SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                 For the quarterly period ended August 31, 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            (I.R.S. Employer Identification No.)
     of incorporation)

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

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

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

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

As of October 13, 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 AUGUST 31, 1997

                                      INDEX

Part I.  FINANCIAL INFORMATION                                     Page Number

  Item 1.   Financial Statements - (unaudited)                             

                 Consolidated Statement of Operations -
                   Three and Nine Months Ended
                   August 31, 1997 and 1996 ............................... 3


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

                 Consolidated Statement of Cash Flows -
                   Nine Months Ended
                   August 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................ 17

Part II. OTHER INFORMATION

  Item 1.   Legal Proceedings     ......................................... 30

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

Signatures................................................................. 32

EXHIBIT INDEX         ..................................................... 33

Exhibits


<PAGE>



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

                                                         Three months ended
                                                  August 31          August 31
                                                    1997               1996
                                                -------------         ---------
Revenues
    Principal transactions                           $   195          $     85
    Investment banking                                   295               189
    Commissions                                           90                65
    Interest and dividends                             3,339             2,717
    Other                                                  8                 1
                                                   ---------          --------
         Total revenues                                3,927             3,057
     Interest expense                                  3,228             2,614
                                                       -----             -----
         Net revenues                                    699               443
                                                      ------            ------
Non-interest expenses
     Compensation and benefits                           391               267
     Brokerage, commissions and clearance fees            45                51
     Communications                                       22                24
     Professional services                                21                16
     Business development                                 16                17
     Occupancy and equipment                              17                20
     Depreciation and amortization                        13                13
     Management fees                                      16                 7
     Other                                                47                38
                                                      -------          -------
          Total non-interest expenses                    588               453
                                                      ------            ------
Income (loss) before taxes                               111               (10)
      Provision for (benefit from) income taxes           27               (10)
                                                     -------            ------
Net income (loss)                                     $   84          $      0
                                                      ======          ========




                 See notes to consolidated financial statements.

<PAGE>



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

                                                           Nine months ended
                                                   August 31         August 31
                                                     1997              1996
                                                 -------------      -----------
Revenues
    Principal transactions                             $  579          $  664
    Investment banking                                    697             530
    Commissions                                           247             223
    Interest and dividends                              9,224           7,800
    Other                                                  25              15
                                                     --------         -------
         Total revenues                                10,772           9,232
     Interest expense                                   8,897           7,567
                                                       ------           -----
         Net revenues                                   1,875           1,665
                                                       ------           -----
Non-interest expenses
     Compensation and benefits                          1,010             884
     Brokerage, commissions and clearance fees            150             150
     Communications                                        66              74
     Professional services                                 64              54
     Business development                                  51              55
     Occupancy and equipment                               49              57
     Depreciation and amortization                         39              40
     Management fees                                       47              51
     Other                                                133             137
                                                      -------          ------
          Total non-interest expenses                   1,609           1,502
                                                       ------           -----
Income before taxes                                       266             163
      Provision for income taxes                           76              63
                                                     --------         -------
Net income                                             $  190          $  100
                                                       ======          ======





                 See notes to consolidated financial statements.

<PAGE>


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


<TABLE>
<CAPTION>
                                                                                               August 31     November 30
ASSETS                                                                                           1997               1996
                                                                                          ---------------    -----------

<S>                                                                                           <C>              <C>        
Cash and cash equivalents                                                                     $      129       $       396

Cash and securities segregated and on deposit
  for regulatory and other purposes                                                                  905               663

Securities and other financial instruments owned:
   Governments and agencies                                                                       17,426            21,251
   Corporate stocks                                                                                4,227             3,164
   Corporate debt and other                                                                        4,784             4,739
   Derivatives and other contractual agreements                                                    5,319             5,298
   Mortgages and mortgage-backed                                                                   2,059             2,055
   Certificates of deposit and other money market instruments                                      2,296             3,819
                                                                                                 -------           -------
                                                                                                  36,111            40,326
                                                                                                  ------            ------
Collateralized short-term agreements:
   Securities purchased under agreements to resell                                                48,872            33,145
   Securities borrowed                                                                            15,212            19,035

Receivables:
   Brokers, dealers and clearing organizations                                                     3,969             4,909
   Customers                                                                                       3,951             3,956
   Others                                                                                          3,902             4,611

Property, equipment and leasehold improvements
  (net of accumulated depreciation and amortization
  of $529 in 1997 and $502 in 1996)                                                                  267               283

Deferred expenses and other assets                                                                   218               214

Excess of cost over fair value of net assets
  acquired (net of accumulated amortization
  of $99 in 1997 and $94 in 1996)                                                                    161               166
                                                                                             -----------       -----------
       Total assets                                                                             $113,697          $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>
                                                                                               August 31         November 30
LIABILITIES AND STOCKHOLDER'S EQUITY                                                             1997              1996

