SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                   For the quarterly period ended May 31, 1999

                                       OR

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

                          Commission file number 1-6817

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

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

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

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


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

As of June 30, 1999,  1,006 shares of the  Registrant's  Common Stock, par value
$.10 per share, were outstanding.


<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                       FOR THE QUARTER ENDED MAY 31, 1999

                                      INDEX



Part I.  FINANCIAL INFORMATION                                            Page
                                                                         Number

 Item 1. Financial Statements - (unaudited)

              Consolidated Statement of Income -
              Three and Six Months Ended
              May 31, 1999 and 1998 ........................................  3

              Consolidated Statement of Financial Condition -
              May 31, 1999 and November 30, 1998 ...........................  5

              Consolidated Statement of Cash Flows -
              Six Months Ended
              May 31, 1999 and 1998.........................................  7

              Notes to Consolidated Financial Statements....................  9

 Item 2. Management's Discussion and Analysis of
           Financial Condition and Results of Operations.................... 15

Part II.   OTHER INFORMATION

 Item 1.      Legal Proceedings     ........................................ 35

 Item 6.      Exhibits and Reports on Form 8-K          .................... 37

Signatures.................................................................. 38

EXHIBIT INDEX       ........................................................ 39

Exhibits

<PAGE>

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


                                                       Three months ended
                                              ----------------------------------
                                                  May 31               May 31
                                                   1999                 1998
                                              ----------------     -------------

Revenues
     Principal transactions                         $  217              $  324
     Investment banking                                323                 424
     Commissions                                       125                  97
     Interest and dividends                          3,425               3,943
     Other                                               3                   3
                                              ----------------     -------------
         Total revenues                              4,093               4,791
Interest expense                                     3,272               3,783
                                              ----------------     -------------
         Net revenues                                  821               1,008
                                              ----------------     -------------
Non-interest expenses
     Compensation and benefits                         434                 512
     Brokerage and clearance                            48                  50
     Technology and communications                      45                  43
      Management fees                                   19                  16
     Business development                               22                  22
     Professional fees                                  13                  12
     Occupancy                                          11                  12
     Other                                              11                  11
                                              ----------------     -------------
         Total non-interest expenses                   603                 678
                                              ----------------     -------------
Income before taxes                                    218                 330
     Provision for income taxes                         62                 130
                                              ----------------     -------------
Net income                                          $  156              $  200
                                              ================     =============






                 See notes to consolidated financial statements.

<PAGE>

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


                                                        Six months ended
                                              ---------------------------------
                                                  May 31               May 31
                                                   1999                 1998
                                              ----------------     ------------

 Revenues
      Principal transactions                        $  551              $  607
      Investment banking                               586                 682
      Commissions                                      236                 192
      Interest and dividends                         6,660               7,403
      Other                                              9                   9
                                              ----------------     ------------
          Total revenues                             8,042               8,893
 Interest expense                                    6,448               7,139
                                              ----------------     ------------
          Net revenues                               1,594               1,754
                                              ----------------     ------------
 Non-interest expenses
        Compensation and benefits                      810                 876
        Brokerage and clearance                         98                  94
       Technology and communications                    87                  87
        Management fees                                 51                  48
       Business development                             41                  41
       Professional fees                                22                  27
       Occupancy                                        22                  25
       Other                                            21                  24
                                              ----------------     ------------
       Total non-interest expenses                   1,152               1,222
                                              ----------------     ------------
 Income before taxes                                   442                 532
          Provision for income taxes                   129                 206
                                              ----------------     ------------
 Net income                                        $   313             $   326
                                              ================     ============






                 See notes to consolidated financial statements



<PAGE>

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

<TABLE>
<CAPTION>

                                                                                     May 31               November 30
                                                                                      1999                   1998
                                                                                ------------------     ------------------

ASSETS
<S>                                                                                 <C>                      <C>
Cash and cash equivalents                                                           $    330                 $   460

Cash and securities segregated and on deposit for regulatory  and other
purposes                                                                                 792                     909

Securities and other financial instruments owned:
     Governments and agencies                                                         23,146                  15,931
     Mortgages and mortgage-backed                                                     7,424                  10,524
     Corporate equities                                                                8,965                   5,694
     Corporate debt and other                                                          5,476                   6,824
     Derivatives and other contractual agreements                                      5,041                   5,580
     Certificates of deposit and other money market instruments                        2,131                   1,392
                                                                                ------------------     ------------------
                                                                                      52,183                  45,945
                                                                                ------------------     ------------------

Collateralized short-term agreements:
     Securities purchased under agreements to resell                                  63,864                  47,913
     Securities borrowed                                                              19,566                  14,760

Receivables:
     Broker, dealers and clearing organizations                                        1,483                   2,154
     Customers                                                                         3,256                   3,148
     Others                                                                            5,529                   4,859

Property,  equipment and leasehold improvements (net of accumulated depreciation
and amortization of $573 in 1999 and $559 in 1998)
                                                                                         272                     272

Other assets                                                                             282                     261

Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $112 in 1999 and $108 in 1998)                                           123                     152
                                                                                ------------------     ------------------
     Total Assets                                                                   $147,680                $120,833
                                                                                ==================     ==================


</TABLE>



                 See notes to consolidated financial statements.

