---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|(Mark one)                                     |                                                                                          
|---------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                              | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended August 31, 2002
|OR                                            
|o                                              | 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

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Lehman Brothers Inc.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)        |  | 13-2518466(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------- |  | ----------------------------------------------
|745 Seventh Avenue
New York, New York(Address of principal
executive offices) |  | 10019(Zip Code)                               
|(212) 526-7000(Registrant's telephone number, including area code)           

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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 ý    No o

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 PERMITTED THEREBY.

As of October 15, 2002, 1,006 shares of the Registrant's Common Stock, par value $0.10 per share, were outstanding.

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LEHMAN BROTHERS INC. and SUBSIDIARIES    FORM 10-Q    FOR THE QUARTER ENDED AUGUST 31, 2002    INDEX

|                                                                                                                                                                  |  | Page
Number
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|Available Information                                                                                                                                             |  | 2          
|Part I.    FINANCIAL INFORMATION                                                                                                                                  |  |            
|Item 1.    Financial Statements(unaudited)                                                                                                                       |  |            
|Consolidated Statement of Income
                                Three and Nine Months Ended
                                August 31, 2002 and August 31, 2001 |  | 4          
|Consolidated Statement of Financial Condition
                                August 31, 2002 and November 30, 2001                                              |  | 6          
|Consolidated Statement of Cash Flows
                                Nine Months Ended
                                August 31, 2002 and August 31, 2001       |  | 8          
|Notes to Consolidated Financial Statements                                                                                                                        |  | 9          
|Item 2.    Management's Analysis of Results of Operations                                                                                                         |  | 21         
|Item 4.    Controls and Procedures                                                                                                                                |  | 32         
|Part II.    OTHER INFORMATION                                                                                                                                     |  |            
|Item 1.    Legal Proceedings                                                                                                                                      |  | 33         
|Item 6.    Exhibits and Reports on Form 8-K                                                                                                                       |  | 36         
|Signature                                                                                                                                                         |  | 38         
|Certifications                                                                                                                                                    |  | 40         
|Exhibit Index                                                                                                                                                     |  | 42         
|Exhibits                                                                                                                                                          |  |            
|                                                                                                                                                                  |  |            

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AVAILABLE INFORMATION

Lehman Brothers Inc. ("LBI") files annual, quarterly and current reports and other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document LBI files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC. LBI's electronic SEC filings are available to the public at http://www.sec.gov.

LBI's
public internet site is http://www.lehman.com. LBI makes available free of charge through its internet site, via a link to the SEC's internet site at
http://www.sec.gov, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it
electronically files such material with, or furnishes it to, the SEC.

In
addition, LBI currently makes available on http://www.lehman.com its most recent annual report on Form 10-K and its quarterly reports
on Form 10-Q for the current fiscal year, although in some cases these documents are not available on that site as soon as they are available on the SEC's site. You will need to
have on your computer the Adobe Acrobat Reader software to view these documents, which are in the.PDF format. If you do not have Adobe Acrobat, a link to Adobe's internet site, from which you can
download the software, is provided.

2

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[THIS PAGE INTENTIONALLY LEFT BLANK]

3

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LEHMAN BROTHERS INC. and SUBSIDIARIES        PART IFINANCIAL INFORMATION

ITEM 1    Financial Statements

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

|                      |                               | Three months ended          |      
|--------------------- | ----------------------------- | --------------------------- | -----
|
|Revenues              |                               |                             |      
|                      | Principal transactions        |                             | $    
|                      | Investment banking            |                             |      
|                      | Commissions                   |                             |      
|                      | Interest and dividends        |                             |      
|                      | Other                         |                             |      
|                      |                               |                             |      
|                      |                               | Total revenues              |      
|Interest expense      |                               |                             | 2,058
|                      |                               |                             |      
|                      |                               | Net revenues                |      
|                      |                               |                             |      
|Non-interest expenses |                               |                             |      
|                      | Compensation and benefits     |                             |      
|                      | Brokerage and clearance       |                             |      
|                      | Technology and communications |                             |      
|                      | Occupancy                     |                             |      
|                      | Business development          |                             |      
|                      | Management fees, net          |                             |      
|                      | Professional fees             |                             |      
|                      | Other                         |                             |      
|                      |                               |                             |      
|                      |                               | Total non-interest expenses |      
|                      |                               |                             |      
|Income before taxes   |                               |                             | 173  
|                      | Provision for income taxes    |                             |      
|                      |                               |                             |      
|Net income            |                               | $                           | 143  
|                      |                               |                             |      

See
notes to consolidated financial statements.

4

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

|                      |                               | Nine months ended           |      
|--------------------- | ----------------------------- | --------------------------- | -----
|
|Revenues              |                               |                             |      
|                      | Principal transactions        |                             | $    
|                      | Investment banking            |                             |      
|                      | Commissions                   |                             |      
|                      | Interest and dividends        |                             |      
|                      | Other                         |                             |      
|                      |                               |                             |      
|                      |                               | Total revenues              |      
|Interest expense      |                               |                             | 6,263
|                      |                               |                             |      
|                      |                               | Net revenues                |      
|                      |                               |                             |      
|Non-interest expenses |                               |                             |      
|                      | Compensation and benefits     |                             |      
|                      | Brokerage and clearance       |                             |      
|                      | Technology and communications |                             |      
|                      | Occupancy                     |                             |      
|                      | Business development          |                             |      
|                      | Professional fees             |                             |      
|                      | Other                         |                             |      
|                      | Management fees, net          |                             |      
|                      |                               |                             |      
|                      |                               | Total non-interest expenses |      
|                      |                               |                             |      
|Income before taxes   |                               |                             | 929  
|                      | Provision for income taxes    |                             |      
|                      |                               |                             |      
|Net income            |                               | $                           | 677  
|                      |                               |                             |      

See
notes to consolidated financial statements.

5

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

|                                                                                                                                   |                                                 | August 31
2002 |        | November 30
2001
|---------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | -------------- | ------ | ----------------
|ASSETS                                                                                                                             |                                                 |                |        |                 
|Cash and cash equivalents                                                                                                          |                                                 | $              | 265    |                 
|Cash and securities segregated and on deposit for regulatory and other purposes                                                    |                                                 |                | 1,569  |                 
|Securities and other financial instruments owned:                                                                                  |                                                 |                |        |                 
|                                                                                                                                   | Pledged as collateral                           |                |        | 19,046          
|                                                                                                                                   | Not pledged as collateral                       |                |        | 54,210          
|                                                                                                                                   |                                                 |                |        |                 
|                                                                                                                                   |                                                 |                | 73,256 |                 
|                                                                                                                                   |                                                 |                |        |                 
|Collateralized short-term agreements:                                                                                              |                                                 |                |        |                 
|                                                                                                                                   | Securities purchased under agreements to resell |                |        | 86,599          
|                                                                                                                                   | Securities borrowed                             |                |        | 23,108          
|Receivables:                                                                                                                       |                                                 |                |        |                 
|                                                                                                                                   | Brokers, dealers and clearing organizations     |                |        | 3,052           
|                                                                                                                                   | Customers                                       |                |        | 3,282           
|                                                                                                                                   | Others                                          |                |        | 9,695           
|Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $120 in 2002 and $140 in 2001) |                                                 |                | 142    |                 
|Other assets                                                                                                                       |                                                 |                | 383    |                 
|Excess of cost over fair value of net assets acquired (net of accumulated amortization of $133 in 2002 and $131 in 2001)           |                                                 |                | 152    |                 
|                                                                                                                                   |                                                 |                |        |                 
|                                                                                                                                   |                                                 | Total assets   |        | $               
|                                                                                                                                   |                                                 |                |        |                 

See notes to consolidated financial statements.

6

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

|                                                                                             |                                                | August 31
2002 |                                            | November 30
2001
|-------------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------- | ------------------------------------------ | ----------------
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                         |                                                |                |                                            |                 
|Short-term debt                                                                              |                                                | $              | 129                                        |                 
|Securities and other financial instruments sold but not yet purchased                        |                                                |                | 49,486                                     |                 
|Collateralized short-term financing:                                                         |                                                |                |                                            |                 
|                                                                                             | Securities sold under agreements to repurchase |                |                                            | 96,120          
|                                                                                             | Securities loaned                              |                |                                            | 20,091          
|Advances from Holdings and other affiliates                                                  |                                                |                | 13,639                                     |                 
|Payables:                                                                                    |                                                |                |                                            |                 
|                                                                                             | Brokers, dealers and clearing organizations    |                |                                            | 3,633           
|                                                                                             | Customers                                      |                |                                            | 4,950           
|Accrued liabilities and other payables                                                       |                                                |                | 2,129                                      |                 
|Long-term debt:                                                                              |                                                |                |                                            |                 
|                                                                                             | Senior notes                                   |                |                                            | 3,711           
|                                                                                             | Subordinated indebtedness                      |                |                                            | 4,501           
|                                                                                             |                                                |                |                                            |                 
|                                                                                             |                                                |                | Total liabilities                          |                 
|                                                                                             |                                                |                |                                            |                 
|Commitments and contingencies                                                                |                                                |                |                                            |                 
|STOCKHOLDERS' EQUITY                                                                         |                                                |                |                                            |                 
|Preferred stock, $0.10 par value; 10,000 shares authorized; none outstanding                 |                                                |                |                                            |                 
|Common stock, $0.10 par value; 10,000 shares authorized; 1,006 shares issued and outstanding |                                                |                |                                            |                 
|Additional paid-in capital                                                                   |                                                |                | 1,682                                      |                 
|Accumulated other comprehensive income                                                       |                                                |                | 3                                          |                 
|Retained earnings                                                                            |                                                |                | 1,429                                      |                 
|                                                                                             |                                                |                |                                            |                 
|                                                                                             |                                                |                | Total stockholders' equity                 |                 
|                                                                                             |                                                |                |                                            |                 
|                                                                                             |                                                |                | Total liabilities and stockholders' equity |                 
|                                                                                             |                                                |                |                                            |                 

See notes to consolidated financial statements.

