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, 1997

                                       OR

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

                          Commission file number 1-6817

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

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

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

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

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

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

As of July 11, 1997 1,006 shares of the  Registrant's  Common  Stock,  par value
$.10 per share, were issued and outstanding.
                    
<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                       FOR THE QUARTER ENDED MAY 31, 1997

                                      INDEX

Part I.           FINANCIAL INFORMATION                              Page Number

         Item 1.      Financial Statements - (unaudited)

                           Consolidated Statement of Operations -
                             Three and Six Months Ended May 31, 1997
                             and 1996   ....................................  3


                           Consolidated Statement of Financial Condition -
                             May 31, 1997 and November 30, 1996 ............  5

                           Consolidated Statement of Cash Flows -
                             Six Months Ended May 31, 1997
                             and 1996   ....................................  7


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

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

Part II.          OTHER INFORMATION

         Item 1.      Legal Proceedings     ................................ 26

         Item 6.      Exhibits and Reports on Form 8-K          ............ 27

Signatures.................................................................. 28

EXHIBIT INDEX         .....................................................  29

Exhibits




<PAGE>



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

                                            Three months ended
                                      May 31                       May 31
                                       1997                        1996
                                   -------------              ---------
Revenues
    Principal transactions               $  158                    $  287
    Investment banking                      210                       182
    Commissions                              74                        77
    Interest and dividends                2,954                     2,555
    Other                                     9                         6
                                       --------                  --------
         Total revenues                   3,405                     3,107
     Interest expense                     2,850                     2,492
                                          -----                     -----
         Net revenues                       555                       615
                                         ------                    ------
Non-interest expenses
     Compensation and benefits              259                       303
     Brokerage, commissions and              55                        52
       clearance fees
     Communications                          22                        24
     Professional services                   22                        21
     Business development                    18                        18
     Occupancy and equipment                 16                        17
     Depreciation and amortization           13                        13
     Management fees                         16                        20
     Other                                   48                        52
                                        -------                   -------
        Total non-interest expenses         469                       520
                                          ------                    ------
Income before taxes                          86                        95
      Provision for income taxes             27                        40
                                        -------                   -------
Net income                              $    59                   $    55
                                        =======                   =======



        See   notes  to   consolidated   financial statements.

<PAGE>



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

                                             Six months ended
                                    May 31                      May 31
                                    1997                        1996
Revenues
    Principal transactions            $  384                    $  578
    Investment banking                   402                       342
    Commissions                          157                       158
    Interest and dividends             5,885                     5,083
    Other                                 17                        14
                                     -------                   -------
         Total revenues                6,845                     6,175
     Interest expense                  5,669                     4,953
                                       -----                     -----
         Net revenues                  1,176                     1,222
                                       -----                     -----
Non-interest expenses
     Compensation and benefits           619                       617
     Brokerage, commissions and                              
       clearance fees                    105                        99
     Communications                       44                        50
     Professional services                43                        38
     Business development                 35                        38
     Occupancy and equipment              32                        37
     Depreciation and amortization        26                        27
     Management fees                      31                        44
     Other                                86                        99
                                     -------                   -------
       Total non-interest expenses     1,021                     1,049
                                      -----                     -----
Income before taxes                      155                       173
      Provision for income taxes          49                        73
                                      ------                   -------
Net income                            $  106                    $  100
                                      ======                    ======





                 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
ASSETS                                                                                           1997                   1996
                                                                                          ---------------          -----------
<S>                                                                                                  <C>               <C> 
Cash and cash equivalents                                                                     $      215       $       396

Cash and securities segregated and on deposit
  for regulatory and other purposes                                                                  806               663

Securities and other financial instruments owned:
   Governments and agencies                                                                       18,519            21,251
   Corporate stocks                                                                                3,349             3,164
   Corporate debt and other                                                                        4,999             4,739
   Derivatives and other contractual agreements                                                    5,107             5,298
   Mortgages and mortgage-backed                                                                   2,390             2,055
   Certificates of deposit and other money market instruments                                      3,332             3,819
                                                                                                 -------           -------
                                                                                                  37,696            40,326
                                                                                                  ------            ------
Collateralized short-term agreements:
   Securities purchased under agreements to resell                                                42,884            33,145
   Securities borrowed                                                                            20,901            19,035

Receivables:
   Brokers, dealers and clearing organizations                                                     3,284             4,909
   Customers                                                                                       3,764             3,956
   Others                                                                                          5,181             4,611

Property, equipment and leasehold improvements
  (net of accumulated depreciation and amortization
  of $521 in 1997 and $502 in 1996)                                                                  270               283

Deferred expenses and other assets                                                                   216               214

Excess of cost over fair value of net assets
  acquired (net of accumulated amortization
  of $97 in 1997 and $94 in 1996)                                                                    163               166
                                                                                             -----------       -----------
       Total assets                                                                             $115,380          $107,704
                                                                                                ========          ========       

</TABLE>
                                                                                


                 See notes to consolidated financial statements.


