 28
                              2000             1999
                          --------------- -----------------
  Equities                   $ 616             $ 139
  Fixed Income                 267               375
  ---------------------- --------------- -----------------
                             $ 883             $ 514
  ---------------------- --------------- -----------------

Net revenues  from the fixed income  component of Capital  Markets  decreased to
$267 million in the first quarter of 2000 from $375 million in the first quarter
of 1999.  Strong  customer flow trading in high yield  securities  was offset by
challenging  market  conditions  overall and the Y2K induced slowdown earlier in
the quarter.

Other Other revenues  reflect  earnings from the Company's asset  management and
private equity  businesses.  Other revenues were $8 million in the first quarter
of 2000 from $2 million in the first quarter of 1999.

Non-Interest  Expenses  Non-interest  expenses  were $908  million for the first
quarter of 2000 and $549 million for the first quarter of 1999. Compensation and
benefits  expense as a  percentage  of net  revenues  increased to 52.0% for the
quarter compared to the prior year quarter of 48.6%.  This increase reflects the
Company's continued expansion of its investment banking,  and equities franchise
as  well  as  investment  needs  in  technology  and  e-commerce   capabilities.
Nonpersonnel  expenses  were $212 million for the first quarter of 2000 and $173
million for the first  quarter of 1999,  an increase  of 22.5%,  reflecting  the
impact of  increased  investments  in  personnel  and  growth  in net  revenues.
However, nonpersonnel expenses declined as a percentage of net revenues to 15.8%
for the first  quarter of 2000 from  22.4% for the first  quarter of 1999 as the
Company's net revenues increased at a significantly faster rate.

Income Taxes The  Company's  income tax provision was $159 million for the first
quarter of 2000  compared  to $67  million  for the first  quarter of 1999.  The
effective  tax rate was 37.0% for the  first  quarter  of 2000 and 29.9% for the

<PAGE>

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

first quarter of 1999. The increase in the effective tax rate relates  primarily
to a significantly higher level of pre-tax income, which minimizes the impact of
transactions that are subject to preferential tax treatment.


<PAGE>


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

Funding, Capital Resources and Liquidity

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

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

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

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

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

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

Total Capital Total Capital (defined as long-term debt and stockholder's equity)
was $7.3 billion at February  29, 2000  compared to $7.1 billion at November 30,
1999. The net increase in Total Capital resulted from the retention of earnings.


<PAGE>


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


                                   February 29       November 30
(in millions)                         2000              1999
------------------------------------------------------------------------------
Long-term Debt

    Senior Notes                   $    191               $ 186
    Subordinated Indebtedness         3,774               3,773
                                      -----               -----
                                      3,965               3,959

Stockholder's Equity                  3,374               3,103

------------------------------------------------------------------------------
Total Capital                       $ 7,339             $ 7,062
------------------------------------------------------------------------------

During the first three  months of 2000,  the Company  had no new  issuances  and
long-term  debt  remained  relatively  unchanged  from  November 30,  1999.  The
weighted-average  maturity of  long-term  debt at February 29, 2000 and November
30, 1999 was 4.5 years and 4.8 years, respectively.

Secured  Funding The Company  strives to maximize  the portion of the  Company's
balance  sheet  that is funded  on a secured  basis.  Secured  funding  includes
securities and other financial  instruments sold but not yet purchased,  as well
as  collateralized  short-term  financings,  defined  as  securities  sold under
agreements  to  repurchase  ("repos") and  securities  loaned.  Because of their
secured  nature,   repos  have  historically  been  a  stable  financing  source
irrespective of market  conditions.  At February 29, 2000 and November 30, 1999,
$110 billion and $101  billion,  respectively,  of the  Company's  total balance
sheet of $150  billion and $139  billion at February  29, 2000 and  November 30,
1999, respectively, was financed on a secured basis.

By maximizing its use of secured funding,  the Company minimizes its reliance on
unsecured financing.  As of February 29, 2000 and November 30, 1999,  short-term
debt outstanding totaled $736 million and $615 million, respectively.  There was
no commercial paper outstanding as of February 29, 2000 or November 30, 1999.