<S>                                                                                         <C>                  <C>       
Commercial paper and short-term debt                                                        $        758         $    2,299
Securities and other financial instruments sold but not yet purchased:
   Governments and agencies                                                                       10,590              9,326
   Corporate stocks                                                                                3,176              1,143
   Corporate debt and other                                                                        1,593              2,735
   Derivatives and other contractual agreements                                                    3,428              4,662
                                                                                                --------            -------
                                                                                                  18,787             17,866
                                                                                                  ------             ------
Collateralized short-term financing:
   Securities sold under agreements to repurchase                                                 53,943             52,200
   Securities loaned                                                                              10,124             10,085
Advances from Holdings and other affiliates                                                       12,679              8,552
Payables:
   Brokers, dealers and clearing organizations                                                     3,865              2,200
   Customers                                                                                       5,283              6,395
Accrued liabilities and other payables                                                             2,081              2,250
Long-term debt:
   Senior notes                                                                                      225                215
   Subordinated indebtedness                                                                       4,060              3,950
                                                                                               ---------          ---------
           Total liabilities                                                                     111,805            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                                                                      1,838              1,828
   Foreign currency translation adjustment                                                             3                  3
   Retained earnings (accumulated deficit)                                                            51               (139)
                                                                                           -------------       ------------
            Total stockholder's equity                                                             1,892              1,692
                                                                                             -----------        -----------
            Total liabilities and stockholder's equity                                          $113,697           $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>

                                                                                           Nine months ended
                                                                                  August 31                August 31
                                                                                    1997                     1996
                                                                            ---------------------  --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                <C>                      <C>     
  Net income                                                                       $   190                  $    100
  Adjustments to reconcile income to net cash
      used in operating activities:
         Depreciation and amortization                                                  39                        40
         Provisions for losses and other reserves                                       41                        30
         Deferred tax benefit                                                          (24)
         Other adjustments                                                              13                        15
      Net change in:
         Cash and securities segregated                                               (242)                      (43)
         Securities and other financial instruments owned                            4,215                      (411)
         Securities purchased under agreements to resell                           (15,727)                     (341)
         Securities borrowed                                                         3,823                    (6,849)
         Receivables from brokers, dealers and clearing
            organizations                                                              940                    (2,019)
         Receivables from customers                                                      5                      (893)
         Securities and other financial instruments sold but
             not yet purchased                                                         921                     1,643
         Securities sold under agreements to repurchase                              1,743                     1,549
         Securities loaned                                                              39                     6,859
         Payables to brokers, dealers and clearing organizations                     1,665                       (54)
         Payables to customers                                                      (1,112)                    1,027
         Accrued liabilities and other payables                                       (210)                      109
         Other operating assets and liabilities, net                                   723                    (4,625)
                                                                                    ------                    ------

       Net cash used in operating activities                                       $(2,958)                  $(3,863)
                                                                                    ------                   -------


</TABLE>




                       See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>
                                                                                           Nine months ended
                                                                                  August 31                August 31
                                                                                    1997                     1996
                                                                            ---------------------         --------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                                               <C>                       <C>      
   Principal payments of senior notes                                             $    (1)                  $   (210)
   Proceeds from issuance of subordinated indebtedness                                858                        975
   Principal payments of subordinated indebtedness                                   (750)                      (261)
   Net (payments for) proceeds from commercial paper and
     short-term debt                                                               (1,541)                     3,835
   Increase (decrease) in advances from Holdings
     and other affiliates                                                           4,127                       (256)
   Capital contributions                                                               48                          4
   Dividends and capital distributions paid                                           (38)                      (151)
                                                                                  --------                    ------
     Net cash provided by financing activities                                       2,703                     3,936
                                                                                     -----                     -----

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property, equipment and
     leasehold improvements                                                           (12)                        (3)
                                                                                  -------                    --------
  Net cash used in investing activities                                               (12)                        (3)
                                                                                  -------                    --------
  Net change in cash and cash equivalents                                            (267)                        70
                                                                                   ------                    -------
  Cash and cash equivalents, beginning of period                                      396                        287
                                                                                   ------                     ------
       Cash and cash equivalents, end of period                                    $  129                     $  357
                                                                                   ======                     ======

</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

             Interest  paid totaled  $8,930 and $7,400 for the nine months ended
August 31, 1997 and 1996,  respectively.  Income taxes paid totaled $313 and $11
for the nine months ended August 31, 1997 and 1996, 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 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.  Accounting Policies:

         Derivatives,  typically defined as instruments whose value is "derived"
from an underlying instrument,  index or rate, include futures,  forwards, swaps
and options and other  similar  instruments.  A  derivative  contract  generally
represents future  commitments to exchange interest payment streams based on the
contract or notional  amount or to purchase  or sell  financial  instruments  at
specified terms and future dates. 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").  The
Company's  accounting  methodology for derivatives  depends on both the type and
purpose of the derivative instrument.

         Derivative  transactions  entered into for  Trading-Related  Derivative
Activities  are recorded at market or fair value with realized  gains and losses
reflected currently in principal  transactions in the Consolidated  Statement of
Operations.  Market or fair value for trading  related  instruments is generally
determined  by either  quoted  market  prices (for  exchange-traded  futures and

<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

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,  liquidity
risk, and ongoing  costs.  Further  valuation  adjustments  may be recorded,  as
deemed  appropriate for new or complex  products or for  significant  positions.
These adjustments are integral components of the mark-to-market process.