<PAGE>



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

<TABLE>
<CAPTION>

                                                                                               May 31           November 30
                                                                                                1999               1998
                                                                                            --------------    ----------------

LIABILITIES AND STOCKHOLDER'S EQUITY
<S>                                                                                           <C>                   <C>
Commercial paper and short-term debt                                                          $   570               $  616
Securities and other financial instruments sold but not yet purchased:
     Governments and agencies                                                                  14,055               12,028
     Derivatives and other contractual agreements                                               3,752                3,816
     Corporate equities                                                                         2,758                1,428
     Corporate debt and other                                                                   1,085                1,761
                                                                                            --------------    ----------------
                                                                                               21,650               19,033
                                                                                            --------------    ----------------
Collateralized short-term financings:
     Securities sold under agreements to repurchase                                            78,520               58,905
     Securities loaned                                                                         16,613                5,474
Advances from Holdings and other affiliates                                                    14,682               21,560
Payables:
     Broker, dealers and clearing organizations                                                 2,827                2,230
     Customers                                                                                  4,407                4,540
Accrued liabilities and other payables                                                          1,516                1,668
Long-term debt:
     Senior notes                                                                                 177                  168
     Subordinated indebtedness                                                                  3,922                4,111
                                                                                            --------------    ----------------
         Total liabilities                                                                    144,884              118,305
                                                                                            --------------    ----------------

Commitments and contingencies


STOCKHOLDER'S EQUITY
Preferred  stock,$0.10 par  value;10,000  shares  authorized;  none  outstanding
Common stock, $0.10 par value; 10,000 shares authorized;
        1,006 shares issued and outstanding
Additional paid-in capital                                                                      1,759                1,759
Accumulated other comprehensive income                                                              2                    3
Retained earnings                                                                               1,035                  766
                                                                                            --------------
                                                                                                              ----------------
         Total stockholder's equity                                                             2,796                2,528
                                                                                            --------------    ----------------
         Total liabilities and stockholder's equity                                          $147,680             $120,833
                                                                                            ==============    ================

</TABLE>




                 See notes to consolidated financial statements.

<PAGE>



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

<TABLE>
<CAPTION>

                                                                                             Six months ended
                                                                                   --------------------------------------
                                                                                        May 31               May 31
                                                                                         1999                 1998
                                                                                   -----------------     ----------------

CASH FLOWS FROM OPERATING ACTIVITES
<S>                                                                                 <C>                     <C>
Net income                                                                          $      313              $    326
Adjustments  to reconcile net income to net cash provided by (used in) operating
activities:
     Depreciation and amortization                                                          29                    27
     Provisions for losses and other reserves                                               16                    24
     Other adjustments                                                                      20                    39
Net change in:
     Cash and securities segregated                                                        117                  (131)
     Securities and other financial instruments owned                                   (6,238)              (14,198)
     Securities borrowed                                                                (4,806)               (6,487)
     Receivables from brokers, dealers and clearing organizations                          671                  (224)
      Receivables from customers                                                          (108)                  453
     Securities and other financial instruments sold but not yet purchased
                                                                                         2,617                 8,456
     Securities loaned                                                                  11,139                 4,246
     Payables to brokers, dealers and clearing organizations                               597                 2,250
     Payables to customers                                                                (133)                1,173
     Accrued liabilities and other payables                                               (168)                  (18)
     Other operating assets and liabilities, net                                          (678)               (1,877)
                                                                                   -----------------     ----------------

           Net cash provided by (used in) operating activities                          $3,388               $(5,941)
                                                                                   -----------------     ----------------




</TABLE>

                 See notes to consolidated financial statements.

<PAGE>


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

<TABLE>
<CAPTION>



                                                                                             Six months ended
                                                                                   -------------------------------------
                                                                                       May 31               May 31
                                                                                        1999                 1998
                                                                                   ----------------     ----------------

CASH FLOWS FROM FINANCING ACTIVITES
<S>                                                                                     <C>                     <C>
Proceeds from issuance of senior notes                                                                        $ (79)
Proceeds from issuance of subordinated indebtedness                                                             600
Principal payments of subordinated indebtedness                                        $  (199)                (607)
Net proceeds from commercial paper and short-term debt                                     (46)                 814
Resale agreements net of repurchase agreements                                           3,664                 (585)
Advances from Holdings and other affiliates                                             (6,878)               6,104
Dividends and capital distributions paid                                                   (45)                -
                                                                                   ----------------     ----------------
     Net cash provided by (used in) financing activities                                (3,504)               6,247
                                                                                   ----------------     ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements                                (14)                 (14)
                                                                                   ----------------     ----------------
     Net cash used in investing activities                                                 (14)                 (14)
                                                                                   ----------------     ----------------
       Net change in cash and cash equivalents                                            (130)                 292
                                                                                   ----------------     ----------------
Cash and cash equivalents, beginning of period                                             460                  220
                                                                                   ================     ================
   Cash and cash equivalents, end of period                                              $ 330                $ 512
                                                                                   ================     ================

</TABLE>


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest  paid  totaled  $6,443 and $7,139 for the six months ended May 31, 1999
and 1998,  respectively.  Income taxes (received)/paid totaled ($3) and $298 for
the six months ended May 31, 1999 and 1998, respectively.