Balance Sheet The Company's  total assets  increased to $150 billion at February
29, 2000 from $139 billion at November 30, 1999.  The Company's  adjusted  total
assets,  defined as total assets less the lower of  securities  purchased  under
agreements to resell or securities sold under  agreements to repurchase were $82
billion at February 29, 2000  compared to $78 billion at November 30, 1999.  The
Company believes adjusted total assets is a more effective measure of evaluating
balance sheet usage when  comparing  companies in the securities  industry.  The
increase in adjusted total assets reflects higher levels of securities  borrowed
offset by lower  amounts of  securities  owned both  associated  with  increased
customer flow activities.



<PAGE>


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

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

Credit Ratings

The Company, like other companies in the securities industry, relies on external
sources  to finance a  significant  portion of its  day-to-day  operations.  The
Company's  access to and cost of funding is generally  dependent upon its short-
and long- term debt  ratings.  As of February 29, 2000 the short- and  long-term
debt ratings of LBI were as follows:

                                                                LBI
                                                --------------------------------
                                                  Short-term        Long-term**
----------------------------------------------- ---------------- ---------------
Duff & Phelps Credit Rating Co.                       D-1               A/A-
Fitch IBCA, Inc.                                      F-1               A/A-
Moody's                                               P-1              A2*/A3
Standard & Poor's Corp.                               A-1              A+*/A
Thomson BankWatch                                    TBW-1              A+/A

*   Provisional ratings on shelf registration
** Senior/subordinated


<PAGE>


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

Other

The  Company  underwrites,  trades,  invests  and makes  markets  in high  yield
corporate debt securities.  The Company also  syndicates,  trades and invests in
loans  to  below  investment  grade-rated   companies.   For  purposes  of  this
discussion,  high yield debt  instruments  are defined as securities or loans to
companies rated BB+ or lower, or equivalent  ratings by recognized credit rating
agencies,  as well as non-rated  securities  or loans  which,  in the opinion of
management, are non-investment grade.  Non-investment grade securities generally
involve  greater  risks than  investment  grade  securities  due to the issuer's
creditworthiness  and the  liquidity  of the  market  for  such  securities.  In
addition,  these  issuers have higher  levels of  indebtedness,  resulting in an
increased  sensitivity to adverse economic  conditions.  The Company  recognizes
these   risks  and  aims  to  reduce   market  and  credit   risk   through  the
diversification of its products and counterparties.  High yield debt instruments
are carried at market value, and unrealized gains or losses for these securities
are reflected in the Company's  Consolidated  Statement of Income. The Company's
portfolio  of such  instruments  at  February  29,  2000 and  November  30, 1999
included long positions  with an aggregate  market value of  approximately  $1.5
billion and $1.3 billion,  respectively,  and short  positions with an aggregate
market value of approximately $181 million and $177 million,  respectively.  The
Company may,  from time to time,  mitigate its net exposure to any single issuer
through the use of derivatives and other financial instruments.

Additional  information  about the Company's  High Yield  Securities and Lending
Activities,  including  related  commitments,  can  be  found  in  Note 4 to the
Consolidated Financial Statements (Other Commitments and Contingencies).

The   Company   has   investments   in  seven   merchant   banking  and  venture
capital-related partnerships,  for which the Company acts as general partner, as
well as  related  direct  investments.  At  February  29,  2000,  the  Company's
investment  in  these  partnerships  totaled  $54  million  and  related  direct
investments  totaled  $516  million.  The  Company's  policy  is  to  carry  its
investments,  including its partnership interests,  at fair value based upon the
Company's assessment of the underlying investments. Additional information about
the Company's private equity activities,  including related commitments,  can be
found in Note 4 to the Consolidated  Financial Statements (Other Commitments and
Contingencies).