         The market or fair  value  associated  with  derivatives  utilized  for
trading  purposes  is  recorded  in  the  Consolidated  Statement  of  Financial
Condition on a net by  counterparty  basis where a legal right of set-off exists
and is netted across  products and against cash  collateral when such provisions
are stated in the  master  netting  agreement.  The market or fair value of swap
agreements,  caps and  floors,  and  forward  contracts  in an  unrealized  gain
position,  as well as options  owned and  warrants  held,  are  reported  in the
Consolidated Statement of Financial Condition as assets in derivatives and other
contractual agreements. Similarly, swap agreements, caps and floors, and forward
contracts  in an  unrealized  loss  position,  as well as  options  written  and
warrants   issued,   are  reported  as  liabilities  in  derivatives  and  other
contractual  agreements.  Margin on futures contracts is included in receivables
and payables, as applicable.

         In  addition  to  Trading-Related  Derivative  Activities,  the Company
enters  into  various  derivative  instruments  for  non-trading  purposes as an
end-user to modify the interest rate exposure of certain assets and liabilities.
In this regard,  the Company  utilizes  interest rate swaps,  caps,  collars and
floors to manage the interest rate exposure  associated  with its long-term debt
obligations and secured financing  activities,  including  securities  purchased
under  agreements  to  resell,   securities  borrowed,   securities  sold  under
agreements to repurchase and securities loaned.

         In addition to modifying the interest rate exposure of existing  assets
and liabilities,  the Company utilizes derivative  instruments as an end user to
modify the interest rate  characteristics  of certain  anticipated  transactions
related to its  secured  financing  activities,  where there is a high degree of
certainty  that the Company  will enter into such  contracts.  These  derivative
instruments are designated against existing secured financing transactions based
upon their applicable maturity. The remaining term of the derivative instruments
are designated  against  anticipated  secured financing  transactions which will
replace the existing secured financing  transactions upon maturity.  The Company
continuously monitors the level of secured financing transactions to ensure that
there is a high  degree of  certainty  that it will enter  into the  anticipated
secured financing transactions at a level in excess of the designated derivative
product transactions.

         Derivatives that have been designated as non-trading  related positions
and are  effective in modifying the interest  rate  characteristics  of existing
assets and  liabilities  or  anticipated  transactions  are  accounted for on an
accrual  basis.  Under the accrual  basis,  interest  is accrued  into income or
expense over the life of the contract,  resulting in the net interest  impact of
the  derivative  and the  underlying  hedged  item  being  recognized  in income
throughout the hedge period.

         The  Company  monitors  the  effectiveness  of  its  end  user  hedging
activities  by  periodically  comparing  the  change  in the  value of the hedge
instrument to the underlying  item being hedged,  and reassessing the likelihood
of the  occurrence of  anticipated  transactions.  In the event that the Company

<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

determines that a hedge is no longer effective,  such as upon  extinguishment of
the underlying asset or liability or a change in circumstances  whereby there is
not a high degree of certainty that the anticipated  transaction will occur, the
derivative  transaction  is no longer  accounted  for as a hedge.  Instead,  the
Company  immediately  records  the  market  or  fair  value  of  the  derivative
instrument on the Statement of Financial Condition. Changes in the fair value of
the  derivative  contract  would then be accounted for as a derivative  used for
trading purposes as discussed  above. In the event that a derivative  designated
as a hedge is terminated  early,  any unrealized gain or loss on the termination
would be deferred and amortized to interest income or interest  expense over the
original  period of the  hedge as long as the  underlying  hedged  item is still
outstanding.

3.  Long-Term Debt:

         During the nine months ended August 31, 1997,  the Company  issued $858
million of subordinated  indebtedness with maturities ranging from 1998 to 2007.
Of the total  issuances  for the first nine months of 1997,  $300  million  were
fixed  rate and $558  million  were  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,  $751 million of  long-term  debt matured  during the nine
months ended August 31, 1997.

4.  Capital Requirements:

         As a registered  broker-dealer,  LBI is subject to SEC Rule 15c3-1, the
Net Capital  Rule,  which  requires LBI to maintain net capital of not less than
the greater of 2% of aggregate  debit items arising from customer  transactions,
as defined,  or 4% of funds required to be segregated  for customers'  regulated
commodity  accounts,  as  defined.  At August 31,  1997,  LBI's  regulatory  net
capital,  as defined,  of $1,364  million  exceeded the minimum  requirement  by
$1,262 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 August 31, 1997,
LBFP had capital which exceeded the  requirement  of the most  stringent  rating
agency by $90 million.

