SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


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

                 For the quarterly period ended August 31, 1999

                                       OR

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

                          Commission file number 1-6817

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

           Delaware                                 13-3216325
(State or other jurisdiction of        (I.R.S. Employer Identification No.)
 incorporation or organization)

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

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


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

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

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES

                                    FORM 10-Q

                      FOR THE QUARTER ENDED AUGUST 31, 1999

                                      INDEX


Part I.                 FINANCIAL INFORMATION                         Page
                                                                     Number

 Item 1.    Financial Statements - (unaudited)

                Consolidated Statement of Income -
                Three and Nine Months Ended
                August 31, 1999 and 1998................................  3

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

                Consolidated Statement of Cash Flows -
                Nine Months Ended                                         7
                August 31, 1999 and 1998................................

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


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

Part II.              OTHER INFORMATION

 Item 1.    Legal Proceedings..........................................  36

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

Signature     .......................................................... 38

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

Exhibits





<PAGE>


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


                                                   Three months ended
                                         -------------------------------------
                                            August 31            August 31
                                              1999                 1998
                                         ----------------     ----------------

Revenues
     Investment banking                      $    356            $    406
     Principal transactions                       291                 145
     Commissions                                  107                 108
     Interest and dividends                     3,228               4,083
     Other                                          3                  24
                                         ----------------     ----------------
         Total revenues                         3,985               4,766
Interest expense                                3,100               3,928
                                         ----------------     ----------------
         Net revenues                             885                 838
                                         ----------------     ----------------
Non-interest expenses
     Compensation and benefits                    446                 375
     Brokerage and clearance                       40                  51
     Management Fee                                81                  22
     Technology and communications                 44                  43
     Business development                          22                  17
     Professional fees                             18                  12
     Occupancy                                     12                  13
     Other                                         13                   7
                                         ----------------     ----------------
         Total non-interest expenses              676                 540
                                         ----------------     ----------------
Income before taxes                               209                 298
     Provision for income taxes                    70                 106
                                         ================     ================
Net income                                   $    139            $    192
                                         ================     ================


                 See notes to consolidated financial statements.


<PAGE>


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


                                                   Nine months ended
                                          -------------------------------------
                                             August 31            August 31
                                               1999                 1998
                                          ----------------     ----------------

 Revenues
      Investment banking                    $      942           $   1,088
      Principal transactions                       842                 752
      Commissions                                  343                 300
      Interest and dividends                     9,888              11,486
      Other                                         12                  33
                                          ----------------     ----------------
          Total revenues                        12,027              13,659
 Interest expense                                9,548              11,067
                                          ----------------     ----------------
          Net revenues                           2,479               2,592
                                          ----------------     ----------------
 Non-interest expenses
      Compensation and benefits                  1,256               1,251
      Brokerage and clearance                      138                 145
      Management Fee                               132                  70
      Technology and communications                131                 130
      Business development                          63                  57
      Professional fees                             40                  38
      Occupancy                                     34                  38
      Other                                         34                  33
                                          ----------------     ----------------
          Total non-interest expenses            1,828               1,762
                                          ----------------     ----------------
 Income before taxes                               651                 830
      Provision for income taxes                   199                 312
                                          ================     ================
 Net income                                 $      452          $      518
                                          ================     ================




                 See notes to consolidated financial statements.


<PAGE>

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

<TABLE>
<CAPTION>

                                                                                    August 31             November 30
                                                                                      1999                   1998
                                                                                ------------------     ------------------
ASSETS
<S>                                                                             <C>                     <C>
Cash and cash equivalents                                                       $        758            $        460

Cash and securities segregated and on deposit for regulatory  and other
purposes                                                                               1,001                     909

Securities and other financial instruments owned:
     Governments and agencies                                                         20,967                  16,611
     Mortgages and mortgage-backed                                                     9,594                   9,844
     Corporate equities                                                                9,342                   5,694
     Corporate debt and other                                                          4,874                   6,824
     Derivatives and other contractual agreements                                      4,536                   5,580
     Certificates of deposit and other money market instruments                        2,942                   1,392
                                                                                ------------------     ------------------
                                                                                      52,255                  45,945
                                                                                ------------------     ------------------