<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
           CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued)
                                   (Unaudited)
                      (in millions, except per share data)
<TABLE>
<CAPTION>
                                                                                              May 31           November 30
LIABILITIES AND STOCKHOLDER'S EQUITY                                                             1997               1996
 <S>                                                                                               <C>                  <C>         
Commercial paper and short-term debt                                                         $     1,760         $    2,299
Securities and other financial instruments sold but not yet purchased:
   Governments and agencies                                                                       12,404              9,326
   Corporate stocks                                                                                3,336              1,143
   Corporate debt and other                                                                        3,250              2,735
   Derivatives and other contractual agreements                                                    4,017              4,662
                                                                                                --------            -------
                                                                                                  23,007             17,866
                                                                                                  ------             ------
Collateralized short-term financing:
   Securities sold under agreements to repurchase                                                 49,978             52,200
   Securities loaned                                                                              13,679             10,085
Advances from Holdings and other affiliates                                                       11,646              8,552
Payables:
   Brokers, dealers and clearing organizations                                                     2,259              2,200
   Customers                                                                                       5,041              6,395
Accrued liabilities and other payables                                                             1,913              2,250
Long-term debt:
   Senior notes                                                                                      222                215
   Subordinated indebtedness                                                                       4,048              3,950
                                                                                               ---------          ---------
           Total liabilities                                                                     113,553            106,012
                                                                                                 -------            -------
Commitments and contingencies

Stockholder's Equity:
   Preferred stock, $.10 par value; 10,000 shares authorized;
        none outstanding
   Common Stock, $.10 par value;  10,000 shares authorized;  1,006 shares issued
       and outstanding in 1997 and 1996;
   Additional paid-in capital                                                                      1,858              1,828
   Foreign currency translation adjustment                                                             3                  3
   Accumulated deficit                                                                               (34)              (139)
                                                                                           -------------       ------------
            Total stockholder's equity                                                             1,827              1,692
                                                                                             -----------        -----------
            Total liabilities and stockholder's equity                                          $115,380           $107,704
                                                                                                ========           ========


</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
                                                                                    1997                     1996
                                                                            ---------------------  --------------
CASH FLOWS FROM OPERATING ACTIVITIES
 <S>                                                                                 <C>                        <C> 
Net income                                                                       $   106                  $    100
                                                                   
Adjustments to reconcile income to net cash provided by
      (used in) operating activities:
         Depreciation and amortization                                                26                        27
         Provisions for losses and other reserves                                     19                        21
         Deferred tax benefit                                                        (24)
         Other adjustments                                                             7                        11
      Net change in:
         Cash and securities segregated                                             (143)                      255
         Securities and other financial instruments owned                          2,630                      (231)
         Securities purchased under agreements to resell                          (9,739)                   (6,122)
         Securities borrowed                                                      (1,866)                   (2,728)
         Receivables from brokers, dealers and clearing
            organizations                                                          1,625                      (690)
         Receivables from customers                                                  192                    (2,218)
         Securities and other financial instruments sold but
             not yet purchased                                                     5,141                       445
         Securities sold under agreements to repurchase                           (2,222)                    9,933
         Securities loaned                                                         3,594                     3,824
         Payables to brokers, dealers and clearing organizations                      59                      (981)
         Payables to customers                                                    (1,354)                     (288)
         Accrued liabilities and other payables                                     (356)                      116
         Other operating assets and liabilities, net                                (554)                   (4,477)
                                                                                 -------                    ------

       Net cash used in operating activities                                     $(2,859)                  $(3,003)
                                                                                  -------                   -------


</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
                                                                                     1997                     1996
                                                                                 ---------------------  --------------
CASH FLOWS FROM FINANCING ACTIVITIES
    <S>                                                                              <C>                          <C>
   Principal payments of senior notes                                                                       $   (146)
   Proceeds from issuance of subordinated indebtedness                            $  (409)                       775
   Principal payments of subordinated indebtedness                                    508                       (261)
   Net (payments for) proceeds from commercial paper and
     short-term debt                                                                 (539)                     3,768
   Increase (decrease) in advances from Holdings
     and other affiliates                                                           3,094                     (1,044)
   Capital contributions                                                               48
   Dividends and capital distributions paid                                           (18)                      (123)
                                                                                   ------                     ------
     Net cash provided by financing activities                                      2,684                      2,969
                                                                                    -----                      -----

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property, equipment and
     leasehold improvements                                                            (6)                        (3)
                                                                                 --------                    --------
  Net cash used in investing activities                                                (6)                        (3)
                                                                                 --------                    --------
  Net change in cash and cash equivalents                                            (181)                       (37)
                                                                                   ------                     ------
  Cash and cash equivalents, beginning of period                                      396                        287
                                                                                   ------                     ------
       Cash and cash equivalents, end of period                                    $  215                     $  250
                                                                                   ======                     ======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

             Interest  paid  totaled  $5,676 and $4,883 for the six months ended
May 31, 1997 and 1996, respectively.  Income taxes paid totaled $307 and $17 for
the six months ended May 31, 1997 and 1996, respectively.

</TABLE>



                 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 and South  America and the Asia  Pacific  Region.  Holdings
provides investment banking and capital markets services in Europe and Asia. The
Company is engaged  primarily  in  providing  financial  services.  All material
intercompany  accounts and transactions  have been eliminated in  consolidation.
The Company's  financial  statements  have been prepared in accordance  with the
rules and regulations of the Securities and Exchange Commission (the "SEC") with
respect to the Form 10-Q and reflect all normal recurring adjustments which are,
in the opinion of management,  necessary for a fair  presentation of the results
for the  interim  periods  presented.  Pursuant  to such rules and  regulations,
certain  footnote  disclosures  which  are  normally  required  under  generally
accepted accounting principles have been omitted. The Consolidated  Statement of
Financial  Condition at November 30, 1996 was derived from the audited financial
statements.  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, 1996 (the "Form 10-K").

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

2.  Long-Term Debt:

         During the six months  ended May 31,  1997,  the  Company  issued  $508
million of fixed-rate  subordinated  indebtedness  with maturities  ranging from
1998 to 2007. Of the total  issuances  for the first half of 1997,  $300 million
was fixed rate and $208  million was floating  rate.  The  Company's  fixed rate
issuances have been effectively converted to floating rate obligations, based on
the London  Interbank  Offered Rates ("LIBOR")  through the use of interest rate
swaps. In addition, $409 million of long-term debt matured during the six months
ended May 31, 1997.