7

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

|                                                                                            |                                                                       | Nine Months Ended |                                          
|------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------- | -----------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                                        |                                                                       |                   |                                          
|Net income                                                                                  |                                                                       | $                 | 677                                      
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                                       |                   |                                          
|                                                                                            | Depreciation and amortization                                         |                   |                                          
|                                                                                            | Other adjustments                                                     |                   |                                          
|Net change in:                                                                              |                                                                       |                   |                                          
|                                                                                            | Cash and securities segregated and on deposit                         |                   |                                          
|                                                                                            | Securities and other financial instruments owned                      |                   |                                          
|                                                                                            | Securities borrowed                                                   |                   |                                          
|                                                                                            | Receivables from brokers, dealers and clearing organizations          |                   |                                          
|                                                                                            | Receivables from customers                                            |                   |                                          
|                                                                                            | Securities and other financial instruments sold but not yet purchased |                   |                                          
|                                                                                            | Securities loaned                                                     |                   |                                          
|                                                                                            | Payables to brokers, dealers and clearing organizations               |                   |                                          
|                                                                                            | Payables to customers                                                 |                   |                                          
|                                                                                            | Other operating assets and liabilities, net                           |                   |                                          
|                                                                                            |                                                                       |                   |                                          
|                                                                                            |                                                                       |                   | Net cash provided by operating activities
|                                                                                            |                                                                       |                   |                                          
|CASH FLOWS FROM FINANCING ACTIVITIES                                                        |                                                                       |                   |                                          
|Proceeds from issuance of senior notes                                                      |                                                                       |                   | 1,745                                    
|Principal payments of senior notes                                                          |                                                                       |                   |                                         
|Proceeds from issuance of subordinated indebtedness                                         |                                                                       |                   | 800                                      
|Principal payments of subordinated indebtedness                                             |                                                                       |                   | (505                                     
|Net proceeds from (payments for) short-term debt                                            |                                                                       |                   | (909                                     
|Resale agreements net of repurchase agreements                                              |                                                                       |                   | (1,495                                   
|Increase (decrease) in advances from Holdings and other affiliates                          |                                                                       |                   | (7,848                                   
|Dividends paid                                                                              |                                                                       |                   | (1,002                                   
|                                                                                            |                                                                       |                   |                                          
|                                                                                            |                                                                       |                   | Net cash used in financing activities    
|                                                                                            |                                                                       |                   |                                          
|CASH FLOWS FROM INVESTING ACTIVITIES                                                        |                                                                       |                   |                                          
|Purchase of property, equipment and leasehold improvements, net                             |                                                                       |                   | (9                                       
|                                                                                            |                                                                       |                   |                                          
|                                                                                            |                                                                       |                   | Net cash used in investment activities   
|                                                                                            |                                                                       |                   |                                          
|                                                                                            |                                                                       |                   | Net change in cash and cash equivalents  
|                                                                                            |                                                                       |                   |                                          
|Cash and cash equivalents, beginning of period                                              |                                                                       |                   | 648                                      
|                                                                                            |                                                                       |                   |                                          
|                                                                                            |                                                                       |                   | Cash and cash equivalents, end of period 
|                                                                                            |                                                                       |                   |                                          

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest paid totaled $6,275 and $10,869 for the nine months ended August 31, 2002 and August 31, 2001, respectively.

Income
taxes paid totaled $256 and $571 for the nine months ended August 31, 2002 and August 31, 2001, respectively.

See
notes to consolidated financial statements

8

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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 Holding Inc. ("Holdings"). (Holdings and its subsidiaries are collectively referred to as "Lehman Brothers".) The Company is one
of the leading global investment banks serving institutional, corporate, government and high-net-worth individual clients and customers. The Company's worldwide headquarters in
New York are complemented by offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific Region. The Company is engaged 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. It is recommended that these consolidated financial statements be read in conjunction with the audited consolidated financial statements included in
LBI's Annual Report on Form 10-K for the twelve months ended November 30, 2001 (the "Form 10-K"). The Consolidated Statement of Financial Condition at
November 30, 2001 was derived from the audited financial statements.

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

Consolidation Accounting Policies

Operating Companies

The Company follows Statement of Financial Accounting Standards ("SFAS") No. 94, "Consolidation of All Majority-Owned Subsidiaries", and consolidates
operating entities when the Company has a controlling financial interest over the business activities of such entities. Non-controlled operating entities are accounted for under the equity
method when the Company is able to exercise significant influence over the business activities of such entities. The cost method is applied when the ability to exercise significant influence is not
present.

Special Purpose Entities

For those entities which do not meet the definition of conducting a business, often referred to as special purpose entities ("SPE's"), the Company follows the
accounting guidance under SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilitiesa
replacement of FASB No. 125," and Emerging Issues Task Force ("EITF") Topic D-14, "Transactions Involving Special-Purpose Entities," to determine whether or not such SPE's are
required to be consolidated. The majority of the Company's involvement with SPE's relates to securitization transactions meeting the SFAS 140 definition of a qualifying special purpose entity
("QSPE"). A QSPE can generally be described as an entity with significantly limited powers which are intended to limit it to passively holding financial assets and distributing cash flows based upon
predetermined criteria. Based upon the guidance in SFAS 140, the Company does not consolidate such QSPE's. Rather, the Company accounts for its involvement with such QSPE's under a financial
components approach in which the Company recognizes only its retained involvement with the QSPE. The Company accounts for such retained interests at fair value.

9

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Certain
special purpose entities do not meet the QSPE criteria due to their permitted activities not being sufficiently limited, or because the assets are not deemed qualifying financial
instruments (e.g., real estate). In the limited instances in which the Company is either the sponsor of or transferor of assets to a non-qualifying SPE, the Company follows the accounting
guidance provided by EITF Topic D-14 to determine whether consolidation is required. Under this guidance, the Company would not consolidate such SPE if a third party investor made a
substantial equity investment in the SPE (minimum of 3%), was subject to first dollar risk of loss of such SPE, and had a controlling financial interest.

Transfers of Financial Assets

The Company accounts for transfers of financial assets in accordance with SFAS 140. In accordance with this guidance the Company recognizes the transfer of
financial assets as sales provided that control has been relinquished. Control is deemed to be relinquished only when all of the following conditions have been met: i) the assets have been
isolated from the transferor even in bankruptcy or other receivership (true sale opinions are required), ii) the transferee has the right to pledge or exchange the assets received and
iii) the transferor has not maintained effective control over the transferred assets (e.g., a unilateral ability to repurchase a unique or specific asset).

Revenue Recognition Policies

Principal Transactions

Securities and other financial instruments owned and securities and other financial instruments sold but not yet purchased (both of which are recorded on a trade
date basis) are valued at market or fair value, as appropriate, with unrealized gains and losses reflected in Principal Transactions in the Consolidated Statement of Income. Market value is generally
based on listed market prices. If listed market prices are not available, or if liquidating the Company's position is reasonably expected to affect market prices, fair value is determined based on
broker quotes, internal valuation pricing models which take into account time value and volatility factors underlying the financial instruments, or management's estimate of the amounts that could be
realized under current market conditions, assuming an orderly liquidation over a reasonable period of time.

Investment Banking

Underwriting revenues and fees for merger and acquisition advisory services are recognized when services for the transactions are determined to be completed.
Underwriting expenses are deferred and recognized at the time the related revenues are recorded.

Commissions

Commissions primarily include fees from executing and clearing client transactions on stock, options and futures markets worldwide. These fees are recognized on a
trade date basis.

Interest Revenue/Expense

The Company recognizes contractual interest on securities and other financial instruments owned and securities and other financial instruments sold but not yet
purchased on an accrual basis as a component of Interest and Dividends revenues and Interest Expense, respectively. Interest flows on the Company's derivative transactions are included as part of the
Company's mark-to-market valuation of these contracts within Principal Transactions and are not recognized as a component of interest revenue/expense.

The
Company accounts for its secured financing activities, and short and long-term borrowings on an accrual basis with related interest recorded as interest revenue or
interest expense, as applicable.

10

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2.    Events of September 11, 2001:

As a result of the September 11, 2001 terrorist attack, the Company's leased facilities in the World Trade Center were destroyed and its leased and owned
facilities in the World Financial Center complex (including the 3 World Financial Center building owned jointly with American Express) were significantly damaged.

During
the fourth quarter of 2001, the Company recognized a pretax special charge of $51 million ($29 million after-tax) associated with the net losses stemming
from the events of September 11, 2001. This charge was comprised of charges and costs of $291 million, less estimated insurance recoveries of $240 million.

During
the first nine months of 2002, the Company incurred additional costs resulting from the September 11, 2001 terrorist attack of approximately $22 million, primarily
related to technology restoration and other costs associated with unusable facilities, which were fully offset by estimated insurance recoveries.

In
addition, during the first nine months of 2002, the Company incurred costs of approximately $16 million to repair damage incurred to the core and shell of the Company's 3 World
Financial Center facility, which were fully offset by estimated insurance recoveries. Such costs are anticipated to be fully recoverable under the Company's insurance policy.