                 See notes to consolidated financial statements.
<PAGE>



                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS




1.  Basis of Presentation:

The consolidated  financial  statements  include the accounts of Lehman Brothers
Inc., a registered  broker-dealer  ("LBI") and subsidiaries  (collectively,  the
"Company").  LBI is a wholly owned  subsidiary of Lehman Brothers  Holdings Inc.
("Holdings").  LBI is  one  of  the  leading  global  investment  banks  serving
institutional,  corporate, government and high-net- worth individual clients and
customers.  The Company's worldwide headquarters in New York are complemented by
offices in additional locations in North America, Europe, the Middle East, Latin
America  and the Asia  Pacific  Region.  The  Company is  engaged  in  providing
financial  services.  All material  intercompany  accounts and transactions have
been eliminated in consolidation.  The Company's financial  statements have been
prepared in accordance  with the rules and  regulations  of the  Securities  and
Exchange  Commission  (the "SEC") with  respect to the Form 10-Q and reflect all
normal recurring adjustments which are, in the opinion of management,  necessary
for a fair  presentation  of the  results  for the  interim  periods  presented.
Pursuant to such rules and regulations,  certain footnote  disclosures which are
normally  required under  generally  accepted  accounting  principles  have been
omitted. It is recommended that these consolidated  financial statements be read
in conjunction with the audited  consolidated  financial  statements included in
the Company's  Annual  Report on Form 10-K for the twelve months ended  November
30, 1998 (the "Form 10-K"). The Consolidated Statement of Financial Condition at
November 30, 1998 was derived from the audited financial statements.

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

2.  Long-Term Debt:

The Company did not issue any long-term debt during the six months ended May 31,
1999, while $199 million of long-term debt matured.

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 May 31, 1999, LBI's regulatory net capital,
as  defined,  of $1,247  million  exceeded  the  minimum  requirement  by $1,149
million.

The Company's "AAA" rated derivatives  subsidiaries,  Lehman Brothers  Financial
Products Inc. ("LBFP") and Lehman Brothers  Derivative  Products Inc.  ("LBDP"),
have established  certain capital and operating  restrictions which are reviewed
by various  rating  agencies.  At May 31,  1999,  LBFP and LBDP each had capital
which  exceeded  the  requirement  of  the  most  stringent   rating  agency  by
approximately $137 million and $30 million, respectively.



<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS


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

4.  Derivative Financial Instruments:

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

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

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

Unrealized gains and losses on derivative  contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products when such provisions are stated in the master netting
agreement.  Listed in the  following  table is the fair value and  average  fair
value of the  Company's  Trading-Related  Derivative  Activities.  Average  fair
values of these  instruments were calculated  based upon month-end  statement of
financial condition values, which the Company believes do not vary significantly
from the average  fair value  calculated  on a more  frequent  basis.  Variances
between  average  fair  values and  period-end  values are due to changes in the
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*                        Six Months Ended
                                                                   May 31, 1999                         May 31, 1999
                                                         --------------------------------- -- ---------------------------------
(in millions)                                               Assets          Liabilities          Assets           Liabilities
-------------------------------------------------------- -------------- -- --------------- -- -------------- --- --------------
Interest rate and currency swaps and options
<S>                                                           <C>                <C>               <C>                <C>
(including caps, collars and floors)                          $3,583             $2,333            $3,968             $2,280
Foreign exchange forward contracts and      options
                                                                 393                445               696                551
Options on other fixed income securities,
mortgage-backed securities forward  contracts and
options                                                          448                411               294                283
Equity contracts (including equity swaps,   warrants
and options)                                                     617                563               556                522
Commodity contracts (including swaps,       forwards
and options)
                                                         -------------- -- --------------- -- -------------- --- --------------
         Total                                                $5,041             $3,752            $5,514             $3,636
                                                         -------------- -- --------------- -- -------------- --- --------------

</TABLE>

<TABLE>
<CAPTION>

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

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







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


Assets  included in the tables on the  previous  page  represent  the  Company's
unrealized  gains, net of unrealized  losses for situations in which the Company
has a master netting  agreement.  Similarly,  liabilities  represent net amounts
owed to counterparties.  Therefore, the fair value of assets/liabilities related
to  derivative   contracts  at  May  31,  1999   represents  the  Company's  net
receivable/payable  for derivative financial instruments before consideration of
collateral.  Included  within the $5,041 million fair value of assets at May 31,
1999 was  $4,620  million  related  to swaps and other  OTC  contracts  and $421
million related to exchange-traded option and warrant contracts. Included within
the $5,580  million fair value of assets at November 30, 1998 was $5,333 million
related  to  swaps  and  other  OTC  contracts  and  $247  million   related  to
exchange-traded option and warrant contracts.

With respect to OTC  contracts,  including  swaps,  the Company  views its third
party net credit exposure to be $3,717 million at May 31, 1999, representing the
fair value of the Company's OTC contracts in an unrealized gain position,  after
consideration  of amounts due from  affiliates of $34 million and  collateral of
$869 million.  Presented  below is an analysis of the Company's  third party net
credit exposure at May 31, 1999 for OTC contracts based upon actual ratings made
by external rating agencies or by equivalent ratings established and utilized by
the Company's Credit Risk Management Department.


Counterparty                S&P/Moody's                       Net Credit
Risk Rating                 Equivalent                         Exposure
-----------                 ----------                         --------
     1                        AAA/Aaa                            12%
     2                   AA-/Aa3 or higher                       23%
     3                    A-/A3 or higher                        43%
     4                  BBB-/Baa3 or higher                      21%
     5                   BB-/Ba3 or higher                        1%
     6                    B+/B1 or lower                          0%

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

For a further discussion of the Company's  derivative related activities,  refer
to "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations - Off-Balance Sheet Financial  Instruments and Derivatives" and Notes
1 and 9 to the Consolidated Financial Statements, included in the Form 10-K.