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, 1997, LBI's regulatory net capital,
as  defined,  of $1,619  million  exceeded  the  minimum  requirement  by $1,515
million.

         The Company's  triple-A rated derivatives  subsidiary,  Lehman Brothers
Financial Products Inc. ("LBFP"),  has established certain capital and operating
restrictions  which are reviewed by various  rating  agencies.  At May 31, 1997,
LBFP had capital which exceeded the  requirement  of the most  stringent  rating
agency by $100 million.


<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 instruments 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  both in a trading capacity and as an end user. Acting in a trading
capacity,  the Company enters into derivative  transactions to satisfy the needs
of its clients  and to manage the  Company's  own  exposure to market and credit
risks resulting from its trading  activities in cash instruments  (collectively,
"Trading-Related  Derivative  Activities").  For a  further  discussion  of  the
Company's derivative related activities,  refer to "Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations - Off-Balance  Sheet
Financial Instruments and Derivatives" and Note 8 to the Consolidated  Financial
Statements, included in the Form 10-K.

Trading-Related  Derivative Activities

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

<TABLE>
<CAPTION>


                                                                                                     Average Fair Value*
                                                                       Fair Value*                    Six Months Ended
                                                                   May 31, 1997                        May 31, 1997
                                                                   ------------                        ------------
                                                                  Assets      Liabilities          Assets       Liabilities
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>               <C>             <C> 
Interest rate and currency swaps and options
     (including caps, collars and floors)                         $3,957        $2,696            $4,178         $2,687
Foreign exchange forward contracts and options                       745         1,000               830          1,312
Options on other fixed income securities,
     mortgage-backed securities forward contracts
     and options                                                     207           245               214            211
Equity contracts (including equity swaps, warrants
     and options)                                                    141            60               124             44
Commodity contracts (including swaps, forwards,
     and options)                                                     57            16                41             25
                                                                -------------------------------------------------------

Total                                                             $5,107        $4,017            $5,387         $4,279
                                                                -------------------------------------------------------

</TABLE>

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


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

                                                                                                 Average Fair Value*
                                                                      Fair Value*               Twelve Months Ended
                                                                November 30, 1996                     November 30, 1996
                                                                -----------------                     -----------------
(in millions)                                                     Assets      Liabilities          Assets       Liabilities
---------------------------------------------------------------------------------------------------------------------------
  <S>                                                               <C>          <C>                <C>            <C>
Interest rate and currency swaps and options
     (including caps, collars and floors)                         $3,943        $3,159             $3,336        $1,917
Foreign exchange forward contracts and options                       834         1,089                668         1,118
Options on other fixed income securities,
     mortgage-backed securities forward contracts
     and options                                                     221           248                236           237
Equity contracts (including equity swaps, warrants
     and options)                                                    254           127                233            74
Commodity contracts (including swaps, forwards,
     and options)                                                     46            39                 51            50
                                                                 ------------------------------------------------------

Total                                                             $5,298        $4,662             $4,524        $3,396
                                                                  -----------------------------------------------------
</TABLE>

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

         Assets  included in the table above  primarily  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  related  to
derivative contracts at May 31, 1997 represents the Company's net receivable for
derivative financial  instruments before  consideration of collateral.  Included
within  the  $5,107  million  fair  value of assets at May 31,  1997 was  $4,909
million  related  to  swaps  and OTC  contracts  and  $198  million  related  to
exchange-traded option and warrant contracts.

         With  respect  to OTC  contracts,  the  Company's  views its net credit
exposure to be $3,376  million at May 31, 1997,  representing  the fair value of
the Company's OTC contracts in an unrealized gain position,  after consideration
of collateral of $1,533 million. Presented below is an analysis of the Company's
net credit  exposure  for OTC  contracts  based upon  internal  designations  of
counterparty credit quality.

Counterparty               S&P/Moody's               May 31, 1997
 Risk Rating                  Equivalent                Net Credit
Exposure
       1                AAA/Aaa                           21%
       2                AA-/Aa3 or higher                 19%
       3                A-/A3 or higher                   49%
       4                BBB-/Baa3 or higher                6%
       5                BB-/Ba3 or higher                  4%
       6                B+/B1 or lower                     1%
--------------------------------------------------------------------------------

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


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


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

5.  Other Commitments and Contingencies:

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

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

6.  Related Party Transactions:

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

         During the six months ended May 31, 1997,  the Company paid $18 million
to Holdings as a return of capital.

7.   Incentive Plans:

         In the  first  quarter  of 1997,  Holdings  granted  approximately  2.3
million options (the "1997 Options") under the 1996 Management Ownership Plan to
members of the Corporate  Management  Committee and to certain senior  officers.
The 1997 Options  become  exercisable in four and one-half years and expire five
years after grant  date;  exercisability  is  accelerated  ratably in  one-third
increments at such time as the closing price of Holdings' common stock meets, or
exceeds,  $39, $42, and $45 for fifteen out of twenty consecutive  trading days.
No compensation expense has been recognized for these stock options as they were
issued with an exercise  price above the market price of the common stock on the
date of the grant.