During
the third quarter of 2002, the Company sold its interest in the 3 World Financial Center building to Holdings for book value.

For
further information regarding the special charge associated with the events of September 11, 2001 recognized during 2001, refer to Note 2 to the Consolidated Financial
Statements included in the Form 10-K.

3.    Capital Requirements:

As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the Net Capital Rule, which requires LBI to maintain net capital of not less
than the greater of 2% of aggregate debit items arising from customer transactions, as defined, or 4% of funds required to be segregated for customers' regulated commodity accounts, as defined. At
August 31, 2002, LBI's regulatory net capital, as defined, of $1,664 million exceeded the minimum requirement by $1,572 million.

As
a clearing broker-dealer, the Company has elected to compute a reserve requirement for Proprietary Accounts of Introducing Broker-Dealer ("PAIB calculation"). The PAIB calculation is
completed in order for each correspondent firm that uses the Company as its clearing broker-dealer to classify its assets held by the
Company as allowable assets in the correspondent's net capital calculation. At August 31, 2002, the Company did not have a reserve requirement for PAIB, however the Company had
$53 million of qualified securities or cash on deposit in a Special Reserve Bank Account as of August 31, 2002.

The
Company's "AAA" rated derivatives subsidiaries, Lehman Brothers Financial Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc. ("LBDP"), have established
certain capital and operating restrictions which are reviewed by various rating agencies. At August 31, 2002, LBFP and LBDP each had capital which exceeded the requirement of the most stringent
rating agency by approximately $24 million and $13 million, respectively.

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

11

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4.    Derivative Financial Instruments:

In the normal course of business, the Company enters into derivative transactions both in a trading capacity and as an end-user. The Company's
derivative activities (both trading and end-user) are recorded at fair value on the Company's Consolidated Statement of Financial Condition. As an end user, the Company utilizes
derivatives to modify the market risk exposures of certain assets and liabilities. In this regard, the Company primarily enters into fair value hedges utilizing interest rate swaps to convert a
substantial portion of the Company's fixed rate long-term debt and certain term fixed rate secured financing activities to a floating interest rate. The ineffective portion of the fair
value hedges were included in "Interest Expense" on the Consolidated Statement of Income and were immaterial for the three and nine months ended August 31, 2002 and 2001.

Market
or fair value for derivative instruments is generally determined by either quoted market prices (for exchange-traded futures and options) or pricing models (for
over-the-counter swaps, forwards and options). Pricing models utilize a series of market inputs to determine the present value of future cash flows, with adjustments, as
required, for credit risk and liquidity risk. Further valuation adjustments may be recorded, as deemed appropriate for new or complex products or for positions with significant concentrations. These
adjustments are integral components of the mark-to-market process. Credit-related valuation adjustments represent estimates of expected losses which incorporate business and
economic conditions, historical experience, concentrations, and the character, quality and performance of credit sensitive financial instruments.

Unrealized
gains and losses on derivative contracts are recorded on a net basis in the Consolidated Statement of Financial Condition for those transactions with counterparties executed
under a legally enforceable master netting agreements and are netted across products when such provisions are stated in the master netting agreement. Listed in the following table is the fair value of
the Company's derivative activities. Assets and liabilities represent net unrealized gains (amounts receivable from counterparties) and net unrealized losses (amounts payable to counterparties),
respectively.

|                                                                                                   |       | Fair Value*
August 31, 2002 |       | Fair Value*
November 30, 2001
|-------------------------------------------------------------------------------------------------- | ----- | --------------------------- | ----- | -----------------------------
|
|
|Interest rate, currency and credit default swaps, and options (including caps, collars and floors) |       | $                           | 7,768 |                              
|Foreign exchange forward contracts and options                                                     |       |                             | 309   |                              
|Other fixed income securities contracts (including futures contracts, options and TBAs)            |       |                             | 398   |                              
|Equity contracts (including equity swaps, warrants and options)                                    |       |                             | 357   |                              
|                                                                                                   |       |                             |       |                              
|                                                                                                   | Total |                             | $     | 8,832                        
|                                                                                                   |       |                             |       |                              

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12

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Assets
included in the table above represent the Company's net receivable/payable for derivative financial instruments before consideration of collateral held by the Company. Included
within the $8,832 million fair value of assets at August 31, 2002 was $8,475 million related to swaps and other over-the-counter ("OTC") contracts and
$357 million related to exchange-traded option and warrant contracts. Included within the
$6,727 million fair value of assets at November 30, 2001 was $6,239 million related to swaps and other OTC contracts and $488 million related to exchange-traded option and
warrant contracts.

With
respect to OTC contracts, the Company views its net credit exposure to be $7,138 million at August 31, 2002, representing the fair value of the Company's OTC contracts
in an unrealized gain position, after consideration of collateral. Presented below is an analysis of the Company's net credit exposure at August 31, 2002 for OTC contracts based upon actual
ratings made by external rating agencies or by equivalent ratings established and utilized by the Company's Credit Risk Management Department.

Counterparty
Risk Rating

S&P/Moody's
Equivalent

Net Credit
Exposure1

AAA/Aaa

15%2

AA-/Aa3 or higher

25%3

A-/A3 or higher

41%4

BBB-/Baa3 or higher

14%5

BB-/Ba3 or higher

5%6

B+/B1 or lower




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

For
a further discussion of the Company's derivative related activities, refer to the Notes to the Consolidated Financial Statements included in the Form 10-K.

13

---



5.    Securitizations:

The Company is a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with these activities, the
Company utilizes special purpose entities principally for (but not limited to) the securitization of commercial and residential mortgages, home equity loans, government and corporate bonds, and lease
and trade receivables. The Company derecognizes financial assets transferred in securitizations provided that the Company has relinquished control over such assets. For further information regarding
the accounting for securitization transactions, refer to Note 1,Basis of PresentationConsolidation Accounting PoliciesTransfers of Financial
Assets. The Company may retain an interest in the financial assets it securitizes ("Retained Interests") which may include assets in the form of residual interests in the
special purpose entities established to facilitate the securitization. Any Retained Interests are included in Securities and Other Financial Instruments Owned (principally Mortgages and
Mortgage-Backed) within the Company's Consolidated Statement of Financial Condition. During the first nine months of 2002, the Company securitized approximately $98 billion of financial assets
including: $71 billion of residential mortgages, $7 billion of commercial mortgages and $20 billion of other asset-backed financial instruments.

As
of August 31, 2002 and November 30, 2001, the Company held approximately $1.2 billion and $1.4 billion, respectively, of non-investment grade
Retained Interests from its securitization activities (principally a junior security interest in securitizations) including $0.6 billion and $0.9 billion of commercial mortgages,
$0.4 billion and $0.3 billion of residential mortgages, and $0.2 billion and $0.2 billion of other asset-backed financial instruments, respectively. The Company records its
trading assets on a mark-to-market basis, including those assets held prior to securitization, as well as any retained interest post securitization.
Mark-to-market gains or losses are recorded as a component of "Principal Transactions" in the Consolidated Statement of Income. Fair value is determined based upon listed
market prices, if available. When listed market prices are not available, fair value is determined based on other relevant factors, including broker or dealer price quotations and valuation pricing
models which take into account time value and volatility factors underlying the financial instruments among other factors.

The
tables below outline the key economic assumptions used in measuring the fair value of retained interests:

At August 31, 2002:

|                               |  | Residential
Mortgages |  | Commercial
Mortgages |  | Other
Asset Backed
|------------------------------ |  | --------------------- |  | -------------------- |  | ------------------
|Weighted average life          |  | 3 years               |  | 1 year               |  | 4 years           
|Annual prepayment rate         |  | 8 - 48 CPR            |  | 0 - 15 CPR           |  | 8 - 15 CPR        
|Credit Loss Assumption         |  | .5 - 6%               |  | 2 - 17%              |  | 3 - 10%           
|Weighted average Discount rate |  | 17%                   |  | 20%                  |  | 7%                

At November 30, 2001:

|                               |  | Residential
Mortgages |  | Commercial
Mortgages |  | Other
Asset Backed
|------------------------------ |  | --------------------- |  | -------------------- |  | ------------------
|Weighted average life          |  | 4 years               |  | 1 year               |  | 2 years           
|Annual prepayment rate         |  | 6 - 45 CPR            |  | 0 - 10 CPR           |  | 6 - 12 CPR        
|Credit Loss Assumption         |  | .5 - 6%               |  | 2 - 17%              |  | 3 - 10%           
|Weighted average Discount rate |  | 19%                   |  | 20%                  |  | 8%                

14

---

The
tables below outline the sensitivity of the fair value of the retained interests to immediate 10% and 20% adverse changes in the above assumptions (dollars in millions):

|                       |                              | At August 31, 2002 |   | At November 30, 2001
|---------------------- | ---------------------------- | ------------------ | - | --------------------
|
|Prepayment speed:      |                              |                    |   |                     
|                       | Impact of 10% adverse change |                    | $ | 4                   
|                       | Impact of 20% adverse change |                    | $ | 7                   
|                       |                              |                    |   |                     
|Assumed credit losses: |                              |                    |   |                     
|                       | Impact of 10% adverse change |                    | $ | 21                  
|                       | Impact of 20% adverse change |                    | $ | 41                  
|                       |                              |                    |   |                     
|Discount rate:         |                              |                    |   |                     
|                       | Impact of 10% adverse change |                    | $ | 22                  
|                       | Impact of 20% adverse change |                    | $ | 44                  
|                       |                              |                    |   |                     

The
sensitivity analysis in the preceding table is hypothetical and should be used with caution as the above stresses are performed without consideration of the impact of hedges which
serve to reduce the Company's actual risk. In addition, these results are calculated by stressing a particular economic assumption independent of changes in any other assumption (as required by U.S.
GAAP); in reality changes in one factor often result in changes in another (for example changes in discount rates will often impact expected prepayment speeds). Further, changes in the fair value
based upon a 10% or 20% variation in an assumption should not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.