<PAGE>

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

Risk Management

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

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

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

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

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



<PAGE>

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


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

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

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

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

The Company participates globally in interest rate, equity, and foreign exchange
markets.  The Company's Fixed Income division has a broadly  diversified  market
presence  in  U.S.  and  foreign   government  bond  trading,   emerging  market
securities,  corporate debt (investment and non-investment  grade), money market
instruments, mortgages and mortgage-backed securities,  asset-backed securities,
municipal bonds, and interest rate derivatives.  The Company's Equities division

<PAGE>

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

facilitates  domestic and foreign trading in equity  instruments,  indices,  and
related  derivatives.  The Company's foreign exchange businesses are involved in
trading  currencies  on a spot and forward  basis as well as through  derivative
products and contracts.

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

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

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

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

Average  value at risk  computed  in this  manner  was $18.3  million  and $20.0
million  for the  periods  ended  February  29,  2000  and  November  30,  1999,
respectively. Value at risk at February 29, 2000 and November 30, 1999 was $14.1
million and $14.0  million,  respectively.  Value at risk is one  measurement of
potential  losses in revenues that may result from adverse market movements over
a specified  period of time with a selected  likelihood of occurrence.

<PAGE>


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

Value at risk has substantial limitations,  including its reliance on historical
performance and data as valid predictors of the future.  Consequently,  value at
risk is only one of a number of tools the  Company  utilizes  in its daily  risk
management activities.

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



<PAGE>

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


New Accounting Developments

In September 1999, the FASB issued an Exposure Draft, "Business Combinations and
Intangible   Assets."   The   proposal   would   eliminate   the   use   of  the
pooling-of-interests  method  and  require  that all  business  combinations  be
accounted for using the purchase  method.  The Exposure Draft would also require
goodwill  arising from the  application of the purchase method to be written off
over a maximum 20-year  amortization  period,  which is shorter than the current
40-year  period.  The  provisions  of the  Exposure  Draft  related to  business
combinations are expected  to be applied  only for those  business  combinations
initiated  after the  issuance  of a final  statement,  projected  to be late in
2000.In  June 1998,  the FASB issued SFAS No. 133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities",  which  requires  all  derivatives  to be
recorded on the balance sheet at fair value.

In June 1999, the FASB extended the  implementation  date of SFAS No. 133 by one
year.  As a  result,  SFAS No.  133 will now be  effective  for the  Company  on
December 1, 2000  (Fiscal  Year 2001).  The  expected  impact of adoption on the
Company's  results of operations has not yet been determined,  however it is not
likely to be material  since most of the  Company's  derivatives  are carried at
fair value.

<PAGE>



                     LEHMAN BROTHERS INC. and SUBSIDIARIES

                           PART II - OTHER INFORMATION


ITEM 1   Legal Proceedings

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

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

In re Mobilemedia Securities Litigation (Reported in LBI's 1999 Annual Report on
Form 10-K)

     On February 24, 2000, the Court entered an Order and Final Judgment finally
     approving a settlement and dismissing the action.

Pamahi  Investment  Corp., et al. v. Lehman  Brothers Inc., et al.  (Reported in
LBI's 1999 Annual Report on Form 10-K)

     On March 17, 2000, the motion of LBI and its former branch manager to sever
     the arbitration into a separate case for each set of claimants was granted,
     and all claims  other than those of the lead  claimant,  Pamahi  Investment
     Corp.,   were  dismissed   without  prejudice  to  renewal  in  a  separate
     proceeding.  Pamahi claims  damages of $5.96  million;  no other  Claimants
     assert claims for damages in excess of that amount.




<PAGE>


ITEM 6   Exhibits and Reports on Form 8-K

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

(a)      Exhibits:

         12       Computation in Support of Ratio of Earnings to Fixed Charges

         27       Financial Data Schedule

(b)      Reports on Form 8-K:

         None

<PAGE>



                                    SIGNATURE



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



                                             LEHMAN BROTHERS INC.
                                             (Registrant)



Date:    April 14, 2000                      By: /s/ David Goldfarb
                                                ---------------------------
                                                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