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


8.  Severance Charge:

         Holdings   recorded  an  $84  million  severance  charge  ($50  million
aftertax)  in the fourth  quarter of 1996 related to certain  strategic  actions
taken to improve ongoing profitability.  The 1996 severance charge reflected the
culmination of a worldwide  business unit economic  performance review which was
undertaken  in the  fourth  quarter  of 1996 to focus  the  Company  on its core
investment  banking,  equity and fixed  income  sales and  trading  areas.  This
formalized  review resulted in personnel  reductions of approximately 270 people
across a number of underperforming fixed income and equity businesses, including
exiting  the  precious  metals  business in the U.S.,  Europe and Asia;  exiting
energy  trading in the U.S.  and Europe;  consolidating  Asian fixed income risk
management  activities  into one center in Tokyo;  refocusing  foreign  exchange
trading  activities and combining the Company's New York Private Client Services
offices.  Additionally,  the charge reflects  various other strategic  personnel
reductions  which were aimed at delayering  management.  The Holdings  severance
charge is expected to lead to personnel cost savings beginning in fiscal 1997 of
$90 million annually.  Holdings charge is also expected to result in a permanent
decrease  in  nonpersonnel  expenses  of  approximately  $20  million  annually.
Holdings  intends to  reinvest  substantially  all these  savings  into  certain
businesses to expedite the Holdings'  strategic  initiatives;  these actions are
expected to result in improved operating revenues.

         The Company recorded a $23 million  severance charge ($14 million 
aftertax) in the fourth quarter of 1996 related to these  actions.  The
Company's  cash  outlays  relating  to the charge  were approximately  $12
million in the fourth quarter of 1996 and  approximately  $11 million during the
first six months of 1997.






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

Business Environment

         Market  conditions in the first half of 1997 reflected record corporate
advisory  activities,  strong  underwriting  volumes in  worldwide  fixed income
products,  and generally active trading  activities in worldwide debt and equity
markets.  These  favorable  conditions  were mitigated in part by  significantly
reduced  equity  underwriting  volumes and  increased  volatility in the foreign
exchange markets, particularly in Europe and Asia.

         Global fixed income markets were robust  throughout  most of the first 
quarter of 1997, with heavy trading volumes in both the U.S. and Europe. 
Trading activity in the U.S.  continued to reflect investor  optimism that the
environment of sustained  growth and low inflation  levels would continue.  
Additionally,  U.S.  trading  activity was bolstered by active purchases of U.S.
securities by foreign  investors  due to the favorable  U.S.  macroeconomic 
environment  and the strong dollar.  In late March 1997,  a strong  pattern of 
growth in the U.S.  economy  prompted  the Federal  Reserve to raise the
Federal  Funds rate by 25 basis points to 5 1/2%.  This rate hike  precipitated 
a general  decline in trading  volumes and origination activities in the U.S. 
fixed income market.

         Rising interest rates and fears of additional rate hikes by the Federal
Reserve  continued to depress U.S.  trading and origination  activities  through
March and into April.  However, by mid-April,  economic data reinforced the view
that U.S.  interest  rates would  remain  stable as GDP growth  decelerated  and
inflation  indicators  remained  low.  This led to a recovery of the U.S.  fixed
income  markets in late April as  interest  rates  began to decline  and trading
volumes regained  strength.  This recovery  further  accelerated in May and into
June,  with interest  rates on the 30-year U.S.  Treasury  declining to 6.65% on
June 20, 1997 from a peak of 7.17% on April 11th.

         Trading  activities  in  worldwide  equity  markets  continued  to show
strength in 1997. U.S.  trading volumes  improved over prior year record levels,
as  investor  demand  remained  strong and the  equity  markets  benefited  from
increasing  capital  flows.  The  U.S.  equity  markets,  while  experiencing  a
correction in the second quarter,  continued to show strength  surpassing  prior
year valuation  levels.  The trough in the S&P 500 was also on April 11 when the
index  reached  738;  the U.S.  stock  market is up more  than 20%  since  then.
European  equity  markets saw improved  trading  volumes and valuations in 1997,
despite a  valuation  adjustment  in March,  as the  stronger  U.S.  dollar  and
declining   European  rate   environment   contributed  to  a  favorable  equity
environment.



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



         Worldwide underwriting volumes in fixed income products remained strong
in the first half of 1997.  U.S.  underwriting  volumes,  while  experiencing  a
slowdown in March and April,  strengthened  over the prior year. The improvement
was fueled in part by straight debt  financings  timed in anticipation of higher
interest rates, as well as favorable  pricing in the spread sectors.  Equity and
related underwriting volumes declined  considerably from the strong 1996 levels,
as rising  interest rates and the U.S.  equity market  correction had a negative
effect  on the  timing of  equity  offerings.  New  issuance  activity  was also
negatively impacted by the volatility  experienced in the international markets,
as the  weakening  of the Yen and certain  Asian  markets  caused  equity-market
selloffs and corresponding reductions in new issuance activities.  Elections and
EMU uncertainty also contributed to reduced European issuance activity.

         Corporate finance advisory  activities outpaced the record 1996 levels,
reflecting increased consolidation and globalization across industry sectors and
the overall strength in the global capital markets. The pace of strategic merger
and acquisition activity is expected to remain strong throughout 1997.

         While  fiscal  1996 and  1997  have  been  characterized  by  favorable
financial markets, nevertheless, the financial services industry is cyclical. As
a result,  the Company's  businesses are evaluated  across the market cycles for
operating  profitability  and  their  contribution  to the  Company's  long-term
strategic product base, its global presence, and its risk management practices.











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, 1997 and 1996

         The Company  reported net income of $59 million for the second  quarter
ended  May 31,  1997,  representing  an  increase  of 7% from net  income of $55
million for the second quarter ended May 31, 1996.

         Net revenues  decreased to $555 million for the second  quarter of 1997
from $615 million for the second quarter of 1996 as improved performances in the
Company's corporate finance advisory and merchant banking businesses were offset
by reduced revenues in fixed income and equities.