The
following table summarizes cash flows from securitization trusts for the quarter ended August 31,2002:

|(In millions)                             |  | Residential
Mortgages |  | Commercial
Mortgages |  | Other
Asset Backed
|----------------------------------------- |  | --------------------- |  | -------------------- |  | ------------------
|Purchases of delinquent loans             |  |                      |  |                     |  |                  
|Cash flows received on retained interests |  | $58                   |  | $13                  |  | $5                

15

---

6.    Financial Instruments:

Securities and other financial instruments owned and securities and other financial instruments sold, but not yet purchased are recorded at fair value, and were
comprised of the following:

|                                                                       |                                                             | August 31
2002 |        | November 30
2001
|---------------------------------------------------------------------- | ----------------------------------------------------------- | -------------- | ------ | ----------------
|Securities and other financial instruments owned:                      |                                                             |                |        |                 
|                                                                       | Mortgages and mortgage backed                               |                | $      | 9,966           
|                                                                       | Government and agencies                                     |                |        | 27,736          
|                                                                       | Derivatives and other contractual agreements                |                |        | 8,832           
|                                                                       | Corporate debt and other                                    |                |        | 10,523          
|                                                                       | Corporate equities                                          |                |        | 14,173          
|                                                                       | Certificates of deposits and other money market instruments |                |        | 2,026           
|                                                                       |                                                             |                |        |                 
|                                                                       |                                                             | $              | 73,256 |                 
|                                                                       |                                                             |                |        |                 
|Securities and other financial instruments sold but not yet purchased: |                                                             |                |        |                 
|                                                                       | Government and agencies                                     |                |        | 32,586          
|                                                                       | Derivatives and other contractual agreements                |                |        | 8,565           
|                                                                       | Corporate debt and other                                    |                |        | 5,315           
|                                                                       | Corporate equities                                          |                |        | 3,020           
|                                                                       |                                                             |                |        |                 
|                                                                       |                                                             | $              | 49,486 |                 
|                                                                       |                                                             |                |        |                 

7.    Securities Pledged as Collateral:

The Company enters into secured borrowing and lending transactions to finance trading inventory positions, obtain securities for settlement, and meet customers'
needs. The Company primarily receives collateral in connection with resale agreements, securities borrowed transactions, customer margin loans and certain other loans. The Company is generally
permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, enter into securities lending transactions or deliver to counterparties to
cover short positions. The Company carries secured financing agreements for financial reporting purposes on a net basis when permitted under the provisions of Financial Accounting Standards Board
Interpretation No. 41 ("FIN 41").

At
August 31, 2002 and November 30, 2001, the fair value of securities received as collateral and securities owned that have not been sold, repledged or otherwise
encumbered totaled approximately $13 billion and $9 billion, respectively. At August 31, 2002 and November 30, 2001, the gross fair value of securities received as
collateral where the Company was permitted to sell or repledge the securities was approximately $263 billion and $190 billion, respectively. Of this collateral, approximately
$258 billion and $183 billion at August 31, 2002 and November 30, 2001, respectively, has been sold or repledged, generally as collateral under repurchase agreements or to
cover securities and other financial instruments sold but not yet purchased.

16

---

The
Company also pledges its own assets, principally to collateralize certain financing arrangements. These pledged securities, where the counterparty has the right, by contract or
custom, to rehypothecate the financial instruments are classified as securities and other financial instruments owned, pledged as collateral on the Company's Consolidated Statement of Financial
Condition as required by SFAS 140.

In
addition, the carrying value of securities and other financial instruments owned that have been pledged to counterparties where those counterparties do not have the right to sell or
repledge were approximately $37 billion and $40 billion at August 31, 2002 and November 30, 2001, respectively.

8.    Other Commitments and Contingencies:

As of August 31, 2002 and November 30, 2001, the Company was contingently liable for $0.7 billion and $0.9 billion, respectively, of
letters of credit, primarily used to provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodity exchanges.

In
connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $1.5 billion at both August 31,
2002 and November 30, 2001, respectively. 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. At August 31, 2002, the Company had commitments to enter into forward starting secured financing transactions including reverse repurchase agreements and repurchase agreements
of approximately $54.1 billon and $36.0 billion, respectively, as compared to $43.6 billion and $21.5 billion, respectively, at November 30, 2001. In addition, the Company
had other guarantees of approximately $2.0 billion at August 31, 2002. These other guarantees, which are principally overcollateralized with investment grade collateral, consist of
liquidity facilities and default protection to investors.

In
addition, the Company, through its high grade and high yield sales, trading and underwriting activities, makes commitments to extend credit in loan syndication transactions. The
Company utilizes various hedging and funding strategies to actively manage its market, credit and liquidity exposures on these commitments. In addition, total commitments are not indicative of actual
risk or funding requirements, as the commitments may not be drawn or fully utilized. These commitments and any related draw downs of these facilities typically have fixed maturity dates and are
contingent upon certain representations, warranties and contractual conditions applicable to the borrower.

At
August 31, 2002 and November 30, 2001, the Company had lending commitments to investment grade borrowers of approximately $6.6 billion and $4.3 billion,
respectively. However, these commitments are not indicative of the Company's actual risk as the Company reduced its credit risk through the use of hedges and has utilized funding facilities to
mitigate liquidity risk. The Company views its credit risk for investment grade commitments (after consideration of hedges) to be $3.0 billion and $3.2 billion at August 31, 2002
and November 30, 2001, respectively. Lending commitments to non-investment grade borrowers totaled approximately $1.0 billion at both August 31, 2002 and
November 30, 2001. The Company had available undrawn borrowing facilities with third parties of approximately $2.6 billion and $2.9 billion at August 31, 2002 and
November 30, 2001, respectively, which can be drawn upon to provide funding for these commitments. These funding facilities contain limits for certain concentrations of counterparty, industry
or credit ratings of the underlying loans.

At
August 31, 2002 and November 30, 2001, the Company had commitments to invest up to $182 million and $169 million, respectively, directly and through
partnerships in private equity related investments. These commitments will be funded as required through the end of the respective investment periods, principally expiring in 2004.

17

---

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, established reserves and the advice of 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 cash flows, but may be material to the Company's operating results for any particular period, depending on the level of income for such period.

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, credit or counterparty, liquidity, legal and operational risks. Management has developed a
control infrastructure throughout the Company to monitor and manage these risks on a global basis. For further discussion of these matters, refer to the Risk Management section of Management's
Analysis of Results of Operations included in the Form 10K.

9.    Segments

The Company operates in three segments: Investment Banking, Capital Markets and Client Services.

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

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

Client
Services revenues reflect earnings from the Company's private client and private equity businesses. Private Client revenues reflect the Company's
high-net-worth retail customer flow activities as well as asset management fees earned from these clients. Private Equity revenues include the management and incentive fees
earned in the Company's role as general partner for thirty-three private equity partnerships.

18

---

The
Company's segment information for the three and nine months ended August 31, 2002 and August 31, 2001 is prepared utilizing the following methodologies:



Segments (Three Months Ended):

|(In millions)                         |  | Investment
Banking |     | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | --- | --------------- | - | --------------- |  | -----
|August 31, 2002                       |  |                    |     |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 401 |                 | $ | 2,284           |  | $    
|Interest Expense                      |  |                    |    |                 |   | 2,049           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Net Revenue                           |  | $                  | 401 |                 | $ | 235             |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 2   |                 |   | 10              |  |      
|Other Expenses                        |  |                    | 271 |                 |   | 222             |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Earnings Before Taxes(1)              |  | $                  | 128 |                 | $ | 3               |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.4 |                 | $ | 197.8           |  | $    
|                                      |  |                    |     |                 |   |                 |  |      

---

|(In millions)                         |  | Investment
Banking |     | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | --- | --------------- | - | --------------- |  | -----
|August 31, 2001                       |  |                    |     |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 255 |                 | $ | 3,103           |  | $    
|Interest Expense                      |  |                    |    |                 |   | 2,879           |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Net Revenue                           |  | $                  | 255 |                 | $ | 224             |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 4   |                 |   | 19              |  |      
|Other Expense                         |  |                    | 199 |                 |   | 193             |  |      
|                                      |  |                    |     |                 |   |                 |  |      
|Earnings Before Taxes(1)              |  | $                  | 52  |                 | $ | 12              |  | $    
|                                      |  |                    |     |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.7 |                 | $ | 180.6           |  | $    
|                                      |  |                    |     |                 |   |                 |  |      

---

19

---

Segments (Nine Months Ended):

|(In millions)                         |  | Investment
Banking |       | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | ----- | --------------- | - | --------------- |  | -----
|August 31, 2002                       |  |                    |       |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 1,133 |                 | $ | 7,744           |  | $    
|Interest Expense                      |  |                    |      |                 |   | 6,242           |  |      
|                                      |  |                    |       |                 |   |                 |  |      
|Net Revenue                           |  | $                  | 1,133 |                 | $ | 1,502           |  | $    
|                                      |  |                    |       |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 6     |                 |   | 31              |  |      
|Other Expense                         |  |                    | 787   |                 |   | 1,030           |  |      
|                                      |  |                    |       |                 |   |                 |  |      
|Earnings Before Taxes(1)              |  | $                  | 340   |                 | $ | 441             |  | $    
|                                      |  |                    |       |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.4   |                 | $ | 197.8           |  | $    
|                                      |  |                    |       |                 |   |                 |  |      