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



<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

5.  Derivative Financial Instruments:

         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.  Unrealized
gains and losses on derivative  contracts are currently  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 and against cash collateral 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 (in millions):
                                                             
<TABLE>
<CAPTION>
                                                                                                     Average Fair Value*
                                                                      Fair Value*                     Nine Months Ended
                                                                 August 31, 1997                      August 31, 1997
                                                                 ---------------                      ---------------
                                                                  Assets      Liabilities          Assets       Liabilities
---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S>                                                               <C>           <C>               <C>            <C>   
     (including caps, collars and floors)                         $4,211        $2,264            $4,377         $2,253
Foreign exchange forward contracts and options                       845           932               835          1,202
Options on other fixed income securities,
     mortgage-backed securities forward contracts
     and options                                                     171           157               239            214
Equity contracts (including equity swaps, warrants
     and options)                                                     64            55               105             43
Commodity contracts (including swaps, forwards,
     and options)                                                     28            20                33             23
                                                               --------------------------------------------------------
Total                                                             $5,319        $3,428            $5,589         $3,735
                                                               --------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

                                                                                                 Average Fair Value*
                                                                      Fair Value*               Twelve Months Ended
                                                                November 30, 1996                     November 30, 1996
                                                                -----------------                     -----------------
                                                                  Assets      Liabilities          Assets       Liabilities
---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S>                                                               <C>           <C>                <C>           <C>   
     (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.


<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

         Assets  included  in the  table  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 related to
derivative  contracts at August 31, 1997 represents the Company's net receivable
for  derivative  financial   instruments  before  consideration  of  collateral.
Included  within the $5,319  million fair value of assets at August 31, 1997 was
$5,227  million  related to swaps and OTC contracts  and $92 million  related to
exchange-traded option and warrant contracts.

         With respect to OTC contracts,  including  swaps, the Company views its
net credit  exposure to be $3,871 million at August 31, 1997,  representing  the
fair value of the Company's OTC contracts in an unrealized gain position,  after
consideration of collateral of $1,356 million. Presented below is an analysis of
the  Company's  net  credit  exposure  for OTC  contracts  based  upon  internal
designations of counterparty credit quality.

Counterparty                    S&P/Moody's                    August 31, 1997
 Risk Rating                    Equivalent                  Net Credit Exposure
------------              -------------------------         -------------------
       1                  AAA/Aaa                                        19%
       2                  AA-/Aa3 or higher                              17%
       3                  A-/A3 or higher                                50%
       4                  BBB-/Baa3 or higher                             7%
       5                  BB-/Ba3 or higher                               6%
       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.

         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  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.

         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.


<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

6.  Other Commitments and Contingencies:

         In connection with its secured  financing  activities,  the Company has
commitments  under certain secured lending  arrangements of  approximately  $3.2
billion at August 31,  1997.  These  commitments  require  borrowers  to provide
acceptable  collateral,  as defined in the  agreements,  when  amounts are drawn
under the lending facilities. Advances made under the above lending arrangements
are   typically  at  variable   interest   rates  and   generally   provide  for
over-collateralization based upon the borrowers' creditworthiness.

         In  addition,  the Company  has  commitments  to extend  credit in loan
syndication  transactions of $1.3 billion at August 31, 1997. These  commitments
are typically secured against the borrower's  assets,  have fixed maturity dates
and are contingent on certain contractual conditions that may require payment of
a fee by the  counterparty and are drawn down at the discretion of the borrower.
The total commitment above may not be indicative of actual funding  requirements
as the  commitments  may expire  without being drawn upon by the  borrower.  The
Company frequently syndicates or participates a portion of these commitments.

         The  Company is also a  co-sponsor  of an interim  acquisition  funding
facility.  In  connection  therewith,  the Company is committed to provide up to
$150 million to be used by the facility to provide  short-term bridge financing.
Any draw downs under the facility  would be expected to be  refinanced,  and the
outstanding amounts repaid, within a short-term period.

         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.



<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

7.  Related Party Transactions:

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

         During the nine months  ended  August 31,  1997,  the Company  paid $38
million to Holdings as a return of capital.

8.  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. At
the grant date, the 1997 Options were to become exercisable in four and one-half
years  and  expire  five  years  after  grant  date;  exercisability  was  to be
accelerated ratably in one-third increments at such time as the closing price of
the Company's  common stock met, or exceeded,  $39, $42, and $45 for fifteen out
of twenty  consecutive  trading  days.  As of August 31,  1997,  all of the 1997
Options were exercisable.  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.

9.  1996 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  severance  charge  reflected the
culmination of a worldwide  business unit economic  performance  review that was
undertaken  in the  fourth  quarter  of  1996  to  focus  Holdings  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 New York Private Client Services offices.
Additionally,  the charge reflects various other strategic personnel  reductions
aimed  at  delayering  management.  The  Holdings  severance  charge  has led to
personnel cost savings of approximately $90 million  annually.  Holdings' charge
also resulted 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  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
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

10.  New Accounting Pronouncements:

         In June 1997, the Financial  Accounting Standards Board issued SFAS No.
130,  "Reporting  Comprehensive  Income"  and SFAS No. 131,  "Disclosures  about
Segments  of an  Enterprise  and  Related  Information."  These  statements  are
effective  for fiscal years  beginning  after  December  15, 1997 and  establish
standards for the reporting and display of  comprehensive  income and disclosure
related to segments.