Collateralized short-term agreements:
     Securities purchased under agreements to resell                                  61,365                  47,913
     Securities borrowed                                                              21,863                  14,760

Receivables:
     Brokers, dealers and clearing organizations                                       2,393                   2,154
     Customers                                                                         2,987                   3,148
     Others                                                                            7,018                   4,859

Property, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $580 in 1999 and $559 in 1998)                          270                     272

Other assets                                                                             189                     261

Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $114 in 1999 and $108 in 1998)                                           121                     152
                                                                                ------------------     ------------------
     Total Assets                                                                  $ 150,220               $ 120,833
                                                                                ==================     ==================

</TABLE>


                 See notes to consolidated financial statements.



<PAGE>


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


<TABLE>
<CAPTION>

                                                                                           August 31          November 30
                                                                                             1999                1998
                                                                                         --------------     ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S>                                                                                      <C>                <C>
Commercial paper and short-term debt                                                     $       572        $       616
Securities and other financial instruments sold but not yet purchased:
     Governments and agencies                                                                 15,181              12,028
     Corporate equities                                                                        3,678               1,428
     Derivatives and other contractual agreements                                              3,614               3,816
     Corporate debt and other                                                                  1,141               1,761
                                                                                         --------------     ----------------
                                                                                              23,614              19,033
                                                                                         --------------     ----------------
Collateralized short-term financing:
     Securities sold under agreements to repurchase                                           77,197              58,905
     Securities loaned                                                                        16,445               5,474
Advances from Holdings and other affiliates                                                   16,726              21,560
Payables:
     Brokers, dealers and clearing organizations                                               2,243               2,230
     Customers                                                                                 4,615               4,540
Accrued liabilities and other payables                                                         1,768               1,668
Long-term debt:
     Senior notes                                                                                182                 168
     Subordinated indebtedness                                                                 3,924               4,111
                                                                                         --------------     ----------------
         Total liabilities                                                                   147,286             118,305
                                                                                         --------------     ----------------

Commitments and contingencies


STOCKHOLDER'S EQUITY
Preferred stock,  $0.10 par value;  10,000 shares  authorized;  none outstanding
Common stock, $0.10 par value; 10,000 shares authorized;
  1,006 shares issued and outstanding
Additional paid-in capital                                                                     1,759               1,759
Accumulated other comprehensive income                                                             1                   3
Retained earnings                                                                              1,174                 766
                                                                                         --------------     ----------------
         Total stockholder's equity                                                            2,934               2,528
                                                                                         ==============     ================
         Total liabilities and stockholder's equity                                        $ 150,220           $ 120,833
                                                                                         ==============     ================



</TABLE>

                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                             Nine months ended
                                                                                   --------------------------------------
                                                                                      August 31             August 31
                                                                                         1999                 1998
                                                                                   -----------------     ----------------

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>                   <C>
Net income                                                                          $      452            $      518
Adjustments to reconcile net income to net cash provided by   (used in)
operating activities:
     Depreciation and amortization                                                          43                    41
     Provisions for losses and other reserves                                               24                    29
     Other adjustments                                                                      30                    54
Net change in:
     Cash and securities segregated                                                        (92)                 (459)
     Securities and other financial instruments owned                                   (6,310)              (17,664)
     Securities borrowed                                                                (7,103)               (4,506)
     Receivables from brokers, dealers and clearing organizations                         (239)                1,060
     Receivables from customers                                                            161                  (919)
     Securities and other financial instruments sold but not yet purchased               4,581                 6,156
     Securities loaned                                                                  10,971                   683
     Payables to brokers, dealers and clearing organizations                                13                 2,588
     Payables to customers                                                                  75                 1,734
     Accrued liabilities and other payables                                                 76                  (247)
     Other operating assets and liabilities, net                                        (2,078)               (2,581)
                                                                                   -----------------     ----------------
         Net cash provided by (used in) operating activities                       $       604             $ (13,513)
                                                                                   -----------------     ----------------