---

|(In millions)                         |  | Investment
Banking |       | Capital
Markets |   | Client
Services |  | Total
|------------------------------------- |  | ------------------ | ----- | --------------- | - | --------------- |  | -----
|August 31, 2001                       |  |                    |       |                 |   |                 |  |      
|Gross Revenues                        |  | $                  | 1,029 |                 | $ | 12,618          |  | $    
|Interest Expense                      |  |                    |       |                 |   | 10,736          |  |      
|                                      |  |                    |       |                 |   |                 |  |      
|Net Revenue                           |  | $                  | 1,029 |                 | $ | 1,882           |  | $    
|                                      |  |                    |       |                 |   |                 |  |      
|Depreciation and Amortization Expense |  |                    | 10    |                 |   | 47              |  |      
|Other Expense                         |  |                    | 815   |                 |   | 1,140           |  |      
|                                      |  |                    |       |                 |   |                 |  |      
|Earnings Before Taxes(1)              |  | $                  | 204   |                 | $ | 695             |  | $    
|                                      |  |                    |       |                 |   |                 |  |      
|Segment Assets (billions)             |  | $                  | 0.7   |                 | $ | 180.6           |  | $    
|                                      |  |                    |       |                 |   |                 |  |      

---

The
following are net revenues by geographic region:

|                       |       | Three Months Ended |     | Nine Months Ended
|---------------------- | ----- | ------------------ | --- | -----------------
|
|U.S.                   |       | $                  | 559 |                  
|Europe                 |       |                    | 205 |                  
|Asia Pacific and other |       |                    | 64  |                  
|                       |       |                    |     |                  
|                       | Total |                    | $   | 828              
|                       |       |                    |     |                  

10.  Related Parties:

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

20

---



LEHMAN BROTHERS INC. and SUBSIDIARIES

ITEM 2. MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS

Forward-Looking Statements

Some of the statements contained in this Management's Analysis of Results of Operations, including those relating to the Company's
strategy and other statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates" and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are not historical
facts but instead represent only the Company's expectations, estimates and projections regarding future events. These statements are not guarantees of future performance and involve certain risks and
uncertainties that are difficult to predict, which may include market, credit or counterparty, liquidity, legal and operational risks. Market and liquidity risks include changes in interest and
foreign exchange rates and securities and commodities valuations, the availability and cost of capital and credit, changes in investor sentiment, global economic and political trends, concerns about
possible military action and terrorist activity and industry competition. Legal risks include legislative and regulatory developments in the U.S. and throughout the world. The Company's actual results
and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements and, accordingly, readers are cautioned not to place
undue reliance on such statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or
otherwise.

Results of Operations
For the Three Months Ended August 31, 2002 and August 31, 2001

The Company reported net income of $143 million for the quarter ended August 31, 2002, an increase of 34% from the third quarter of 2001. These
results reflect an improvement in the Company's investment banking activities offsetting the difficult market conditions experienced in Capital Markets activities.

Revenues

Net revenues were $828 million for the third quarter of 2002 as compared to $674 million for the third quarter of 2001, an increase of 23%. Despite
the difficult market conditions experienced in the third quarter of 2002, the Company's strategy, of building a diversified set of high margin global businesses while maintaining strong discipline
around expenses, liquidity and risk management, has resulted in improved market positions in a number of key areas such as mergers and acquisitions ("M&A"), debt and equity underwriting.

Principal Transactions, Commissions and Net Interest Revenues

The Company measures the performance of its Capital Markets and Client Services activities in the aggregate, including Principal Transactions, Commissions and Net
Interest. Decisions relating to these activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction,
including any associated commissions, and the interest income or expense associated with financing or hedging the Company's positions. Therefore, the Company views net revenues from principal
transactions, commissions and interest, offset by related interest expense, in the aggregate, because the revenue classifications, when analyzed individually, are not always indicative of the
performance of the Company's overall Capital Markets and Client Services activities.

Principal
Transactions, Commissions and Net Interest revenues increased 10% to $419 million for the third quarter of 2002 as compared to $381 million for the third quarter
of 2001. Despite the negative market conditions, customer flow activity remained relatively strong.

21

---

Within
these amounts, Principal Transactions revenues decreased to a loss of $98 million for the third quarter of 2002 as compared to a loss of $81 million in the third
quarter of 2001. Commissions revenues were $304 million for the third quarter of 2002 as compared to $206 million for the third quarter of 2001. Interest and Dividend revenues were
$2,271 million for the third quarter of 2002 as compared to
$3,149 million for the third quarter of 2001. Interest expense was $2,058 million for the third quarter of 2002 as compared to $2,893 million for the third quarter 2001. The
Company measures the performance of its Capital Markets and Client Services business in the aggregate, including Principal Transactions, Commissions and Net Interest. Decisions relating to these
activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction, including any associated commissions, and the
interest income or expense associated with financing or hedging the Company's positions; therefore caution should be utilized when analyzing revenue categories individually.

The
decrease in Principal Transactions revenues in 2002 resulted from poor market conditions for both fixed income and equity products. In addition, Principal Transactions revenues in
2002 decreased as a result of the transition to a commission-based revenue structure on certain NASDAQ trades whereas in the prior year, the Company's NASDAQ trades for substantially all of its
institutional customers were transacted on a spread basis (with related revenues classified within Principal Transactions).

Commissions
revenues increased as compared to the prior year's level principally due to the transition to a commission-based revenue structure on certain NASDAQ trades.

Interest
and dividend revenues and interest expense are a function of the level and mix of total assets and liabilities, principally financial instruments owned and secured financing
activities, the prevailing level of interest rates, as well as the term structure of the Company's financings. Interest and dividends revenues and interest expense are integral components of the
Company's overall customer flow activities. The decline in interest revenue and interest expense from the previous year is principally due to a substantial decline in interest rates over the period.
The decrease in net interest income for the third quarter of 2002 was primarily due to a change in the asset mix to generally higher quality assets, which usually produce lower yields.

Investment Banking

Investment Banking revenues were $402 million for the third quarter of 2002 as compared to $278 million for the third quarter of 2001. Investment
Banking revenues result mainly from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, and advising clients on M&A activities and other
services. Investment Banking revenues increased 45% from the third quarter of 2001, primarily due to the Company's role as joint lead manager on the largest initial public offering in the third
quarter of 2002 as well as strong M&A activities in the third quarter of 2002.

Segments

The Company is segregated into three business segments (each of which is described below): Investment Banking, Capital Markets and Client Services. Each segment
represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional and high-net-worth retail
clients, which are recognized across all revenue categories contained in the Company's Consolidated Statement of Income. (Net revenues also contain certain internal allocations, including funding
costs, which are centrally managed.)

22

---

Segment ResultsThree Months Ended August 31, 2002 and August 31, 2001

|                             |  | Three Months Ended August 31, 2002 |     | Three Months Ended August 31, 2001 |  
|---------------------------- |  | ---------------------------------- | --- | ---------------------------------- | -
|
|Principal Transactions       |  | $                                  |    |                                    | $
|Interest and Dividend Income |  |                                    |    |                                    |  
|Investment Banking           |  |                                    | 401 |                                    |  
|Commissions                  |  |                                    |    |                                    |  
|Other                        |  |                                    |    |                                    |  
|                             |  |                                    |     |                                    |  
|Total Revenues               |  | $                                  | 401 |                                    | $
|Interest Expense             |  |                                    |    |                                    |  
|                             |  |                                    |     |                                    |  
|Net Revenues                 |  | $                                  | 401 |                                    | $
|Non-Interest Expenses        |  |                                    | 273 |                                    |  
|                             |  |                                    |     |                                    |  
|Earnings Before Taxes(1)     |  | $                                  | 128 |                                    | $
|                             |  |                                    |     |                                    |  

---

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

In
assessing the performance of Capital Markets and Client Services, the Company measures Principal Transactions, Commissions and Net Interest revenues in the aggregate. Decisions
relating to capital markets and client services activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a
transaction including any associated commissions, and the interest income or expense associated with financing or hedging the Company's positions. Therefore, the Company views net revenues from
principal transactions, commissions and interest, offset by related interest expense, in the aggregate, because the revenue classifications, when analyzed individually, are not always indicative of
the performance of the Company's Capital Markets and Client Services activities.

Investment BankingThis segment's earnings result from fees earned by the Company for underwriting
public and private offerings of fixed income and equity securities, and advising clients on M&A activities and other services.

Investment
Banking pre-tax earnings of $128 million increased significantly from the third quarter of 2001, as net revenues increased 57%. The increase was primarily
due to an increase in equity underwriting, and to a lesser extent, M&A advisory and fixed income underwriting activity.

Debt
underwriting revenues totaled $201 million for the third quarter 0f 2002, an increase of 10% from the third quarter of 2001, due to the continued strength in U.S. investment
grade debt underwriting driven by a favorable interest rate environment.

INVESTMENT BANKING NET REVENUES

Three Months EndedIn millions

August 31
2002

August 31
2001Debt Underwriting

$
201

$
182Equity Underwriting


111


29M&A Advisory


89


44$
401

$
255


23

---

Equity
underwriting revenues increased substantially to $111 million in the third quarter of 2002 from $29 million in the third quarter of 2001. Although
industry-wide equity market volumes decreased during the third quarter of 2002 compared to the third quarter of 2001, the Company's quarterly volume increased. The results for the third
quarter of 2002 reflect the Company's participation as joint lead-manager for the largest initial public offering transaction in the quarter.