<PAGE>

                    LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

5.  Other Commitments and Contingencies:

In  connection  with its  financing  activities,  the  Company  had  outstanding
commitments under certain lending  arrangements of approximately $3.8 billion at
May 31, 1999 and $3.0 billion at November 30, 1998.  These  commitments  require
borrowers to provide acceptable collateral,  as defined in the agreements,  when
amounts are drawn under the lending  facilities.  Advances  made under the above
lending  arrangements  are  typically at variable  interest  rates and generally
provide for over-collateralization based upon the borrowers' creditworthiness.

The Company,  through its high yield sales, trading and underwriting activities,
makes  commitments  to  extend  credit  principally  to below  investment  grade
borrowers  and then sells a  significant  portion of these  commitments  through
syndication. These commitments, net of syndications and participations,  totaled
$1.2  billion  and  $1.5  billion  at  May  31,  1999  and  November  30,  1998,
respectively,  and are typically  secured against the borrower's assets and have
fixed maturity dates. The draw down of these facilities is generally  contingent
upon certain  representations,  warranties  and  contractual  conditions  of the
borrower.  Total  commitments  are not  indicative  of  actual  risk or  funding
requirements  as the  commitments  may not be drawn or  fully  utilized  and the
Company will continue to syndicate and/or sell these commitments.

The Company also had lending commitments to high-grade borrowers of $1.1 billion
and $610  million at May 31, 1999 and November  30,  1998,  respectively.  These
commitments also are typically secured against the borrower's assets, have fixed
maturity  dates,  and are  generally  contingent  upon certain  representations,
warranties and  contractual  conditions of the borrower.  The company  generally
sells a significant portion of these commitments through syndication

At May 31, 1999 and November 30, 1998, the Company had  commitments to invest up
to  $385  million  and  $238   million,   respectively,   directly  and  through
partnerships,  which in turn will make  merchant  banking  and  venture  capital
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 $305 million at May 31, 1999 and November 30, 1998.

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.


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


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

6.  Related Parties:

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

During the six months ended May 31, 1999, the Company paid dividends to Holdings
of $45 million.



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

Increasing  evidence that the U.S. economic growth remained very strong led to a
sharp rise in U.S. bond yields in early 1999.  Gross domestic  product growth of
6% in the  fourth  quarter of 1998 was  followed  by growth of 4.1% in the first
quarter of 1999.  While wage and price  inflation  remained  low, a  larger-than
expected  rise in core  inflation  in May and the  shift in bias by the  Federal
Reserve to tighten  interest rates,  led to a further  sell-off in the U.S. bond
market and a general widening in credit spreads. As a result, U.S. ten-year bond
yields rose by  approximately  one percentage  point to 5.6% over the six months
ended May 1999. Nevertheless,  interest rates still remained in a relatively low
historical range.

Initially,  the  U.S.  equity  markets  responded  positively  to  stronger-than
expected  growth:  by late  April  the S&P 500 had  risen  15% to  around  1350.
Assessing that the global  financial  crisis had subsided  considerably and that
global  growth  was on a firmer  footing,  performance  broadened  with  smaller
capitalization  and cyclical  industry stocks  outperforming  the overall market
beginning in April.  Reflecting  good local and global growth,  earnings for the
first calendar  quarter were  significantly  ahead of expectations.  However,  a
further rise in U.S.  bond yields in May and the  heightened  concerns  that the
Federal  Reserve would soon raise interest  rates led to a decline  through May,
with the S&P ending the month at around 1300.

On June 30, 1999,  the Federal  Reserve,  as expected,  raised the Federal funds
rate by 25 basis points to 5.0% and  announced a change in its bias to a neutral
stance.  These actions served to calm the U.S.  markets and produced  rallies in
both the U.S. debt and equity markets.

Corporate Finance Advisory activities continued at near record levels during the
first half of 1999. Industrywide, the volume of announced transactions soared to
roughly  $1.5  trillion.  The first six months of 1999 also  reflected  a steady
advance of merger and  acquisition  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.

<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 May 31, 1999 and 1998

The Company reported net income of $156 million for the second quarter ended May
31, 1999, representing a decrease of 22% from net income of $200 million for the
second quarter ended May 31, 1998.

Net  revenues  decreased  to $821  million  for the second  quarter of 1999 from
$1,008  million for the second  quarter of 1998.  Revenues in fixed  income were
lower due to decreased  activity in the high yield origination  market partially
offset by record revenues in the equity business.

Compensation  and benefits expense as a percentage of net revenues was 52.9% and
50.8%  for the  second  quarter  of 1999 and  1998,  respectively.  Nonpersonnel
expenses  were $169 million in the second  quarter of fiscal  1999,  essentially
unchanged from the $166 million in the second quarter of fiscal 1998.

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



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


<TABLE>
<CAPTION>

Three Months Ended May 31, 1999

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking          Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
<S>                                             <C>               <C>                 <C>              <C>      <C>
Equity                                          $123              $115                $84              $ 1      $  323
Corporate Finance Advisory                        (3)                                  82                           79
Fixed Income                                     250                 8                130                1         389
Merchant Banking                                  (1)                                  27                           26
Other                                              1                 2                                   1           4
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
                                                $370              $125               $323              $ 3       $ 821
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
</TABLE>

<TABLE>
<CAPTION>

Three Months Ended May 31, 1998

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking         Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
<S>                                              <C>               <C>                <C>                      <C>
Equity                                           $59               $86                $99                      $  244
Corporate Finance Advisory                        (5)                                  96                          91
Fixed Income                                     424                 7                212              $(1)       642
Merchant Banking                                   5                                   17                          22
Other                                              1                 4                                   4          9
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
                                                $484               $97               $424              $ 3     $1,008
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
</TABLE>

Equity Equity net revenues reflect equity underwriting, customer flow activities
(both institutional and high-net-worth retail), secondary trading and derivative
and financing  activities  related to equity products.  The Company's equity net
revenues  increased 32% to $323 million for the second quarter of 1999 from $244
million for the second quarter of 1998.  Higher revenues resulted from increased
customer flow  activities in U.S. cash products as well as a strong  performance
in equity arbitrage.