<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 nine months of 1997  reflected  record
corporate finance advisory activities,  strong underwriting volumes in worldwide
fixed income products, and generally active trading in worldwide debt and equity
markets.  These  favorable  conditions  were mitigated in part by reduced global
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 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 March 1997, the Federal Reserve raised the overnight lending rate by
0.25% to 5.50%.  However,  the  deceleration  of GDP  growth and  continued  low
inflation  indicators kept the Federal Reserve from raising interest rates for a
second time in 1997. The decline  experienced in trading volumes and origination
activities  in the U.S.  fixed income  market from the increase in the overnight
lending rate was  short-lived.  Towards the end of April,  the U.S. fixed income
markets  recovered  as interest  rates  declined  and trading  volumes  regained
strength. This trend continued through the beginning of October.

         The interest rate on the 30-year U.S.  Treasury,  which peaked at 7.17%
on April  11th,  declined  to 6.28% on October 7, 1997.  However,  on October 8,
1997,  investors  again became  concerned  about a possible  tightening  in U.S.
interest rates based upon remarks by the Federal  Reserve Board Chairman that it
would be difficult  to maintain a balance  between  tight labor  markets and low
growth.  In  addition  he  cautioned  investors  not to expect  stock  prices to
continue to rally  indefinitely.  As a result,  the interest rate on the 30-year
U.S. Treasury rose to 6.43% on October 10, 1997

         Trading  activities  in  worldwide  equity  markets  continued  to show
strength in 1997.  U.S.  trading  volumes  improved over the prior year's record
levels, as investor demand remained strong and the equity markets benefited from
increasing  capital flows.  The U.S.  equity markets  continued to show strength
through  October  1997,  reaching  new  highs  on most  major  indexes.  A brief
correction in August and September was the result of several concerns:  currency
turmoil in Southeast Asia,  which investors  believed would hurt profits of U.S.
companies;  profit warnings; and, once again, fears that a strengthening economy
would induce the Federal Reserve to raise rates.  As these concerns  diminished,
the equity market  resumed its upward trend.  While intraday moves in the equity
market have become large and provide the  appearance of a more volatile  market,
the upward trend in prices and the lower  volatility since August have benefited
the  origination  and trading  activities of securities  firms.  European equity
markets  saw  improved  trading  volumes  and  valuations  in 1997,  despite  an
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 nine months of 1997. U.S. underwriting volumes,  while experiencing
a  slowdown  in March and  April,  strengthened  over the prior  year led by the
issuance of  corporate,  asset-backed,  high yield,  and emerging  market bonds.
Issuers came to market to take advantage of the historically  attractive yields,
as well as favorable  pricing in the spread sectors.  Equity and  equity-related
underwriting  volumes  declined  from the strong  1996  levels,  as  uncertainty
regarding  both interest  rates and  prospective  earnings  performance  of U.S.
companies  contributed to U.S. equity market corrections.  New issuance activity
was  also  negatively   impacted  by  a  lower  volume  of  large  international
privatizations over the period.

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

         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 August  31, 1997 and 1996

         The Company  reported  net income of $84 million for the third  quarter
ended August 31,  1997,  and a net loss of $264  thousand for the third  quarter
ended August 31, 1996. This increase reflected  across-the-board strength in the
Company's equity, fixed income and investment banking businesses.

         Net revenues  increased  to $699 million for the third  quarter of 1997
from $443  million  for the third  quarter of 1996 as all four of the  Company's
major business units (fixed income,  equity,  corporate  finance  advisory,  and
merchant banking) had improved performance.

         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  increased  to $306  million  for the third  quarter  of 1997 from $188
million for the third  quarter of 1996.  The increase in combined  revenues from
principal  transactions and net interest in the third quarter of 1997 was due to
increased revenues across almost all equity and fixed income product lines .



<PAGE>

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

         The  following   table  of  net  revenues  by  business  unit  and  the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that  reflects the manner in which the Company  manages its
businesses.  For internal management  purposes,  the Company has been segregated
into  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.

<TABLE>
<CAPTION>


Three Months Ended August 31, 1997


                                      Principal
                                  Transactions and                         Investment
                                    Net Interest         Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>             <C>          <C> 
Fixed Income                               $258              $  6              $87             $2           $353
Equity                                       40                81               81                           202
Corporate Finance Advisory                                                      66                            66
Merchant Banking                              4                                 61                            65
Other                                         4                 3                               6             13
---------------------------------------------------------------------------------------------------------------------------
                                           $306               $90             $295             $8           $699
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

Three Months Ended August 31, 1996

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

</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  increased 14% to
$353  million  for the third  quarter  of 1997 from $310  million  for the third
quarter of 1996. The increase in the third quarter results versus the prior year
quarter  reflected  increased  revenues  from a number of fixed income  products
including high yield corporates,  preferreds,  and mortgages partially offset by
decreased results in derivatives. Investment banking revenues, as a component of
fixed income  revenues,  increased to $87 million for the third  quarter of 1997
from $67 million  for the third  quarter of 1996 due to  increased  underwriting
fees, particularly in high yield corporates.

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


         Equity.  Equity net revenues  reflect  customer flow  activities  (both
institutional   and   high-net-worth   retail),    secondary   trading,   equity
underwriting,   equity  finance,   equity   derivatives  and  equity   arbitrage
activities.  The Company's equity net revenues increased to $202 million for the
third  quarter of 1997 from $62  million for the third  quarter of 1996.  Higher
revenues  resulted  from  improved  contributions  from  NASDAQ  and  derivative
activities.  Investment  banking  revenues,  as a component of equity  revenues,
increased to $81 million for the third  quarter of 1997 from $53 million for the
third quarter of 1996 due to increased underwriting volumes as markets rebounded
from the Fed tightening in the second quarter.