M&A
advisory fees for the third quarter of 2002 were $89 million, up from $44 million in the third quarter of 2001, principally due to an increase in the Company's market
share in the U.S.

Capital MarketsThis segment's earnings reflect institutional customer flow activities and secondary
trading and financing activities related to fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments.

Capital
Markets pre-tax earnings of $3 million decreased slightly from the third quarter of 2001. Capital Markets non-interest expenses increased 9% during
the quarter to $232 million from $212 million in the third quarter of 2001, primarily due to an increase in compensation and benefits associated with higher revenues, as well as an
increase in nonpersonnel expenses, particularly occupancy costs associated with increased headcount levels, technology spending in order to enhance the Company's trading platforms and technology
infrastructure and a slight increase in brokerage and clearance costs due to higher volumes in certain fixed income structured products.

CAPITAL MARKETS NET REVENUES

|             |  | Three Months Ended August 31, 2002 |       | Three Months Ended August 31, 2001
|------------ |  | ---------------------------------- | ----- | ----------------------------------
|
|Fixed Income |  | $                                  | 1,899 |                                   
|Equities     |  |                                    | 385   |                                   
|             |  |                                    |       |                                   
|             |  | $                                  | 2,284 |                                   
|             |  |                                    |       |                                   

Capital
Markets' net revenues were $235 million for the third quarter of 2002, up 5% from the third quarter of 2001, despite the extremely difficult market environment.

Net
revenues from the fixed income component of Capital Markets in the third quarter of 2002 decreased by 36% from the third quarter of 2001. Revenues from fixed income products were
adversely affected by price deterioration associated with widening credit spreads, particularly in the investment grade and high yield sectors. The weakness in the secondary markets was driven by
historically high levels of downgrades as well as investor uncertainty due to corporate governance issues, geopolitical risks and continued global economic weakness.

Net
revenues from the equities component of Capital Markets were $121 million in the third quarter of 2002, up 157% from the third quarter of 2001. 2002 net revenues were
positively impacted by reduced financing costs associated with the lower interest rate environment and by the Company's ability to increase its market share in the listed and NASDAQ markets. In
addition, the increase reflects higher revenues from institutional trading, as in 2002 there was a change to commission-based pricing on certain NASDAQ trades to compensate for the compressed spreads
(reflected within Principal Transactions) caused by decimalization, which had resulted in historically low revenue levels from NASDAQ customer flow activities in 2001. The increase was partially
offset by a decline in convertible revenues as a result of spreads widening in the underlying bonds, as well as lower levels of secondary trading volumes consistent

24

---

with
the decrease in origination activity. In addition, the Company recorded mark-to-market losses on certain private equity investments in 2002 to reflect decreased
valuations.

Client ServicesClient Services earnings reflect earnings from the Company's Private Client and
Private Equity businesses. Private Client net revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees. Private Equity net
revenues include the management and incentive fees earned in the Company's role as general partner for thirty-three private equity banking partnerships.

Client
Services pre-tax earnings of $42 million decreased from $60 million in the third quarter of 2001, primarily due to an incentive fee recognized in Private
Equity in 2001 as well as an increase in non-interest expenses, including occupancy and compensation.

Client
Services net revenues were $192 million in the third quarter of 2002 virtually flat versus the third quarter of 2001. Private Client net revenues increased 12%, from
$171 million in the third quarter of 2001 to $191 million in the third quarter of 2002 as customers remained invested during the difficult market environment by repositioning their
portfolios to fixed income products.

CLIENT SERVICES REVENUES

Three Months EndedIn millions

August 31
2002

August 31
2001Private Client

$
191

$
171Private Equity


1


24$
192

$
195


Private
equity net revenues declined substantially in the third quarter of 2002 from the third quarter of 2001 primarily due to an incentive fee recognized from the Company's general
partner interest in a single Merchant Banking investment in the third quarter of 2001.

Non-Interest ExpensesNon-interest expenses were $655 million for the
third quarter of 2002 compared to $550 million for the third quarter of 2001. Compensation and benefits expense of $421 million in the
third quarter of 2002 increased 22% from $344 million in the third quarter of 2001, consistent with the increase in net revenues.

Nonpersonnel
expenses were $234 million for the third quarter of 2002, up 14% compared to the third quarter of 2001. The increase is mainly attributable to higher management fees
and occupancy expenses, driven by the increase in space, and technology costs required for the increase in headcount. Technology and communications, Business development and Professional fees
decreased from the third quarter of 2001, due to lower discretionary spending in response to the current market environment.

Income TaxesThe Company's income tax provision was $30 million for the third quarter of 2002
versus $17 million for the third quarter of 2001. The effective tax rate was 17.3% for the third quarter of 2002 versus 13.7% for the third quarter of 2001. The effective tax rate for 2002 is
higher than for 2001 primarily due to a decrease in tax benefits attributable to income subject to preferential tax treatment coupled with higher pretax income.

25

---

Results of Operations
For the Nine Months Ended August 31, 2002 and August 31, 2001

The Company reported net income of $677 million for the nine months ended August 31, 2002, a decrease of 10% from the nine months ended
August 31, 2001. These results reflect the difficult market conditions experienced throughout 2002, led by a decline in equity capital markets and M&A activities. However, during this nine
month period, the Company was generally able to continue to execute its strategy of building market share while maintaining a strict discipline with regard to its expenses, capital and liquidity.

Revenues

Net revenues were $3,217 million for the fist nine months of 2002 compared to $3,478 million for the first nine months of 2001. Revenues declined 8%
as compared to the prior year's levels, reflecting the impact of the difficult market conditions throughout the current fiscal year.

Principal Transactions, Commissions and Net Interest Revenues

The Company measures the performance of its Capital Markets and Client Services activities in the aggregate including Principal Transactions, Commissions and Net
Interest. Decisions relating to these activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction,
including associated commissions, and the interest income or expense associated with financing or hedging the Company's positions. The Company views these revenues in the aggregate, because the
revenue classifications, when analyzed individually, are not always indicative of the performance of the Company's Capital Markets and Client Services activities.

Principal
Transactions, Commissions and Net Interest revenues were $2,056 million for the first nine months of 2002 as compared to $2,394 million for the first nine months
of 2001. Principal Transactions, Commissions and Net Interest revenues decreased 14% from the first nine months of 2001 as a result of strong fixed income results being more than offset by weakness in
the equity markets. Fixed income results were fueled by historically low interest rate levels and increased customer trading volumes, particularly in mortgage related products and investment grade
debt, as investors rebalanced portfolios into fixed income products amid geopolitical and accounting uncertainties. The weakness in equity results were driven by declining equity indices and reduced
customer flow, as investors had a bias against equity trading.

Within
these amounts, Principal Transactions revenue decreased to $608 million for the first nine months of 2002 from $1,198 for the first nine months of 2001. Commissions
revenues were $806 million for the first nine months of 2002 as compared to $644 million for the first nine months of 2001. Interest and Dividends revenue were $6,905 million for
the first nine months of 2002 as compared to $11,360 million for the first nine months of 2001. Interest Expense was $6,263 million for the first nine months of 2002 as compared to
$10,808 million for the first nine months of 2001.

The
decrease in Principal Transactions revenues represents weakness in the equity markets resulting from the continued depressed levels of market volatility and declining equity indices
offset by higher fixed income results, driven by historically low interest rate levels which led to increased customer flow activities. In addition, Principal Transaction revenues in 2002 decreased as
a result of the transition to a commission-based revenue structure on certain NASDAQ trades. In the prior year, the Company's NASDAQ trades for substantially all of its institutional customers were
transacted on a spread basis (with related revenues classified within Principal Transactions).

Commissions
revenues increased as compared to the prior year period primarily due to the migration to institutional commission-based pricing in the NASDAQ market.

26

---



Interest and Dividends revenues and Interest Expense are a function of the level and mix of total assets and liabilities, including financial instruments owned and secured financing
activities, the prevailing level of interest rates, as well as the term structure and volatility of the Company's financings. Interest and Dividends revenues and Interest Expense are integral
components of trading activities. The decline in interest income and interest expense from the previous year is principally due to a significant decline in interest rates over the period. The increase
in net interest income was due in part to higher interest and dividend earning asset levels in the first nine months of 2002 as compared to the first nine months of 2001, as well as an increase in
spreads earned as a result of lower financing costs, offset by a change in the asset mix during the third quarter of 2002.

Investment Banking

Investment Banking revenues were $1,135 million for the first nine months of 2002 as compared to $1,054 million for the first nine months of 2001.
Investment Banking revenues result mainly from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, and advising clients on M&A activities
and other services. Investment Banking revenues increased 8% from the first nine months of 2001 primarily as a result of market share increases in fixed income and equity underwriting.

Segments

The Company is segregated into three business segments (each of which is described below): Investment Banking, Capital Markets and Client Services. Each segment
represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional and high-net-worth retail
clients, which are recognized across all revenue categories contained in the Company's Consolidated Statement of Income. (Net revenues also contain certain internal allocations, including funding
costs, which are centrally managed.)