Corporate Finance Advisory  Corporate finance advisory net revenues,  classified
in the  Consolidated  Statement of Income as a component of  investment  banking
revenues,  result  primarily  from  fees  earned by the  Company  in its role as
strategic  advisor to its  clients.  This role  consists of advising  clients on
mergers   and   acquisitions,   divestitures,   leveraged   buyouts,   financial
restructurings,  and a variety of cross-border  transactions.  Net revenues from
corporate finance advisory activities were $79 million for the second quarter of
1999, a decrease of 13% versus the $91 million  recognized in the second quarter
of 1998. This decrease was due to the absence of several large transactions that
were present in the prior year's quarter, partially offset by continued strength
in the overall  merger and  acquisition  market  environment.

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


Fixed Income. The Company's fixed income net revenues reflect debt underwriting,
customer  flow  activities  (both  institutional  and  high-net-worth   retail),
secondary  trading and financing  activities  related to fixed income  products.
Fixed income  products  include  dollar- and non-dollar  government  securities,
mortgage-  and  asset-backed  securities,  money  market  products,  dollar- and
non-dollar  corporate debt  securities,  emerging market  securities,  municipal
securities,  financing  (global  access  to  debt  financing  sources  including
repurchase  and reverse  repurchase  agreements),  foreign  exchange,  and fixed
income  derivative  products.  Fixed income net revenues  decreased  39% to $389
million for the second  quarter of 1999 from the $642 million  recognized in the
second  quarter of 1998.  The  decrease in the second  quarter  results from the
prior year's quarter was due to the absence of several sizable leveraged finance
transactions that were present in the prior year's quarter, and the effect of an
overall decline in the high yield origination  market partially offset by higher
origination in the high grade corporate bond sector.

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

Non-Interest Expenses.  Non-interest  expenses  were $603 million for the second
quarter of 1999 and $678 million for the second  quarter of 1998.  This decrease
in  non-interest   expenses  was  primarily   attributable  to  a  reduction  in
compensation and benefits, which decreased as a result of lower net revenues.

Income Taxes. The Company's income tax provision was $62 million for the second
quarter of 1999  compared to $130  million for the second  quarter of 1998.  The
effective  tax rate was 28.4% for the  second  quarter of 1999 and 39.4% for the
second  quarter of 1998.  The lower  effective  tax rate is the result of a more
favorable mix of earnings,  which reduced the state and local provision,  and an
increase in tax  benefits  attributable  to income and  transactions  subject to
preferential tax treatment.


<PAGE>

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


Results of Operations
For the Six Months Ended May 31, 1999 and 1998

The Company reported net income of $313 million for the six months ended May 31,
1999,  representing a decrease of 4% from net income of $326 million for the six
months ended May 31, 1998.

Net revenues  decreased to $1,594 million for the six months of 1999 from $1,754
million for the six months of 1998. Revenues decreased due to decreased activity
in the high yield origination  market partially offset by record revenues in the
equities business.

Compensation  and benefits expense as a percentage of net revenues was 50.8% and
49.9% for the first half of 1999 and 1998,  respectively.  Nonpersonnel expenses
were $342 million in the six months of fiscal 1999,  essentially  unchanged from
the $346 million in expenses for the six months of fiscal 1998.

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



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

<TABLE>
<CAPTION>

Six Months Ended May 31, 1999

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking          Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
<S>                                          <C>                 <C>                <C>                <C>         <C>
Equity                                       $   153             $ 218              $ 130              $ 1         $ 502
Corporate Finance Advisory                        (6)                                 163                            157
Fixed Income                                     621                14                260                2           897
Merchant Banking                                  (6)                                  33                             27
Other                                              1                 4                                   6            11
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
                                              $  763             $ 236              $ 586              $ 9        $1,594
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
</TABLE>

<TABLE>
<CAPTION>

Six Months Ended May 31, 1998

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking         Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
<S>                                           <C>                <C>                <C>               <C>      <C>
Equity                                        $   81             $ 173              $ 150             $  1     $  405
Corporate Finance Advisory                        (8)                                 169                         161
Fixed Income                                     797                12                337                1      1,147
Merchant Banking                                  (1)                                  26                          25
Other                                              2                 7                                   7         16
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
                                               $ 871             $ 192              $ 682             $  9     $1,754
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
</TABLE>

Equity.   Equity  net  revenues  reflect  equity  underwriting,   customer  flow
activities (both institutional and high-net-worth retail), secondary trading and
derivative and financing  activities  related to equity products.  The Company's
equity net  revenues  increased  24% to $502  million for the six months of 1999
from $405  million for the six months of 1998.  Higher  revenues  resulted  from
strong customer flow activities and a strong performance in equity arbitrage.