         Corporate  Finance  Advisory.  Corporate finance advisory net revenues,
classified  in the  Consolidated  Statement  of  Operations  as a  component  of
investment banking revenues, result primarily from fees earned by the Company in
its role as  strategic  advisor to its clients.  This role  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 $66 million for the third
quarter of 1997,  reflecting a 32% increase  from the $50 million  recognized in
the third quarter of 1996. This increase  reflected the closing of several large
deals in the third quarter of 1997 and continued  strength in the overall merger
and acquisition market environment.

         Merchant  Banking.  The Company is the general  partner for four active
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 $65
million for the third  quarter of 1997 and $15  million in the third  quarter of
1996.  This increase was  principally  due to realized  gains on the sale of the
Company's  remaining  position in two publicly  traded  investments  held by the
partnerships.

         Non-Interest Expenses.  Non-interest expenses were $588 million for the
third  quarter  of  1997  and  $453  million  for the  third  quarter  of  1996.
Compensation  and  benefits  expense  increased  to $391  million  for the third
quarter of 1997 from $267 million for the third quarter of 1996  reflecting  the
higher level of revenues in 1997.

         Income  Taxes.  The  Company's  income tax provision was $27 million on
pretax  earnings of $111 million for the third  quarter of 1997 as compared to a
benefit of $10 million on a pretax loss of $10 million for the third  quarter of
1996.  The  increase in the tax  provision  reflects an overall  higher level of
earnings partially offset by an increase in tax benefits  attributable to income
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 Nine Months Ended August 31, 1997 and 1996

         The  Company  reported  net income of $190  million for the nine months
ended August 31, 1997,  representing  an increase of 90% from net income of $100
million for the nine months ended August 31, 1996.

         Net revenues  increased  to $1,875  million for the nine months of 1997
from $1,665 million for the nine months of 1996 as improved  performances in the
Company's equity,  corporate finance advisory,  and merchant banking  businesses
were partially offset by reduced revenues from fixed income.

         The Company  ranked  fourth in  worldwide  lead managed debt and equity
underwritings  in 1997 up from its fifth place ranking in the  comparable  prior
year period. In equity and equity - related underwriting,  the Company's ranking
improved  significantly,  rising to sixth place from its tenth place  ranking in
1996.  In  worldwide  lead  managed  fixed  income  underwriting,   the  Company
maintained its second place ranking. In worldwide mergers and acquisitions,  the
Company  ranked  tenth for 1997 in  completed  transactions  and ended the third
quarter of 1997 with a strong transaction pipeline which stood at $38 billion in
terms of total  dollar  value.  These  rankings  are based on data  compiled  by
Securities  Data Company for the nine month periods  December  through August in
both fiscal 1997 and 1996.

         Principal  transactions  and net  interest  revenues  increased to $906
million  for the nine  months of 1997 from $897  million  for the nine months of
1996. The increase in the combined revenues from principal  transactions and net
interest in the nine months of 1997 was the result of increased  revenues across
almost all equity products  partially offset by reduce revenues in certain fixed
income 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>

Nine Months Ended August 31, 1997

                                      Principal
                                  Transactions and                         Investment
                                     Net Interest        Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>               <C>             <C>         <C>   
Fixed Income                               $791             $  24             $240            $ 4         $1,059
Equity                                      110               213              172              1            496
Corporate Finance Advisory                                                     168                           168
Merchant Banking                             (3)                               117                           114
Other                                         8                10                              20             38
---------------------------------------------------------------------------------------------------------------------------
                                           $906              $247             $697            $25         $1,875
---------------------------------------------------------------------------------------------------------------------------

</TABLE>


<PAGE>


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


<TABLE>
<CAPTION>

Nine Months Ended August 31, 1996

                                      Principal
                                  Transactions and                         Investment
                                      Net Interest       Commissions         Banking         Other         Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>               <C>            <C>          <C>   
Fixed Income                               $902             $  42             $198           $  3         $1,145
Equity                                        5               167              161              4            337
Corporate Finance Advisory                                                     137                           137
Merchant Banking                            (10)                                34                            24
Other                                                          14                               8             22
---------------------------------------------------------------------------------------------------------------------------
                                           $897              $223             $530            $15         $1,665
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


         Fixed Income. Fixed income net revenues decreased to $1,059 million for
the nine  months of 1997 from $1,145  million  for the nine months of 1996.  The
reduced  revenues from derivatives and foreign exchange were partially offset by
improved revenues from high yield and preferreds.  Investment  banking revenues,
as a component of fixed income revenues,  increased to $240 million for the nine
months of 1997 from $198  million for the nine  months of 1996 due to  increased
underwriting  fees on certain higher margin debt products.  The Company improved
its  ranking in high  yield  underwriting  to seventh  from ninth as well as its
market share to 5.4% from 4.4%.