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

         Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest  revenues  depending upon the method of financing and/or hedging
related to  specific  inventory  positions.  The Company  evaluates  its trading
strategies  on an overall  profitability  basis which  includes  both  principal
transactions  revenues  and net  interest.  Therefore,  changes in net  interest
should  not be viewed in  isolation  but  should be viewed in  conjunction  with
revenues from principal  transactions.  Principal  transactions and net interest
revenues  decreased  to $262  million  for the second  quarter of 1997 from $350
million for the second  quarter of 1996.  The decrease in the combined  revenues
from principal  transactions  and net interest in the second quarter of 1997 was
the result of reduced  revenues from  customer flow  activities in certain fixed
income and equity products.

         The  following   table  of  net  revenues  by  business  unit  and  the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that  reflects the manner in which the Company  manages its
businesses.  For internal management  purposes,  the Company has been segregated
into  four  major  business  units:  Fixed  Income,  Equity,  Corporate  Finance
Advisory,  and Merchant  Banking.  Each business  unit  represents a grouping of
financial activities and products with similar  characteristics.  These business
activities result in revenues that are recognized in multiple revenue categories
contained in the Company's Consolidated Statement of Operations. Net revenues by
business unit contain certain  internal  allocations,  including  funding costs,
which are centrally managed.


<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, 1997

                                      Principal
                                  Transactions and                         Investment
                                     Net Interest        Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
 <S>                                        <C>              <C>               <C>            <C>            <C>
Fixed Income                               $231              $  9              $64           $  2           $306
Equity                                       34                62               37                           133
Corporate Finance Advisory                                                      56                            56
Merchant Banking                             (4)                                54                            50
Other                                         1                 3               (1)             7             10
---------------------------------------------------------------------------------------------------------------------------
                                           $262               $74             $210           $  9           $555
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

Three Months Ended May 31, 1996

                                      Principal
                                  Transactions and                         Investment
                                      Net Interest       Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
 <S>                                       <C>                <C>              <C>             <C>            <C>
Fixed Income                               $319               $13              $68           $  1           $401
Equity                                       37                60               60              1            158
Corporate Finance Advisory                                                      47                            47
Merchant Banking                             (5)                                 7                             2
Other                                        (1)                4                               4              7
---------------------------------------------------------------------------------------------------------------------------
                                           $350               $77             $182           $  6           $615
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


         Fixed Income.  The Company's fixed income net revenues reflect customer
flow  activities  (both  institutional  and  high-net-worth  retail),  secondary
trading, debt underwriting,  syndicate and financing activities related to fixed
income products. Fixed income products include 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 24% to
$306  million  for the second  quarter of 1997 from $401  million for the second
quarter of 1996.  The reduction in the second  quarter  results versus the prior
year quarter  reflected  reduced customer flow activities from a number of fixed
income  products  including  mortgages,  fixed income  derivatives,  and foreign
exchange.  Investment banking revenues, as a component of fixed income revenues,
were relatively  unchanged,  decreasing to $64 million for the second quarter of
1997 from $68 million for the second quarter of 1996.

         Equity.  Equity net revenues  reflect  customer flow  activities  (both
institutional   and   high-net-worth   retail),    secondary   trading,   equity
underwriting,   equity  finance,   equity   derivatives  and  equity   arbitrage
activities.  The Company's equity net revenues decreased to $133 million for the
second  quarter  of 1997 from $158  million  for the  second  quarter of 1996 as
customer  trading and  underwriting  activities were negatively  impacted by the
market  transaction.  Decreased  equity  revenues in 1997  resulted from reduced
contributions  from most products  including  NASDAQ,  U.S.  listed,  and equity
financing.  Investment  banking  revenues,  as a component  of equity  revenues,
decreased to $37 million for the second quarter of 1997 from $60 million for the
second  quarter  of 1996 as the  higher  interest  rate  environment  prompted a
correction  in  the  U.S.   equity   markets,   resulting  in  lower  levels  of
underwritting volume.


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


         Corporate  Finance  Advisory.  Corporate finance advisory net revenues,
classified  in the  Consolidated  Statement  of  Operations  as a  component  of
investment banking revenues, result primarily from fees earned by the Company in
its role as  strategic  advisor to its clients.  This role  consists of advising
clients on mergers and acquisitions,  divestitures, leveraged buyouts, financial
restructurings,  and a variety of cross-border  transactions.  Net revenues from
corporate  finance advisory  activities  increased to $56 million for the second
quarter of 1997,  reflecting a 19% increase  from the $47 million  recognized in
the second quarter of 1996. This increase exemplified  continued strength in the
overall merger and acquisition market environment.

         Merchant Banking.  The Company is the general partner for four merchant
banking   partnerships.   Current  merchant  banking  investments  held  by  the
partnerships   include  both  publicly   traded  and  privately  held  companies
diversified on a geographic and industry  basis.  Merchant  banking net revenues
primarily  represent the Company's  proportionate  share of net realized and net
unrealized gains and losses from the sale and revaluation of investments held by
the partnerships.  Such amounts are classified in the Consolidated  Statement of
Operations as a component of investment  banking revenues.  Merchant banking net
revenues also reflect the net interest  expense relating to the financing of the
Company's investment in the partnerships. Merchant banking net revenues were $50
million for the second  quarter of 1997 and $2 million in the second  quarter of
1996.  This  increase was  principally  due to a realized  gain on the sale of a
significant  portion of a publicly traded  investment held by the  partnerships.
The Company  expects to complete the  divestiture of both this investment and an
additional investment in the third quarter of 1997.

         Non-Interest Expenses.  Non-interest expenses were $469 million for the
second  quarter  of 1997  and  $520  million  for the  second  quarter  of 1996.
Compensation  and  benefits  expense  decreased  to $259  million for the second
quarter of 1997 from $303 million for the second quarter of 1996  reflecting the
lower level of revenues in 1997.