Segment ResultsNine Months Ended August 31, 2002 and August 31, 2001

|                             |  | Nine Months Ended August 31, 2002 |       | Nine Months Ended August 31, 2001
|---------------------------- |  | --------------------------------- | ----- | ---------------------------------
|
|Principal Transactions       |  | $                                 |      |                                  
|Interest and Dividend Income |  |                                   |      |                                  
|Investment Banking           |  |                                   | 1,133 |                                  
|Commissions                  |  |                                   |      |                                  
|Other                        |  |                                   |       |                                  
|                             |  |                                   |       |                                  
|Total Revenues               |  | $                                 | 1,133 |                                  
|Interest Expense             |  |                                   |      |                                  
|                             |  |                                   |       |                                  
|Net Revenues                 |  | $                                 | 1,133 |                                  
|Non-Interest Expenses        |  |                                   | 793   |                                  
|                             |  |                                   |       |                                  
|Earnings Before Taxes(1)     |  | $                                 | 340   |                                  
|                             |  |                                   |       |                                  

---

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

27

---

In
assessing the performance of Capital Markets and Client Services, the Company measures Principal Transactions, Commissions and Net Interest revenues in the aggregate. Decisions
relating to capital markets and client services activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a
transaction including any associated commissions, and the interest income or expense associated with financing or hedging the Company's positions. The Company views these revenues in the aggregate,
because the revenue classifications, when analyzed individually, are not always indicative of the performance of the Company's Capital Markets and Client Services activities.

Investment BankingThis segment's earnings result from fees earned by the Company for underwriting
public and private offerings of fixed income and equity securities and advising clients on M&A activities and other services.

Investment
Banking pre-tax earnings of $340 million for the first nine months of 2002 increased 67% from $204 for the first nine months of 2001, reflecting both higher
revenues and a decrease in non-interest expenses. Non-interest expense decreased 4% in the first nine months of 2002 as compared to the first nine months of 2001, reflecting
both lower compensation expenses and reduced non-compensation related expenses, particularly business development and professional fees, as the Company focused on minimizing discretionary
spending in light of reduced revenue levels.

Investment
Banking's net revenues of $1,133 million increased 10% in the first nine months of 2002 when compared to $1,029 million for the first nine months of 2001. The
increase is mainly due to higher underwriting revenues as a result of continued strength in debt underwriting and gains in market share in equity origination.

INVESTMENT BANKING NET REVENUES

Nine Months Ended(In millions)

August 31
2002

August 31
2001Debt Underwriting

$
601

$
582Equity Underwriting


326


224Merger and Acquisition Advisory


206


223$
1,133

$
1,029


M&A
advisory revenues decreased by 8% to $206 million for the first nine months of 2002 from $223 million for the first nine months of 2001. The decrease reflected the
extremely difficult market conditions, partially attributed to weak equity share valuations and corporate governance issues, as the market volume was the lowest it has been in several years.

Capital MarketsThis segment's earnings reflect institutional customer flow activities and secondary
trading and financing activities related to fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments.

Capital
Markets pre-tax earnings of $441 million decreased 37% from the first nine months of 2001 pre-tax earnings of $695 million driven by a 20%
decrease in net revenues. Capital Markets non-interest expenses decreased 11% during the first nine months of 2002 to $1,061 million from $1,187 million in the first nine
months of 2001, as a decrease in compensation and benefits was partially offset by an increase in non-personnel expenses, particularly occupancy costs associated with increased headcount
levels and technology spending in order to enhance the Company's trading platforms and technology infrastructure

28

---

CAPITAL MARKETS NET REVENUES

|             |  | Nine Months Ended August 31, 2002 |       | Nine Months Ended August 31, 2001
|------------ |  | --------------------------------- | ----- | ---------------------------------
|
|Fixed Income |  | $                                 | 6,422 |                                  
|Equities     |  |                                   | 1,322 |                                  
|             |  |                                   |       |                                  
|             |  | $                                 | 7,744 |                                  
|             |  |                                   |       |                                  

Capital
Markets' net revenues were $1,502 million for the first nine months of 2002, down 20% from the first nine months of 2001 due principally to an extremely weak equities
market.

Net
revenues from the fixed income component of Capital Markets of $1,142 million in the first nine months of 2002 were up slightly as compared to the first nine months of 2001.
These results were driven by strong institutional customer flow activity in mortgage and credit related products.

Net
revenues from the equities component of Capital Markets decreased 53% to $360 million in the first nine months of 2002 from $758 million in the comparable 2001 period.
The decrease was a result of the difficult market conditions over the first nine months of 2002, which were evidenced by declining equity indices and the historical lows in volatility levels, which
negatively impacted revenue levels. These negative market conditions resulted in revenue declines across most equity products, including private equity investments. Within net revenues from equity
capital markets products, commissions revenues increased as a result of the increase in the portion of revenue derived from institutional commission-based pricing in the NASDAQ market with related
revenues classified within commissions, whereas in the prior year, the Company's NASDAQ trades for institutional customers were primarily transacted on a spread basis with related revenues classified
within principal transactions.

Net
interest income benefited due to a steepening yield curve environment and higher interest earning asset levels in the first nine months of 2002 as compared to the first nine months
of 2001.

Client ServicesClient Services' earnings reflect earnings from the Company's private client and
private equity businesses. Private client net revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees. Private equity net
revenues include the management and incentive fees earned in the Company's role as general partner in its private equity partnerships.

Client
Services pre-tax earnings of $148 million decreased 10% in the first nine months of 2002 compared to the first nine months of 2001 pre-tax earnings
of $165 million. Non-interest expenses increased 8% to $434 million in the first nine months of 2002 compared to $402 million during the first nine months of 2001,
primarily due to higher compensation expense for the high-net-worth business and an increase in occupancy expense.

29

---

Client
Services' net revenues increased to $582 million for the first nine months of 2002 as compared to $567 million for the first nine months of 2001. Record fixed income
activity offset declines in equities activities in the Company's high-net-worth business. Private equity net revenues declined substantially for the first nine months of 2002
from the first nine months of 2001, principally due to an incentive fee recognized from the Company's general partner interest in a single Merchant Banking investment in the third quarter of 2001.

CLIENT SERVICES NET REVENUES

Nine Months Ended(in millions)

August 31
2002

August 31
2001Private Client

$
579

$
541Private Equity


3


26$
582

$
567


Non-Interest ExpensesNon-interest expenses were $2,288 million for
the first nine months of 2002 compared to $2,414 million for the first nine months of 2001. The decrease in non-interest expenses highlights the Company's continued disciplined
approach to expense management. This ongoing focus is a key element of the Company's strategic objectives. Compensation and benefits expense of $1,639 million decreased 8% from
$1,773 million in the first nine months of 2001, consistent with the decrease in net revenues.

Nonpersonnel
expenses were $649 million for the first nine months of 2002, up 1% compared to the first nine months of 2001. The increase is mainly attributable to higher
management fees and occupancy expenses, driven by the increase in space and technology costs required for the increase in headcount. Business development and Professional fees decreased from the first
nine months of 2001, due to lower discretionary spending in response to the current market environment.

Income TaxesThe Company's income tax provision was $252 million for the nine months of 2002
compared to $314 million for the nine months of 2001. The effective tax rate was 27.1% for the first nine months of 2002 versus 29.5% for the first nine months of 2001. The effective tax rate
for 2002 is lower than for 2001 primarily due to an increase in tax benefits attributable to income subject to preferential tax treatment coupled with lower pretax income.

30

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Significant Accounting Policies

The Company's financial statements are prepared in conformity with generally accepted accounting principles, many of which require the use of management estimates
and assumptions. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

Fair ValueThe Company records its inventory positions, including Securities and Other Financial Instruments Owned and
Securities Sold but not yet Purchased, at fair value, with unrealized gains and losses reflected in Principal Transactions in the Consolidated Statement of Income. Market value is generally based on
listed prices. If listed market prices are not available, or if liquidating the Company's position is reasonably expected to affect market prices, fair value is determined based on either internal
valuation pricing models, which take into account time value and volatility factors underlying the financial instruments, or management's estimate of the amounts that could be realized under current
market conditions, assuming an orderly liquidation over a reasonable period of time. The determination of fair value is fundamental to the Company's financial condition and results of operations and,
in certain circumstances, it requires the use of complex judgments. The use of different pricing models or assumptions could produce different estimates of fair value.

Transfers of Financial AssetsThe Company accounts for transfers of financial assets in accordance with Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilitiesa replacement of FASB No. 125". In
accordance with this guidance the Company recognizes transfers of financial assets as sales provided that control has been relinquished. Control is deemed to be relinquished only when all of the
following conditions have been met: (i) the assets have been isolated from the transferor, even in bankruptcy or other receivership (true sale opinions are required), (ii) the transferee
has the right to pledge or exchange the assets received and (iii) the transferor has not maintained effective control over the transferred assets (e.g. a unilateral ability to repurchase a
unique or specific asset). The Company is a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with these activities, the Company
utilizes special purposes entities principally for (but not limited to) the securitization of commercial and residential mortgages, home equity loans, government and corporate bonds, and lease and
trade receivables. The Company derecognizes financial assets transferred in securitizations provided that the Company has relinquished control over such assets.

The
Company may retain an interest in the financial assets it securitizes ("Retained Interests"), which may include assets in the form of residual interests in the special purpose
entities established to facilitate the securitization. Any Retained Interests are included in Securities and Other Financial Instruments Owned (principally Mortgages and mortgage-backed) within the
Company's Consolidated Statement of Financial Condition. The Company records its Securities and Other Financial Instruments Owned, including Retained Interests, at fair value, with changes in fair
value reported in earnings.

For
additional information on the Company's significant accounting policies see Note 1 to the Consolidated Financial Statements (Summary of Significant Accounting Policies)
included in the Form 10-K.