         Equity. The Company's equity net revenues increased to $496 million for
the nine months of 1997 from $337  million  for the nine months of 1996.  Higher
revenues for the nine months of 1997 resulted from improved  contributions  from
NASDAQ and derivative activities. Investment banking revenues, as a component of
equity revenues, increased to $172 million for the nine months of 1997 from $161
million for the nine months of 1996 due to increased underwriting volumes.

         Corporate  Finance  Advisory.   Net  revenues  from  corporate  finance
advisory  activities  increased  to $168  million  for the nine  months  of 1997
reflecting a 23% increase from the $137 million recognized in the nine months of
1996.  This  increase  reflected  continued  strength in the overall  merger and
acquisition market environment.

         Merchant  Banking.  Merchant banking net revenues were $114 million for
the  nine  months  of 1997 and $24  million  in the nine  months  of 1996.  This
increase  was  principally  due to realized  gains on the sale of the  Company's
remaining position in two publicly traded investments held by the partnerships.

         Non-Interest  Expenses.  Non-interest  expenses were $1,609 million for
the nine  months  of 1997  and  $1,502  million  for the  nine  months  of 1996.
Compensation  and benefits  expense was $1,010 million for 1997 and $884 million
for 1996.


<PAGE>

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

         Income  Taxes.  The  Company's  income tax provision was $76 million on
pretax  earnings of $266  million for the nine months  ended  August 31, 1997 as
compared to $63 million on pretax  earnings of $163  million for the nine months
ended August 31, 1996.  The  increase in the tax  provision  reflects an overall
higher  level of  earnings  partially  offset  by an  increase  in tax  benefits
attributable to income subject to preferential tax treatment.




<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  balance  sheet is liquid and consists  primarily of cash
and cash  equivalents,  securities and other financial  instruments  owned,  and
collateralized  short-term  financing  agreements.  The highly  liquid nature of
these assets provides the Company with flexibility in financing and managing its
business.  The  Company's  primary  activities  are based on customer  execution
transactions.  This flow of customer  business supports the rapid asset turnover
rate of the Company's inventory.  Due to the nature of the Company's activities,
the overall size of the Company's assets and liabilities fluctuates from time to
time and at specific points in time may be higher than at fiscal quarter ends.

         The Company's  total assets  increased to $113.7  billion at August 31,
1997 from $107.7  billion at November 30, 1996.  The increase in total assets is
primarily attributable to an increase in customer financing activities.

Funding and Capital Policies

         The  Company's  Finance  Committee 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.  Under the authority of the Finance Committee,  members  of the
Company's  treasury  work with  Regional  Asset and Liability  Committees  to 
ensure  coordination  of global  funding  efforts  and implementation  of the 
funding and liquidity  policies.  The Regional  Asset and Liability  Committees
are aligned with the Company's  geographic funding centers and are responsible 
for  implementing  funding  strategies for their  respective 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.

<PAGE>

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

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.

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  certain  other  types  of   collateralized   borrowing   sources  are  less
credit-sensitive and have historically been a more stable financing source under
adverse market conditions.

         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.  The majority of the
Company's assets are funded with collateralized borrowing sources. At August 31,
1997 and November 30, 1996,  $83 billion and $80 billion,  respectively,  of the
Company's  total  balance  sheet was  financed  using  collateralized  borrowing
sources.

         As  of  August  31,  1997  and  November  30,  1996,   short-term  debt
outstanding  was $758  million and $2,299  million,  respectively.  There was no
commercial paper outstanding as of August 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 $6.2  billion at August  31,  1997 from $5.9
billion at November 30,  1996.  Total  Capital  increased  primarily  due to the
retention of earnings and an increase in long-term debt.

                                         August 31             November 30
(in millions)                              1997                   1996
--------------------------------------------------------------------------------
Long-Term Debt
     Senior Notes                       $     225               $    215
     Subordinated Indebtedness              4,060                  3,950
                                          -------                -------
                                            4,285                  4,165
Stockholder's Equity                        1,892                  1,692
--------------------------------------------------------------------------------
Total Capital                              $6,177                 $5,857
--------------------------------------------------------------------------------

         During the nine  months of 1997,  the Company  issued  $858  million in
long-term debt, which was $107 million in excess of its maturing debt. Long-term
debt  increased to $4.3 billion at August 31, 1997 from $4.2 billion at November
30,  1996 with a weighted  average  maturity of 3.9 years at August 31, 1997 and
4.5 years at November 30, 1996.

         The   increase  in  Total   Capital   also   reflects  an  increase  in
stockholder's  equity to $1.9  billion at August 31,  1997 from $1.7  billion at
November 30, 1996. The net increase in stockholder's equity was primarily due to
the retention of earnings.