</TABLE>
                 See notes to consolidated financial statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                            Nine months ended
                                                                                   -------------------------------------
                                                                                      August 31            August 31
                                                                                        1999                 1998
                                                                                   ----------------     ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                                                 <C>                        <C>
Principal payments of senior notes                                                                      $       (79)
Proceeds from issuance of subordinated indebtedness                                                             750
Principal payments of subordinated indebtedness                                     $     (202)                (791)
Net proceeds from commercial paper and short-term debt                                     (44)                 327
Resale agreements net of repurchase agreements                                           4,840                3,208
Advances from Holdings and other affiliates                                             (4,834)              10,567
Dividends and capital distributions paid                                                   (46)                 (60)
                                                                                   ----------------     ----------------
       Net cash provided by (used in) by financing activities                             (286)              13,922
                                                                                   ----------------     ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements                                (20)                 (25)
                                                                                   ----------------     ----------------
       Net cash used in investing activities                                               (20)                 (25)
                                                                                   ----------------     ----------------
       Net change in cash and cash equivalents                                             298                  384
                                                                                   ----------------     ----------------
Cash and cash equivalents, beginning of period                                             460                  220
                                                                                   ================     ================
       Cash and cash equivalents, end of period                                     $      758           $      604
                                                                                   ================     ================

</TABLE>


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest  paid  totaled  $9,558 and $11,070 for the nine months ended August 31,
1999 and 1998,  respectively.  Income taxes paid totaled $2,931 and $482 for the
nine months ended August 31, 1999 and 1998, respectively.




                 See notes to consolidated financial statements.

<PAGE>


                      LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS



1.  Basis of Presentation:

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

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

2.  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,  1999,  LBI's  regulatory  net
capital,  as defined,  of $1,466  million  exceeded the minimum  requirement  by
$1,368 million.

The Company's "AAA" rated derivatives  subsidiaries,  Lehman Brothers  Financial
Products Inc. ("LBFP") and Lehman Brothers  Derivative  Products Inc.  ("LBDP"),
have established  certain capital and operating  restrictions which are reviewed
by various rating  agencies.  At August 31, 1999, LBFP and LBDP each had capital
which  exceeded  the  requirement  of  the  most  stringent   rating  agency  by
approximately $144 million and $30 million, respectively.

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



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

3.  Derivative Financial Instruments:

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

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

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

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


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


<TABLE>
<CAPTION>

                                                                                                  Average Fair Value*
                                                                   Fair Value*                     Nine Months Ended
                                                                 August 31, 1999                    August 31, 1999
                                                         --------------------------------- ----------------------------------
<S>                                                          <C>                <C>            <C>                <C>
(in millions)                                               Assets          Liabilities       Assets           Liabilities
-------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
Interest rate and currency swaps and options
(including caps, collars and floors)                         $ 3,339            $ 2,308        $ 3,786            $ 2,263
Foreign exchange forward contracts and      options
                                                                 539                517            726                640
Options on other fixed income securities,
mortgage-backed securities forward  contracts and
options                                                          360                392            334                278
Equity contracts (including equity swaps, warrants
and options)                                                     298                397            315                349
Commodity contracts (including swaps, forwards
and options)                                                                                         3                  1
                                                         -------------- -- --------------- -------------- --- ---------------
         Total                                               $ 4,536            $ 3,614        $ 5,164            $ 3,531
                                                         -------------- -- --------------- -------------- --- ---------------
</TABLE>

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


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

</TABLE>

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



<PAGE>

                     LEHMAN BROTHERS INC. and SUBSIDIARIES
                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

Assets  included in the tables on the  previous  page  represent  the  Company's
unrealized  gains, net of unrealized  losses for situations in which the Company
has a master netting  agreement.  Similarly,  liabilities  represent net amounts
owed to counterparties.  Therefore, the fair value of assets/liabilities related
to  derivative  contracts  at August  31,  1999  represents  the  Company's  net
receivable/payable  for derivative financial instruments before consideration of
collateral.  Included  within the $4,536  million fair value of assets at August
31, 1999 was $4,434  million  related to swaps and other OTC  contracts and $102
million related to exchange-traded option and warrant contracts. Included within
the $5,580  million fair value of assets at November 30, 1998 was $5,333 million
related  to  swaps  and  other  OTC  contracts  and  $247  million   related  to
exchange-traded option and warrant contracts.