31

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LEHMAN BROTHERS INC. and SUBSIDIARIES

PART IFINANCIAL INFORMATION

ITEM 4.    Controls and Procedures

The Chairman and Chief Executive Officer and the Chief Financial Officer of LBI (its principal executive officer and principal financial officer, respectively)
have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report, that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by LBI in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by LBI in such reports is accumulated
and communicated to the Company's management, including the Chairman and Chief Executive Officer and the Chief Financial Officer of LBI, as appropriate to allow timely decisions regarding required
disclosure.

There
were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.

32

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LEHMAN BROTHERS INC. and SUBSIDIARIES

PART IIOTHER INFORMATION

ITEM 1.    Legal Proceedings

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

Although
there can be no assurance as to the ultimate outcome, the Company generally has denied, or believes it has a meritorious defense and will deny, liability in all significant
cases pending against it including the matters described below, and it intends to defend vigorously each such case. Based on information currently available, advice of counsel, available insurance
coverage 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 the consolidated financial position or cash flows of the Company but may be material to the Company's operating results for any particular period, depending on the level of the Company's
income for such period.

WorldCom Bondholders Litigation

LBI and other underwriters of WorldCom, Inc. bonds have been named as defendants in certain lawsuits alleging that the offering materials were false and
misleading. Two of the lawsuits are purported class actions filed in the U.S. District Court for the Southern District of New York on July 10, 2002, and the U.S. District Court for the District
of Columbia on July 19, 2002, respectively, arising out of a May 24, 2000, offering of (insofar as the claims against LBI are concerned) $1,250,000,000 principal amount of WorldCom
notes. The New York action purports to be brought on behalf of purchasers of the notes issued in, or traceable to, the 2000 offering and generally alleges violations of the disclosure requirements of
the federal securities laws. The District of Columbia action purports to be brought on behalf of persons who were participants in or beneficiaries of WorldCom's 401(k) Salary Savings Plan and/or other
WorldCom retirement and savings plans and generally alleges violations of the Employee Retirement Income Security Act as well as common law claims in
connection with the purchase of the notes and WorldCom stock. LBI underwrote $93,750,000 principal amount of the notes in the 2000 offering.

A
third lawsuit was filed by SunTrust Bank and Trusco Capital Management in the U.S. District Court for the Southern District of Mississippi on September 16, 2002. Insofar as the
claims against LBI are concerned, the Mississippi action alleges violations of the disclosure requirements of the federal securities laws as well as common law claims in connection with the
plaintiffs' purchase of a total of $5,025,000 principal amount of WorldCom bonds in offerings in which LBI was an underwriter in 1998 and 2000. One or more of these three actions also name(s) as
defendants WorldCom, certain of WorldCom's present or former officers and/or directors, and/or WorldCom's outside accounting firm.

Each
of these actions seeks, among other things, compensatory damages. Requests to consolidate these and other pending litigation relating to WorldCom are pending before the Judicial
Panel on Multidistrict Litigation. On July 21, 2002, WorldCom, Inc., filed for protection under the U.S. bankruptcy laws.

33

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Research Analyst Independence Investigations

LBI has received subpoenas and/or requests for information, documents and testimony in connection with the industry-wide investigations of research
analyst independence and related issues from various governmental and regulatory agencies. LBI is cooperating with these investigations. The Company is not currently party to any legal, governmental
or regulatory proceedings related to these investigations. In October 2002, the SEC, the NASD, the New York Stock Exchange, the New York State Attorney General and the North American Securities
Administrators Association announced a joint effort to conclude the various separate investigations by proposing appropriate settlements to companies under investigation and/or proposing new industry
regulations.

In re Metricom Securities Litigation

In August 2002, plaintiffs filed in the United States District Court for the Northern District of California a First Amended Consolidated Class Action
Complaint for Violation of the Securities Act of 1933 and the Exchange Act of 1934, Corrected Copy, inIn re Metricom Securities Litigation. It alleges
the same claims and names the same purported class of plaintiffs and the same defendants as the complaint previously reported under the captionYoung, et al. v. Dreisbach, et
al.in LBI's 2001 Annual Report on Form 10-K.

Actions Regarding Enron Corporation(reported in LBI's Quarterly Report on Form 10-Q for the quarter ended
February 28, 2002)

In
May 2002, a complaint was filed in the District Court of Galveston County, Texas, 56th Judicial Circuit, against LBI and Holdings by American National Insurance Company and its
affiliates. The complaint seeks unspecified compensatory relief and punitive damages for purported violations of securities laws. The complaint is based on the allegations in In re Enron Corporation Securities
Litigation(the "Enron Securities Litigation") and asserts that plaintiffs relied on defendants' false and misleading
statements in purchasing and continuing to hold Enron debt and equities in their Lehman Brothers' accounts. The complaint alleges violations of the Texas State Securities Act, fraud, breach of
fiduciary duty, negligence and professional malpractice.

In
August 2002, a complaint was filed in the Court of Common Pleas, Civil Division, Franklin County, Ohio, against Holdings along with four other commercial or investment banks,
among other defendants, by the Public Employees Retirement System of Ohio and three other state employees' retirement plans. The complaint seeks unspecified compensatory relief and punitive damages
for purported violations of securities laws based on the theory that defendants engaged or participated in manipulative devices to inflate Enron's reported profits and financial condition, made false
or misleading statements and participated in a scheme or course of business to defraud Enron's shareholders and that plaintiffs relied on defendants' false and misleading statements in purchasing and
continuing to hold Enron debt and equities in the State's pension funds. Against Holdings, the complaint alleges common law fraud and deceit, aiding and abetting common law fraud, conspiracy to commit
fraud, negligent misrepresentation and violations of the Texas Securities Act.

In
August 2002, Capital Management L.P., the former general partner of LJM2 Co-Investment, L.P. ("LJM2"), an Enron-related special purpose entity, filed a third-party
claim in Delaware Chancery Court alleging that Holdings' subsidiary LB I Group Inc., an investor in LJM2, together with the other LJM2 limited partners breached the Limited Partnership
Agreement by rescinding a capital call.

34

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On
September 9, 2002, the Washington State Investment Board, which is a named plaintiff in the Enron Securities Litigation, filed a new purported class action which mirrors the
claims in the Enron Securities Litigation. This new action, however, alleges a class period of September 9, 1997, to October 18, 1998, whereas the Enron Securities Litigation asserts a
class action period of October 18, 1998, to November 27, 2001. This new action is an attempt to expand the class action period in the Enron Securities Litigation based upon the
lengthened statute of limitations in the Sarbanes-Oxley Act of 2002.

Actions Regarding Frank Gruttadauria(reported in LBI's 2001 Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q for the quarters ended February 28 and May 31, 2002)

Settlements
have been agreed to in two of the actions pending in the District Courts.

AIA Holding SA et al. v. Lehman Brothers Inc. and Bear Stearns & Co., Inc.(reported in LBI's 2001
Annual Report on Form 10-K)

A
trial date for the first group of plaintiffs has been set for Nov. 4, 2002.

35

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ITEM 6.    Exhibits and Reports on Form 8-K



|3.01  |  | Restated Certificate of Incorporation of the Registrant dated September 3, 1981 (incorporated by reference to Exhibit 3.01 to the Registrant's Annual Report on Form 10-K for the year ended November
30, 2001)                             
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.02  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant dated May 11, 1984 (incorporated by reference to Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for the year ended November 30,
2001)      
|3.03  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated March 6, 1985 (incorporated by reference to Exhibit 3.03 to the Registrant's Annual Report on Form 10-K for the year ended November 30,
2001)    
|3.04  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated August 31, 1987 (incorporated by reference to Exhibit 3.04 to the Registrant's Annual Report on Form 10-K for the year ended November 30,
 2001))
|3.05  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated January 28, 1988 (incorporated by reference to Exhibit 3.05 to the Registrant's Annual Report on Form 10-K for the year ended November
30, 2001))
|3.06  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated July 19, 1990. (incorporated by reference to Exhibit 3.06 to the Registrant's Annual Report on Form 10-K for the year ended November 30,
2001)   
|3.07  |  | Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated August 2, 1993 (incorporated by reference to Exhibit 3.07 to the Registrant's Annual Report on Form 10-K for the year ended November 30,
2001)   
|3.08  |  | Certificate of Designations of Floating Rate Preferred Stock, filed April 30, 1996 (incorporated by reference to Exhibit 3.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996)                           
|3.09  |  | By-Laws of the Registrant, amended as of January 30, 1997 (incorporated by reference to Exhibit 3.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996)                                                    
|12.01 |  | Computation of Ratio of Earnings to Fixed Charges (filed herewith)                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                             

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|99.01 |  | Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|----- |  | ---------------------------------------------------------------------------------------------------------------
|99.02 |  | Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)



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SIGNATURE

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

|                       |  | LEHMAN BROTHERS INC.(Registrant)
|---------------------- |  | --------------------------------
|Date: October 15, 2002 |  | By:                             

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[THIS PAGE INTENTIONALLY LEFT BLANK]

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CERTIFICATIONS

I,
Richard S. Fuld, Jr., certify that:

Date:
October 15, 2002

| |  | /s/RICHARD S. FULD, JR.Richard S. Fuld, Jr.
Chairman and Chief Financial Officer
| |  | --------------------------------------------------------------------------------

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I,
David Goldfarb, certify that:

Date:
October 15, 2002

| |  | /s/DAVID GOLDFARBDavid Goldfarb
Chief Financial Officer
| |  | -------------------------------------------------------

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EXHIBIT INDEX

|Exhibit No.   |  | Exhibit                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------
|Exhibit 12.01 |  | Computation of Ratio of Earnings to Fixed Charges                                             
|Exhibit 99.01 |  | Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|Exhibit 99.02 |  | Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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