         Income Taxes.  The  Company's  income tax provision was $27 million for
the second  quarter of 1997  compared to $40  million for the second  quarter of
1996.  The effective tax rate was 31% for the second quarter of 1997 and 42% for
the second  quarter of 1996.  The decrease in the effective  tax rate  primarily
reflects  an  increase  in  tax  benefits  attributable  to  income  subject  to
preferential  tax  treatment  and an increase in the  Company's net deferred tax
assets resulting from a change in state and local tax laws.


<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, 1997 and 1996

         The  Company  reported  net income of $106  million  for the six months
ended May 31,  1997,  representing  an  increase  of 6% from net  income of $100
million for the six months ended May 31, 1996.

         Net  revenues  decreased  to $1,176  million for the six months of 1997
from $1,222 million for the six months of 1996 as improved  performances  in the
Company's  equities,  corporate finance advisory and merchant banking businesses
were offset by reduced revenues from fixed income.

         Principal  transactions  and net  interest  revenues  decreased to $600
million for the six months of 1997 from $708 million for the six months of 1996.
The  decrease in the  combined  revenues  from  principal  transactions  and net
interest  in the six  months of 1997 was the  result of  reduced  revenues  from
customer flow activities in certain fixed income and equity products.

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

<TABLE>
<CAPTION>

Six Months Ended May 31, 1997

                                      Principal
                                  Transactions and                         Investment
                                     Net Interest        Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
   <S>                                      <C>             <C>                <C>             <C>          <C>
Fixed Income                             $  533             $  18             $152           $  3         $  706
Equity                                       70               132               91              1            294
Corporate Finance Advisory                                                     102                           102
Merchant Banking                             (7)                                57                            50
Other                                         4                 7                              13             24
---------------------------------------------------------------------------------------------------------------------------
                                         $  600              $157             $402            $17         $1,176
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

Six Months Ended May 31, 1996

                                      Principal
                                  Transactions and                         Investment
                                      Net Interest       Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
   <S>                                      <C>             <C>                <C>             <C>          <C>
Fixed Income                             $  670             $  30             $131           $  4         $  835
Equity                                       45               119              109              3            276
Corporate Finance Advisory                                                      87                            87
Merchant Banking                             (7)                                15                             8
Other                                                           9                               7             16
---------------------------------------------------------------------------------------------------------------------------
                                         $  708              $158             $342            $14         $1,222
---------------------------------------------------------------------------------------------------------------------------

</TABLE>

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



         Fixed Income.  Fixed income net revenues  decreased to $706 million for
the six months of 1997 from $835 million for the six months of 1996. The reduced
revenues were primarily in mortgages and foreign  exchange.  Investment  banking
revenues, as a component of fixed income revenues, increased to $152 million for
the six  months  of 1997  from $131  million  for the six  months of 1996 due to
increased underwriting volumes and a mix change to higher margin debt products.

         Equity. The Company's equity net revenues increased to $294 million for
the six months of 1997 from $276  million for the six months of 1996.  Increased
revenues from equity  derivatives  and  convertible  securities  were  partially
offset by a decline in U.S.  listed equity  trading and NASDAQ  revenues for the
first  half of 1997.  Investment  banking  revenues,  as a  component  of equity
revenues,  decreased to $91 million for the six months of 1997 from $109 million
for the six months of 1996 as the higher  interest rate  environment  prompted a
correction in the U.S. equity markets, resulting in lower levels of underwriting
volume.

         Corporate  Finance  Advisory.   Net  revenues  from  corporate  finance
advisory  activities  increased  to $102  million  for the  six  months  of 1997
reflecting a 17% increase  from the $87 million  recognized in the six months of
1996.  This  increase  reflected  continued  strength in the overall  merger and
acquisition market environment.

         Merchant  Banking.  Merchant  banking net revenues were $50 million for
the six months of 1997 and $8 million in the six months of 1996.  This  increase
was principally due to a realized gain on the sale of a significant portion of a
publicly  traded  investment  held by the  partnerships.  The Company expects to
complete  the  divestiture  of this and an  additional  investment  in the third
quarter of 1997.

         Non-Interest  Expenses.  Non-interest  expenses were $1,021 million for
the  six  months  of 1997  and  $1,049  million  for the  six  months  of  1996.
Compensation and benefits expense was $619 million for 1997 and $617 million for
1996.

         Income Taxes.  The  Company's  income tax provision was $49 million for
the first half of 1997  compared to $73 million for the first half of 1996.  The
effective  tax  rate  was 32% for 1997 and 42% for  1996.  The  decrease  in the
effective tax rate primarily  reflects an increase in tax benefits  attributable
to income subject to preferential tax treatment and an increase in the Company's
deferred tax assets resulting from a change in state and local tax laws.




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



 Liquidity and Capital Resources

Overview

         As a leading global  investment bank that actively  participates in the
global capital markets, the Company has large and diverse capital  requirements.
Many of the  businesses  in which the Company  operates  are capital  intensive.
Capital is required to finance,  among other things,  the  Company's  securities
inventory,  underwriting  activities,  principal  investments,  merchant banking
activities and investments in fixed assets.

         The Company's total assets  increased to $115.4 billion at May 31, 1997
from $107.7  billion at  November  30,  1996.  The  increase in total  assets is
primarily  attributable  to an increase in matched book fixed  income  financing
activities.