Corporate Finance Advisory.  Corporate finance advisory net revenues, classified
in the  Consolidated  Statement of Income as a component of  investment  banking
revenues,  result  primarily  from  fees  earned by the  Company  in its role as
strategic  advisor to its  clients.  This role  consists of advising  clients on
mergers   and   acquisitions,   divestitures,   leveraged   buyouts,   financial
restructurings,  and a variety of cross-border  transactions.  Net revenues from
corporate finance advisory activities were relatively  unchanged at $157 million
for the six months of 1999, versus the $161 million recognized in the six months
of 1998.

Fixed Income. The Company's fixed income net revenues reflect debt underwriting,
customer  flow  activities  (both  institutional  and  high-net-worth   retail),
secondary  trading and financing  activities  related to fixed income  products.

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

Fixed income  products  include  dollar- and non-dollar  government  securities,
mortgage  and  asset-backed  securities,  money  market  products,  dollar-  and
non-dollar  corporate debt  securities,  emerging market  securities,  municipal
securities,  financing  (global  access  to  debt  financing  sources  including
repurchase  and reverse  repurchase  agreements),  foreign  exchange,  and fixed
income  derivative  products.  Fixed income net revenues  decreased  22% to $897
million  for the six months of 1999 from  $1,147  million  for the six months of
1998.  The  decrease in the first half  results from the prior year's first half
reflected the absence of several sizable  leveraged  finance  transactions  that
were  present  in the prior  year's  second  quarter,  as well as a  substantial
decline in the overall high yield origination market, partially offset by higher
origination in the high-grade corporate bond sector.

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

Non-Interest Expenses.  Non-interest  expenses  were $1,152  million for the six
months of 1999 and $1,222  million for the six months of 1998.  This decrease in
non-interest expenses was primarily  attributable to a reduction in compensation
and benefits, which decreased as a result of lower net revenues.

Income Taxes. The Company's  income tax  provision  was $129 million for the six
months  of 1999  compared  to $206  million  for the six  months  of  1998.  The
effective  tax rate was 29.2%  for the six  months of 1999 and 38.7% for the six
months of 1998.  The lower  effective tax rate is the result of a more favorable
mix of earnings, which reduced the state and local provision, and an increase in
tax benefits attributable to income and transactions subject to preferential tax
treatment.


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

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
      diversify funding through a global investor base which increases liquidity
      and reduces concentration risk.

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



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


Total  Capital.  The Company's  Total Capital base at May 31, 1999  increased to
$6.9 billion from $6.8 billion at November 30, 1998.

                                       May 31              November 30
(in millions)                           1999                  1998
--------------------------------------------------------------------------------
Long-term Debt

     Senior Notes                         $177                    $168
     Subordinated Indebtedness           3,922                   4,111
                                      --------                 -------
                                         4,099                   4,279

Stockholder's Equity                     2,796                   2,528


--------------------------------------------------------------------------------
Total Capital                           $6,895                  $6,807
--------------------------------------------------------------------------------

During the first six months of 1999, the Company had no new issuances. Long-term
debt decreased to $4.1 billion at May 31, 1999 from $4.3 billion at November 30,
1998,  with a  weighted-average  maturity  of 4.3 years at May 31,  1999 and 4.6
years at November 30, 1998.

Secured  Funding.  The Company  strives to maximize the portion of the Company's
balance  sheet  that is funded  on a secured  basis.  Secured  Funding  includes
securities and other financial  instruments sold but not yet purchased,  as well
as  collateralized  short-term  financings,  defined  as  securities  sold under
agreements  to  repurchase  ("repos") and  securities  loaned.  Because of their
secured  nature,  OECD  government  repos and other  investment  grade  types of
collateralized borrowings are less credit-sensitive and have historically been a
stable financing source  irrespective of market conditions.  At May 31, 1999 and
November 30, 1998, $113 billion and $80 billion,  respectively, of the Company's
total  balance  sheet of $148  billion  and  $121  billion  at May 31,  1999 and
November 30, 1998, respectively, were financed on a secured basis.

By maximizing its use of secured funding,  the Company minimizes its reliance on
unsecured  funding.  As of May 31, 1999 and November 30, 1998,  short-term  debt
outstanding  was $570  million  and $616  million,  respectively.  There  was no
commercial paper outstanding as of May 31, 1999 or November 30, 1998.

Balance Sheet. The Company's total assets increased to $147.7 billion at May 31,
1999 from $137.0 billion at February 28, 1999 and $120.8 billion at November 30,
1998.  The Company's  adjusted  total  assets,  defined as total assets less the
lower of securities  purchased  under  agreements  to resell or securities  sold
under  agreements to  repurchase  were $83.8 billion at May 31, 1999 compared to
$79.0 billion at February 28, 1999 and $72.9  billion at November 30, 1998.  The
Company  believes  adjusted total assets is a more effective  measure of balance
sheet usage when comparing companies in the securities  industry.  The increases
in adjusted total assets reflect increases in government and agency inventory

<PAGE>

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

levels  associated  with increased flow  activities.  The remaining  increase in
total assets was driven by an increase in secured customer financing  activities
during the second quarter.