With respect to OTC contracts, including swaps, the Company views its net credit
exposure to be $3,871 million at August 31, 1999, representing the fair value of
the Company's OTC contracts in an unrealized gain position,  after consideration
of amounts due from non-consolidated affiliates of $54 million and collateral of
$509 million.  Presented  below is an analysis of the Company's  third party net
credit  exposure at August 31, 1999 for OTC contracts  based upon actual ratings
made by  external  rating  agencies or by  equivalent  ratings  established  and
utilized by the Company's Credit Risk Management Department.


Counterparty                   S&P/Moody's                   Net Credit
Risk Rating                    Equivalent                     Exposure
-----------                    ----------                     --------
     1                           AAA/Aaa                        15%
     2                      AA-/Aa3 or higher                   17%
     3                       A-/A3 or higher                    39%
     4                     BBB-/Baa3 or higher                  23%
     5                      BB-/Ba3 or higher                    4%
     6                       B+/B1 or lower                      2%

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

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



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


4.  Other Commitments and Contingencies:

In  connection  with its  financing  activities,  the  Company  had  outstanding
commitments under certain lending  arrangements of approximately $2.6 billion at
August 31, 1999 and $3.0 billion at November 30, 1998. These commitments require
borrowers to provide acceptable collateral,  as defined in the agreements,  when
amounts are drawn under the lending  facilities.  Advances  made under the above
lending  arrangements  are  typically at variable  interest  rates and generally
provide for over-collateralization based upon the borrowers' creditworthiness.

The Company,  through its high yield sales, trading and underwriting activities,
makes  commitments  to  extend  credit  principally  to below  investment  grade
borrowers  and then sells a  significant  portion of these  commitments  through
syndication. These commitments, net of syndications and participations,  totaled
$1.1  billion  and $1.5  billion  at August  31,  1999 and  November  30,  1998,
respectively,  and are typically  secured against the borrowers' assets and have
fixed maturity dates. The draw down of these facilities is generally  contingent
upon certain  representations,  warranties and contractual conditions applicable
to the borrower.  Total commitments are not indicative of actual risk or funding
requirements  as the  commitments  may not be drawn or  fully  utilized  and the
Company will continue to syndicate and/or sell these commitments.

The Company also had lending commitments to high-grade borrowers of $2.3 billion
and $610 million at August 31, 1999 and November 30, 1998,  respectively.  These
commitments also are typically secured against the borrower's assets, have fixed
maturity  dates,  and are  generally  contingent  upon certain  representations,
warranties and contractual  conditions  applicable to the borrower.  The company
generally sells a significant portion of these commitments through syndication

At August 31, 1999 and November 30, 1998, the Company had  commitments to invest
up to  $303  million  and  $238  million,  respectively,  directly  and  through
partnerships, in merchant banking and venture capital related investments. These
commitments  will be  funded  as  required  through  the  end of the  respective
investment periods, principally expiring in 2004.

In  addition to these  specific  commitments,  the  Company  had  various  other
commitments  of  approximately  $300 million and $305 million at August 31, 1999
and November 30, 1998, respectively.

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



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


As a leading  global  investment  bank,  risk is an inherent  part of all of the
Company's  businesses and activities.  The extent to which the Company  properly
and effectively identifies,  assesses,  monitors and manages each of the various
types of risks involved in its trading (including  derivatives),  brokerage, and
investment  banking  activities is critical to the success and  profitability of
the Company.  The principal types of risks involved in the Company's  activities
are market risk, credit or counterparty  risk and transaction  risk.  Management
has  developed a control  infrastructure  throughout  the Company to monitor and
manage these risks on a global basis.  For further  discussion of these matters,
refer to Note 11 to the Consolidated Financial Statements, in the Form 10-K.

5.  Related Parties:

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

During the nine months  ended August 31,  1999,  the Company  paid  dividends to
Holdings of $46 million.




<PAGE>


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


Business Environment

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

U.S.  economic  growth remained very strong at the turn of the year leading to a
sharp rise in U.S. bond yields,  notwithstanding  successive  external trade and
financial  shocks in many developing  countries.  While wage and price inflation
remained  low,  the  risk of  rising  inflationary  pressures  emanating  from a
tightening  labor market  caused the Federal  Reserve to raise the Federal funds
rate twice, each by 25 basis points, on June 30 and August 24, 1999.  Increasing
evidence  that  growth  had slowed in the  second  quarter  (to just 1.8%) and a
decline in the value of the dollar  relative  to the yen led to a modest rise in
ten-year  Treasury  yields from 5.6% to 5.9% in the three months  ended  August,
1999.