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

Credit Ratings

         The Company, like other companies in the securities industry, relies on
external sources to finance a significant portion of its day-to-day  operations.
The  Company's  access to and cost of funding is  generally  dependent  upon its
short-and  long-term debt ratings. As of August 31, 1997, the current short- and
long-term  senior debt ratings of Holdings and Lehman Brothers Inc. ("LBI") were
as follows:
<TABLE>
<CAPTION>

                                                       Holdings                                    LBI
                                        Short-term                 Long-term            Short-term   Long-term**
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                      <C>                 <C>            <C>  
Duff & Phelps Credit Rating Co.            D-1                       A                  D-1            A/A-
Fitch Investors Service Inc.               F-1                       A                  F-1            A/A-
IBCA                                       A1                        A-                 A1             A/A-
Moody's                                    P2                        Baa1               P2             A3*/Baa1
S&P+                                       A-1                       A                  A-1            A+*/A
Thomson BankWatch                          TBW-1                     A-                 TBW-1          A/A-
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


  * Provisional ratings on shelf registration
** Senior/subordinated
+  Long-term ratings outlook revised to negative on September 21, 1994

<PAGE>


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

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 August 31, 1997 and November 30, 1996
included long positions  with an aggregate  market value of  approximately  $2.1
billion and $1.3 billion,  respectively,  and short  positions with an aggregate
market value of approximately  $210 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 $85  million and $78
million at August 31, 1997 and November 30, 1996, respectively.

Lending Activities

         The  Company  has  commitments  to extend  credit  in loan  syndication
transactions of $1.3 billion at August 31, 1997. These commitments are primarily
to below  investment  grade  borrowers  and,  if  drawn  upon,  would  represent
additional  high yield debt securities as defined above.  These  commitments are
typically secured against the borrower's assets,  have fixed maturity dates, and
are contingent on certain  contractual  conditions that may require payment of a
fee by the  counterparty  and are drawn down at the  discretion of the borrower.
The total commitment may not be indicative of actual funding requirements as the
commitments  may expire  without being drawn upon by the  borrower.  The Company
frequently syndicates or participates a portion of these commitments.

Merchant Banking and Bridge Lending 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  August  31,  1997,  the   investments  in  merchant   banking
partnerships were $36 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.

         The  Company is also a  co-sponsor  of an interim  acquisition  funding
facility.  In  connection  therewith,  the Company is committed to provide up to
$150 million to be used by the facility to provide  short-term bridge financing.
Any draw downs against the facility would be expected to be refinanced,  and the
outstanding amounts repaid, within a short-term period.

<PAGE>

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


         In  addition,  at August 31,  1997,  the Company had direct  short-term
bridge financings outstanding of $24 million.

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 or  co-general  partner for
approximately  $3.0 billion of  partnership  investment  capital and manages the
remaining real estate  investment  portfolio.  At August 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 has elected to provide financial
and other support and  assistance  to such  investments  to maintain  investment
values. There is no contractual requirement that the Company continue to provide
this support.

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

Year 2000

         The  Company  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 the full four digits. If these systems are not identified and reconfigured,
year 2000  transactions  would be  processed  as year "00",  which would lead to
processing inaccuracies and potential inoperability.  Costs incurred relating to
this project are 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 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)

         The  Stipulation  and Order was approved by the United States  District
Court for the Southern  District of New York on April 22, 1997. The class action
plaintiffs  intervened  to appeal the Court's  approval of the  Stipulation  and
Order to the United States Court of Appeals for the Second Circuit.  That appeal
is pending.

AIA Holding SA et al. v. Lehman  Brothers  Inc. and Bear Stearns & Co. Inc.  
(Reported  in LBI's Second  Quarter  Report on Form 10-Q)

          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 by introducing  broker which
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 complaint 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






<PAGE>



                                   SIGNATURES



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



                                            LEHMAN BROTHERS INC.
                                            (Registrant)





Date:    October 15, 1997           By       /s/ Richard S. Fuld Jr.
                                             -------------------------------
                                             Richard S. Fuld, Jr.
                                             Chairman of the Board and
                                             Chief Executive Officer
                                             (Principal Executive Officer)




Date:    October 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          Nine Months
                                              Ended               Ended              Ended               Ended            Ended
                                            December 31        November 30        November 30         November 30       August 31
                                            -----------        -----------        -----------         -----------       ---------
                                         1992       1993           1994               1995               1996              1997
                                         ----       ----           ----               ----               ----              ----
Fixed charges:
  Interest expense:
<S>                                    <C>         <C>            <C>               <C>               <C>                 <C>    
    Subordinated indebtedness          $   210     $   192        $   184           $   204           $     221           $   185
    Bank loans and other
      borrowings*                        4,363       4,393          5,661             9,750               9,900             8,712
    Interest component of rentals
      of office and equipment               64          62             27                25                  18                11
  Other adjustments**                      127         101             53                 2                   7                 2
                                          ----      ------         ------           -------             -------             ----- 
TOTAL (A)                               $4,764      $4,748         $5,925            $9,981             $10,146            $8,910
                                        ======      ======         ======            ======             =======            ======

Earnings:
  Pre-tax income (loss) from
    continuing operations              $   319    $             $       1        $       78           $     309           $   266
                                                      (146)
  Fixed charges                          4,764       4,748          5,925             9,981              10,146             8,910
  Other adjustments***                     (68)        (68)           (52)               (1)                 (6)               (2)
                                      --------    --------       --------       -----------         -----------         ---------
    TOTAL (B)                           $5,015      $4,534         $5,874           $10,058             $10,449            $9,174
                                        ======      ======         ======           =======             =======            ======
(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