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

Funding and Capital Policies

         The Company's  Finance  Committee,  which includes senior officers from
key areas of the  Company,  is  responsible  for  establishing  and managing the
funding and liquidity policies of the Company.  The Finance  Committee's funding
and liquidity  policies  include  recommendations  for capital and balance sheet
size as well as the allocation of capital and balance sheet to product areas. In
addition,  the treasury  staff  members of the Finance  Committee  work with the
Regional Asset and Liability Committees to ensure coordination of global funding
efforts.  The  Regional  Asset and  Liability  Committees  are aligned  with the
Company's  geographic  funding  centers  and are  responsible  for  implementing
funding  strategies  consistent with the direction set by the Finance  Committee
and for monitoring and managing liquidity for the region.

         The  primary  goal of the  Company's  funding  policies  is to  provide
sufficient  liquidity and availability of funding sources across a wide range of
market  environments.  There are five key elements of its funding  strategy that
the Company attempts to achieve:

o To maintain an  appropriate  Total  Capital  structure to support the business
activities in which the Company is engaged.

o    To minimize  liquidity and refinancing risk by funding the Company's assets
     on a global basis with unsecured  liabilities which have maturities similar
     to the anticipated liquidation period of the assets.

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



o    To  maintain  sufficient  liquidity  during a period  of  financial  stress
     through  a  combination  of  collateralized  short-term  financings,  Total
     Capital and a contingency funding plan.  Financial stress is defined as any
     event which severely  constrains the Company's access to unsecured  funding
     sources.

o To obtain  diversified  funding through a global investor base which maximizes
liquidity and reduces concentration risk.

o    To maintain funding availability in excess of actual utilization.

Short-Term Funding

         The Company  strives to maximize the portion of the  Company's  balance
sheet that is funded through  collateralized  borrowing  sources,  which in turn
minimizes the reliance placed upon unsecured short-term debt.

         Collateralized borrowing sources include 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 types of collateralized  borrowing  sources are less  credit-sensitive
and have  historically  been a more stable financing source under adverse market
conditions. Also, collateralized borrowing sources generally provide the Company
with access to lower cost funding.

         The amount of the Company's  collateralized  borrowing  activities will
vary  reflecting  changes in the mix and overall  levels of securities and other
financial instruments owned and global market conditions. However, at all times,
the vast  majority  of the  Company's  assets  are  funded  with  collateralized
borrowing  sources.  At May 31, 1997 and November 30, 1996,  $87 billion and $80
billion,  respectively,  of the Company's total balance sheet was financed using
collateralized  borrowing  sources.  As of May 31, 1997 and  November  30, 1996,
respectively,  short-term  debt  outstanding  was $1.8 billion and $2.3 billion.
There was no commercial  paper  outstanding  as of May 31, 1997 and November 30,
1996.




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



Total Capital

         In accordance with the Company's  liquidity plan, the Company increased
its Total Capital base in 1997 to $6.1 billion at May 31, 1997 from $5.9 billion
at November 30, 1996.  Total Capital  increased  primarily due to an increase in
long-term debt and the retention of earnings.

                                     May 31                   November 30
(in millions)                         1997                       1996
--------------------------------------------------------------------------------
Long-Term Debt

     Senior Notes                    $   222                    $   215
     Subordinated Indebtedness         4,048                      3,950
                                     -------                    -------
                                       4,270                      4,165

Stockholder's Equity                   1,827                      1,692

--------------------------------------------------------------------------------
Total Capital                         $6,097                     $5,857
--------------------------------------------------------------------------------

         During the second  quarter of 1997,  the Company issued $508 million in
long-term debt, which was $99 million in excess of its maturing debt.  Long-term
debt increased to $4.3 billion at May 31, 1997 from $4.2 billion at November 30,
1996 with a weighted average maturity of 4.8 years at May 31, 1997 and 4.5 years
at November 30, 1996.

         The   increase  in  Total   Capital   also   reflects  an  increase  in
stockholders'  equity to $1.8  billion  at May 31,  1997 from  $1.7  billion  at
November 30, 1996. The net increase in stockholders' equity was primarily due to
the retention of earnings and capital contributions received.

         At May 31, 1997, the Company had  approximately  $1.1 billion available
for the issuance of debt securities under various shelf registrations.



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



Credit Ratings

         The Company, like other companies in the securities industry, relies on
external sources to finance a significant portion of its day-to-day  operations.
The Company's access and cost of funding is generally  dependent upon its short-
and long-term debt ratings. As of May 31, 1997, the current short- and long-term
senior debt ratings of the Company are as follows:
                                                     LBI
                                       Short-term           Long-term**
--------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co.            D-1                A/A-
Fitch Investors Service Inc.               F-1                A/A-
IBCA                                       A1                 A/A-
Moody's                                    P2                 A3*/Baa1
S&P+                                       A-1                A+*/A
Thomson BankWatch                          TBW-1              A/A-
--------------------------------------------------------------------------------
  * Provisional ratings on shelf registration
** Senior/subordinated
+  Long term ratings outlook revised to negative on September 21, 1994

High Yield Securities

         The Company  underwrites,  trades,  invests  and makes  markets in high
yield corporate debt securities. The Company also syndicates, trades and invests
in  loans  to below  investment  grade-rated  companies.  For  purposes  of this
discussion,  high yield debt  securities  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 securities
are carried at market value and unrealized  gains or losses for these securities
are  reflected  in the  Company's  Consolidated  Statement  of  Operations.  The
Company's  portfolio  of such  securities  at May 31, 1997 and November 30, 1996
included long positions  with an aggregate  market value of  approximately  $1.6
billion and $1.3 billion,  respectively,  and short  positions with an aggregate
market value of approximately  $131 million and $99 million,  respectively.  The
portfolio  may from  time to time  contain  concentrated  holdings  of  selected
issues.  The  Company's  largest  high yield  position  was $205 million and $78
million at May 31, 1997 and November 30, 1996, respectively.