The two hikes in  interest  rates  and the risk of  potentially  more  increases
constrained  the equity  markets  in the fiscal  third  quarter  despite  strong
corporate  earnings growth. In addition,  the decline in the value of the dollar
relative to the yen caused concern over whether  foreign  investors would reduce
their U.S. equity holdings.  For the third quarter ended August 31, the DJIA and
S&P 500  were up 2.2%  and  2.0%  respectively.  However,  for the  first  three
quarters of the fiscal year, all three major indices were in positive territory;
the DJIA was up 18.6%, the S&P was up 12.3%, and the NASDAQ was up 36.7%.

Corporate  Finance  Advisory   activities   continued  at  near  record  levels.
Industrywide,  the volume of announced  transactions  soared to approximately $2
trillion.  The first  nine  months of 1999 also  reflected  a steady  advance of
merger and acquisition  activity  involving  European companies and cross-border
mergers and acquisitions. Merger and acquisition activities continued to reflect
the trends of  consolidation,  deregulation  and  globalization  across industry
sectors and across borders.

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


<PAGE>


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





Results of Operations
For the Three Months Ended August 31, 1999 and 1998

The Company  reported  net income of $139  million for the third  quarter  ended
August 31, 1999,  representing a decrease of 28% from net income of $192 million
for the third quarter ended August 31, 1998.

Net revenues  increased to $885 million for the third  quarter of 1999 from $838
million for the third quarter of 1998. Consistent with the Company's strategy to
grow  higher  margin  businesses  and  diversify  its  revenue  base,  a greater
proportion of revenues  were  generated in equities  which  experienced a record
quarter.

Compensation  and benefits expense as a percentage of net revenues was 50.4% and
44.7%  for the  third  quarter  of 1999  and  1998,  respectively.  Nonpersonnel
expenses  were $230 million in the third quarter of 1999 and $165 million in the
third quarter of 1998.

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



<PAGE>

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

<TABLE>
<CAPTION>

Three Months Ended August 31, 1999

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking          Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ------------ ----------
<S>                                            <C>              <C>                <C>                           <C>
Equity                                         $ 216            $   95             $   70                        $ 381
Fixed Income                                     207                10                187                          404
Corporate Finance Advisory                        (2)                                 103                          101
Merchant Banking                                  (3)                                  (4)                          (7)
Other                                              1                 2                                 $ 3           6
-------------------------------------- ------------------- ------------------ ------------------ ------------ ----------
                                               $ 419             $ 107              $ 356              $ 3       $ 885
-------------------------------------- ------------------- ------------------ ------------------ ------------ ----------
</TABLE>


<TABLE>
<CAPTION>

Three Months Ended August 31, 1998

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking         Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
<S>                                           <C>                <C>                <C>              <C>        <C>
Equity                                        $   21             $  95              $ 108            $   2      $ 226
Fixed Income                                   $ 264                 8                147                2        421
Corporate Finance Advisory                        (5)                                 142                         137
Merchant Banking                                  (5)                                   9                           4
Other                                             25                 5                                  20         50
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
                                               $ 300             $ 108              $ 406             $ 24      $ 838
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
</TABLE>

Equity.   Equity  net  revenues  reflect  equity  underwriting,   customer  flow
activities (both institutional and high-net-worth retail), secondary trading and
derivative and financing  activities  related to equity products.  The Company's
equity net revenues increased 69% to a record high of $381 million for the third
quarter of 1999 from $226 million for the third quarter of 1998. Higher revenues
are primarily  attributable  to continued  strong customer flow in both cash and
derivative  products,  and a strong  contribution  from  equity  arbitrage.  The
increase  in revenues also  benefited from favorable comparisons to a difficult
market environment in the prior year.