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

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.  On July 7,  1999,  Moody's  placed the  long-term
ratings of LBI on review for possible upgrade.  As of May 31, 1999 the short-and
long-term senior debt ratings of LBI were as follows:

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




 *   Provisional ratings on shelf registration
 ** Senior/subordinated



<PAGE>

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

High Yield Securities and Lending Activities.  The Company underwrites,  trades,
invests and makes markets in high yield corporate debt  securities.  The Company
also  syndicates,  trades and invests in loans to below  investment  grade-rated
companies.  For purposes of this  discussion,  high yield debt  instruments  are
defined as  securities or loans to companies  rated BB+ or lower,  or equivalent
ratings by recognized credit rating agencies, as well as non-rated securities or
loans  which,  in  the  opinion  of  management,   are   non-investment   grade.
Non-investment  grade securities generally involve greater risks than investment
grade securities due to the issuer's  creditworthiness  and the liquidity of the
market for such  securities.  In addition,  these  issuers have higher levels of
indebtedness,   resulting  in  an  increased  sensitivity  to  adverse  economic
conditions.  The Company  recognizes  these risks and aims to reduce  market and
credit risk through the diversification of its products and counterparties. High
yield debt  instruments  are carried at market value,  and  unrealized  gains or
losses  for  these  securities  are  reflected  in  the  Company's  Consolidated
Statement of Income.  The  Company's  portfolio of such  instruments  at May 31,
1999,  February 28, 1999 and November 30, 1998 included long  positions  with an
aggregate  market value of  approximately  $1.2  billion,  $1.6 billion and $1.2
billion,  respectively,  and short  positions with an aggregate  market value of
approximately  $110 million,  $108 million and $200 million,  respectively.  The
Company may,  from time to time,  mitigate its net exposure to any single issuer
through the use of derivatives and other financial instruments.

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

     Merchant  Banking.  At May 31, 1999,  the Company's  investment in merchant
banking and venture capital partnerships totaled $60 million and direct merchant
banking and venture  capital  investments  totaled $209  million.  The Company's
merchant  banking and venture capital  activities  include  investments in seven
partnerships,  for which the Company acts as general partner,  as well as direct
investments.  The Company's  policy is to carry its  investments,  including its
partnership interests,  at fair value based upon the Company's assessment of the
underlying  investments.  Additional  information  about the Company's  merchant
banking activities, including related commitments, can be found in Note 5 to the
Consolidated Financial Statements (Other Commitments and Contingencies).

Excess of Cost over Fair Value of Net Assets acquired  ("Goodwill").  During the
quarter,  the  Company  reduced  Goodwill  as a result  of  recognizing  the tax
benefits   associated   with  net  operating   losses  acquired  in  prior  year
acquisitions.



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

Risk Management

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

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

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

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

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



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

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

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

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

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

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



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

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

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

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

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

Value at Risk. For purposes of Securities and Exchange  Commission  ("SEC") risk
disclosure requirements,  the Company has performed an entity-wide value at risk
calculation of virtually all of the Company's trading  activities.  The value at
risk  calculation  measures the potential  loss in expected  revenues with a 95%
confidence  level. The methodology  incorporates  actual trading revenues over a
standardized 250-day historical period. A confidence level of 95% implies, on

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

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 $18.4 million
and $13.5  million for the periods  ended May 31, 1999 and  November  30,  1998,
respectively.  Average value at risk  increased in 1999 compared to 1998 because
of  the  extreme  market  volatility  during  the  August-October  1998  period.
Excluding the effects of this  volatility,  average value at risk for the second
quarter ended May 31, 1999 was $12.7 million.

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

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



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

Year 2000 Readiness Disclosure

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

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

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

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

o         Inventory and Assessment
o         Remediation
o         Testing

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

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

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



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

Testing for year 2000  compliance  has also been  organized  into three  phases.
Phase one involves testing individual  applications or groups of applications on
mainframe or on distributed  platforms.  Consultants were engaged to assist with
the testing of distributed applications classified as highly critical. Phase two
involves real-time testing across platforms (integration  testing).  Phase three
involves testing applications between firms (external testing).

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

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

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

In March and April of 1999,  the Company  participated  in the SIA  Industrywide
Test,  as well as the Stock  Loan  Test and SIA  Market  Data  Test in May.  The
Company has participated in a variety of  point-to-point  oversees tests in Hong
Kong and Tokyo. We are currently  participating in Industrywide testing in Japan
with a June 27 completion.  The Company has  participated in testing in Germany,
Italy,  U.K.,  Sweden,  and  France.  The  Company  is also  participating  in a
cooperative  test with Euroclear.  The Company is also  participating in Custody
2000 testing of cash and securities  settlement  systems with banks in Italy and
Poland.  Additional European tests are scheduled to October,  1999. All tests to
date have been successful.

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


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

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

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

However, even if these changes are successful,  the Company remains at risk from
year 2000 failures caused by third parties. Externally, the Company is an active
participant in the SIA Third Party Vendor Committee.  Internally, the Company is
evaluating efforts of key counterparties,  banks, exchanges, agencies, utilities
and suppliers,  among others, to assess and remediate their year 2000 issues. As
part of this effort,  the Third Party Vendor team has  inventoried  and has sent
surveys to vendors  whose  software and  hardware  products the Company uses and
whose services the Company employs to determine  their year 2000 readiness.  The
team is also testing critical software and hardware products to ensure year 2000
readiness. To date the Company has received information from 99% of its vendors,
including  overseas  vendors whose year 2000 awareness seems to be less advanced
than in the United States.

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

Additionally, general uncertainty regarding the success of remediation may cause
many market  participants to reduce their market activities  temporarily as they
address  and assess  their year 2000  efforts  in 1999.  This could  result in a
general  reduction in market  activities and revenue  opportunities in late 1999
and early 2000. Management cannot predict the magnitude of any such reduction or
its impact on the Company 's financial results. However, the Company's Risk

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

Management  Department  continues to evaluate third party and credit risks posed
by year 2000. Recognizing the uncertainty of external dependencies,  the Company
is also preparing a contingency plan that identifies potential problems, actions
to minimize  the  likelihood  of them  occurring  and action plans to be invoked
should  they  occur.  The plan  includes  backup  processes  that do not rely on
computer systems, where appropriate.  The base contingency plan was finalized at
the end of April 1999. The Company's  business units continue to review and fine
tune the  contingency  plan and to  respond to new  information  about year 2000
risks as such information becomes available.