Merchant Banking Activities

         The Company's merchant banking  activities include  investments in four
partnerships,  for which the Company acts as general partner,  as well as direct
investments.  At May 31, 1997, the investment in merchant  banking  partnerships
was $185 million.  The Company's policy is to carry its  investments,  including
its partnership interests,  at fair value based upon the Company's assessment of
the underlying investments.


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



Non-Core Activities and Investments

         In March 1990, the Company discontinued the origination of partnerships
(the assets of which are primarily real estate) and  investments in real estate.
Currently,  the Company acts as a general partner for approximately $3.5 billion
of  partnership  investment  capital  and  manages  the  remaining  real  estate
investment  portfolio.  At May 31, 1997, the Company's investments in these real
estate  activities,  as well as  commitments  and contingent  liabilities  under
guarantees   and   credit   enhancements   were  fully   reserved.   In  certain
circumstances,  the Company provides  financial and other support and assistance
to such  investments  to maintain  investment  values.  There is no  contractual
requirement that the Company continue to provide this support.

         Management's  intention  with regard to non-core  assets is the prudent
liquidation of these investments as and when possible.

Year 2000

         Holdings has developed a detailed  plan to modify its computer  systems
in  anticipation  of the  year  2000.  Many  of  the  existing  systems  process
transactions  based on storing two digits for the year of a transaction,  rather
than full four digits.  If these systems are not  identified  and  reconfigured,
year 2000  transactions  would be  processed  with year "00" which would lead to
processing inaccuracies and potential inoperability. Any costs incurred relating
to this project will be expensed as technology  maintenance  costs in accordance
with generally accepted accounting principles.





<PAGE>

                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 1   Legal Proceedings

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

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


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

         FCH  Shareholder  and Agent Actions.  On April 21, 1997, the California
District  Court entered an order  approving the  settlement  and  dismissing the
Action.

Sonnenfeld v. The City and County of Denver, Colorado, et al (Reported in LBI's 
Annual Report on Form 10-K)

         On May 30, 1997, the parties entered into a Memorandum of Understanding
to settle  and  dismiss  the action and are in the  process of  entering  into a
definitive  settlement  agreement  which  will be  submitted  to the  Court  for
approval.

AIA Holding SA et al. v. Lehman Brothers Inc. and Bear Stearns & Co. Inc.

          On July 9, 1997, LBI was served with a complaint in the U.S.  District
Court for the Southern District of New York in which 277 named plaintiffs assert
24 causes of action  against  LBI and Bear  Stearns & Co.,  Inc.  The  amount of
damages  claimed is  unspecified.  The claims  arise from the  activities  of an
individual  named Ahmad  Daouk,  who was employed as an  introducing  broker who
introduced  accounts to Shearson  Lehman  Hutton  between  1988 and 1992.  Daouk
allegedly  perpetrated a fraud upon the claimants,  who are mostly  investors of
middle eastern origin,  and the compliant alleges that Shearson breached various
contractual and common law duties owed to the investors.






<PAGE>


ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K

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

(a)      Exhibits:

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

           27.    Financial Data Schedule


(b)      Reports on Form 8-K:

         None












<PAGE>



                                   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, 1997                     By          /s/ Richard S. Fuld, Jr.
                                                      -------------------------
                                                         Richard S. Fuld, Jr.
                                                   Chairman of the Board and
                                                     Chief Executive Officer
                                                  (Principal Executive Officer)




Date:    July 15, 1997                   By          /s/ Charles B. Hintz
                                                    -----------------------
                                                         Charles B. Hintz
                                                  Chief Financial Officer
                                               (Principal Financial Officer)






<PAGE>




                                  EXHIBIT INDEX


Exhibit No.           Exhibit



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

Exhibit 27.        Financial Data Schedule





<PAGE>



                                                                     Exhibit 12


<PAGE>


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


<TABLE>
<CAPTION>


                                                                 For the            For the             For the          For the
                                          For the Year        Eleven Months           Year               Year           Six Months
                                              Ended               Ended              Ended               Ended            Ended
                                            December 31        November 30        November 30         November 30         May 31
                                            -----------        -----------        -----------         -----------         ------
                                         1992       1993           1994               1995               1996              1997
                                         ----       ----           ----               ----               ----              ----
Fixed charges:
  <S>                                     <C>        <C>            <C>              <C>                  <C>              <C>  
  Interest expense:
    Subordinated indebtedness          $   210    $  192        $   184           $   204           $     221           $   126
    Bank loans and other
      borrowings*                        4,363     4,393          5,661             9,750               9,900             5,543
    Interest component of
rentals
      of office and equipment               64        62             27                25                  18                 7
  Other adjustments**                      127       101             53                 2                   7                 3
                                          ----      ----        --------         ---------           ---------           -------
                                                  
    TOTAL (A)                           $4,764    $4,748         $5,925            $9,981             $10,146            $5,679
                                        ======    ======         ======            ======             =======            ======

Earnings:
  Pre-tax income (loss) from
    continuing operations              $   319    $ (146)        $    1            $   78           $     309           $   155
                                                      
  Fixed charges                          4,764     4,748          5,925             9,981              10,146             5,679
  Other adjustments***                     (68)      (68)           (52)               (1)                 (6)               (3)
                                      --------    --------       -------       -----------         -----------         ---------
    TOTAL (B)                           $5,015    $4,534         $5,874           $10,058             $10,449            $5,831
                                        ======    ======         ======           =======             =======            ======
(B / A)                                   1.05      ****           ****              1.01                1.03              1.03
                                    
 </TABLE>

*        Includes amortization of long-term debt discount.

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

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

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




<PAGE>


                                                                  Exhibit 27