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

The  Company  has  established  an  internal  auditing  plan to  ensure  ongoing
compliance of tested applications.

The  Company's  total year 2000  project  cost is based on  presently  available
information.  The total  remaining cost of the year 2000 project is estimated at
approximately $3 million,  which will be funded through  operating cash flow and
expensed  as incurred  over the next one year.  The  Company  has  incurred  and
expensed  approximately  $2 million in 1997, $4 million in 1998,  and $2 million
through May 31, 1999, related to the year 2000 project.

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

Accounting Standards Not Yet Adopted by the Company

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

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities",  which  requires  all  derivatives  to be
recorded on the balance sheet at fair value. 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 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,
including the Company.

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

County of Orange et al. v. Bear Stearns & Co. et al.  (Reported in LBI's Annual
Report on Form 10-K)

         On June 29, 1999, the district court entered final orders approving the
settlement   reached   between  the  County  and  the  remaining   broker-dealer
defendants.  This settlement finally resolves all of the County's claims against
the Company.


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

         The hearing scheduled for April, 1999 has been adjourned to October,
1999.

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)

         Two appeals from the Final  Judgment and Order of Dismissal were filed.
One was  withdrawn.  The other was  dismissed  by the  Second  Circuit  Court of
Appeals on July 8, 1999.



<PAGE>


Easton & Co. v. Mutual Benefit Life Insurance Co., et al., Easton & Co. v.
Lehman Brothers Inc.  (Reported In LBI's Annual Report on Form 10-K)

         On May 25, 1999, the Court signed an Order and Final Judgment approving
the settlements reached in these two consolidated class actions.


Corporacion Nacional del Cobre de Chile v. Lehman Brothers Inc., Lehman Brothers
Commercial Corp., Lehman Brothers Commodities Ltd. and Lehman Brothers Holdings
Inc.

         On April 29, 1999,  Corporacion Nacional del Cobre de Chile ("Codelco")
filed an Amended Statement of Claim against LBI and certain of its affiliates in
a proceeding before the American Arbitration Association. In connection with the
metals trading  conducted by Codelco's  chief metals trader,  Juan Pablo Davila,
the Amended  Statement of Claim  asserts the  following  claims  against  Lehman
Brothers: common law fraud, aiding and abetting fraud, breach of fiduciary duty,
aiding and abetting a breach of fiduciary duty,  breach of contract,  and breach
of duty of good faith and fair  dealing.  The Amended  Statement  of Claim seeks
damages in the amount of $48 million for Codelco's  alleged  trading losses with
Lehman  Brothers,  additional  amounts to be determined by the  arbitrators  for
Codelco's  losses with other brokers  allegedly  caused by Lehman's  misconduct,
plus punitive  damages and attorneys'  fees.



<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:

         12.1     Computation in Support of Ratio of Earnings to Fixed Charges

         27       Financial Data Schedule

(b)      Reports on Form 8-K:

         None




<PAGE>



                                   SIGNATURES



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



                                      LEHMAN BROTHERS INC.
                                          (Registrant)








Date:    July 15, 1999                By:  /s/ David Goldfarb
                                           -----------------------------------
                                           Chief Financial Officer
                                           (Principal Financial Officer)




<PAGE>


                                  EXHIBIT INDEX



Exhibit No.        Exhibit

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

Exhibit 27         Financial Data Schedule




<PAGE>




                                                                Exhibit 12.1



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


<TABLE>
<CAPTION>

                                        For the       For the         For the           For the          For the          For the
                                         Eleven        Twelve          Twelve           Twelve            Twelve            Six
                                         Months     Months Ended    Months Ended     Months Ended      Months Ended    Months Ended
                                         Ended      November 30     November 30       November 30      November 30        May 31
                                      November 30       1995            1996             1997              1998            1999
                                          1994
                                      ------------  -------------   -------------    --------------    -------------   -------------
Fixed Charges:
  Interest expense:
<S>                                     <C>          <C>             <C>             <C>               <C>                 <C>
     Subordinated indebtedness          $  184       $    204        $    221        $      236        $     239           $  145
     Bank loans and other
borrowings*                              5,661          9,750           9,900           11,980            14,491          6,303
     Interest component of rentals
    of office and equipment                 27             25              18               16                16              8
  Other adjustments**                       53              2               7                3                 4
                                      ============  =============   =============    ==============    =============   =============
   TOTAL (A)                            $5,925         $9,981         $10,146          $12,235           $14,750         $6,456
                                      ============  =============   =============    ==============    =============   =============

Earnings:
   Pretax income (loss) from
continuing operations                 $      1      $      78        $    309        $     593         $     847        $   442
   Fixed charges                         5,925          9,981          10,146           12,235            14,750          6,456
   Other adjustments***                    (52)            (1)             (6)              (2)               (4)
                                      ============  =============   =============    ==============    =============   =============
   TOTAL (B)                            $5,874        $10,058         $10,449          $12,826           $15,593         $6,898
                                      ============  =============   =============    ==============    =============   =============
(B/A)                                     ****           1.01            1.03             1.05              1.06           1.07

</TABLE>

*        Includes amortization of long-term debt discount.

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

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

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