Fixed Income. The Company's fixed income net revenues reflect debt underwriting,
customer  flow  activities  (both  institutional  and  high-net-worth   retail),
secondary  trading and financing  activities  related to fixed income  products.
Fixed income  products  include  dollar- and non-dollar  government  securities,
mortgage-  and  asset-backed  securities,  money  market  products,  dollar- and
non-dollar  corporate debt  securities,  emerging market  securities,  municipal
securities,  financing  (global  access  to  debt  financing  sources  including
repurchase  and reverse  repurchase  agreements),  foreign  exchange,  and fixed
income derivative products.  Fixed income net revenues decreased to $404 million
for the third quarter of 1999 from $421 million  recognized in the third quarter
of 1998.  The  reduction  in the third  quarter  results  versus  the prior year

<PAGE>

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


quarter reflected stronger syndicate  activity,  offset by reduced customer flow
across several fixed income products.

Corporate Finance Advisory. Corporate finance advisory net revenues,  classified
in the  Consolidated  Statement of Income as a component of  investment  banking
revenues,  result  primarily  from  fees  earned by the  Company  in its role as
strategic  advisor to its  clients.  This role  consists of advising  clients on
mergers   and   acquisitions,   divestitures,   leveraged   buyouts,   financial
restructurings,  and a variety of cross-border  transactions.  Net revenues from
corporate finance advisory activities were $101 million for the third quarter of
1999, down from $137 million recognized in the third quarter of 1998, but up 28%
from the second quarter of 1999.

Merchant Banking.  The Company is the general partner for eleven active merchant
banking and venture  capital  partnerships  and also  invests  directly in other
merchant  banking and venture capital  transactions.  Current  merchant  banking
investments include both publicly traded and privately held companies.  Merchant
banking net revenues represent net realized and unrealized gains and losses from
the  revaluation  of these  investments.  Such  amounts  are  classified  in the
Consolidated  Statement of Income as a component of investment banking revenues.
Merchant  banking net revenues also reflect the net interest  expense related to
the financing of the Company's investment in the partnerships.  Merchant banking
net revenues were $(7) million for the third  quarter of 1999,  down $11 million
from the third quarter of 1998. The decrease is the result of unrealized  losses
on several publicly traded positions.

Non-Interest  Expenses.  Non-interest  expenses  were $676 million for the third
quarter of 1999 and $540 million for the third  quarter of 1998.  This  increase
was primarily  attributable to higher  compensation and benefit costs associated
with higher revenues, and an increase in net management fees paid to affiliates.
These fees increased as a result of changes in the mix of activities between the
Company and other affiliates of Holdings.

Income Taxes.  The Company's  income tax provision was $70 million for the third
quarter of 1999  compared  to $106  million for the third  quarter of 1998.  The
effective  tax rate was 33% for the third  quarter of 1999 and 36% for the third
quarter of 1998.  The decrease in the effective tax rate reflects an increase in
tax benefits attributable to income and transactions subject to preferential tax
treatment, partially offset by an increase in state and local taxes.



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


Results of Operations
For the Nine Months Ended August 31, 1999 and 1998

The Company reported net income of $452 million for the nine months ended August
31, 1999, representing a decrease of 13% from net income of $518 million for the
nine months ended August 31, 1998.

Net revenues  decreased to $2,479 million for the first nine months of 1999 from
$2,592  million  for the first nine  months of 1998.  Revenues  declined  due to
decreased  activity in the high yield  origination  market  partially  offset by
record revenues in the equities business.

Compensation  and benefits expense as a percentage of net revenues was 50.7% and
48.3% for the first  nine  months of 1999 and 1998,  respectively.  Nonpersonnel
expenses  were $572  million in the nine months of fiscal 1999  compared to $511
million in the nine months of fiscal 1998.

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



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

<TABLE>
<CAPTION>

Nine Months Ended August 31, 1999

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking          Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
<S>                                         <C>                  <C>                <C>              <C>           <C>
Equity                                      $    368             $ 313              $ 200            $   2         $ 883
Fixed Income                                     829                23                447                2         1,301
Corporate Finance Advisory                        (8)                                 266                            258
Merchant Banking                                  (9)                                  29                             20
Other                                              2                 7                                   8            17
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
                                             $ 1,182             $ 343              $ 942             $ 12       $ 2,479
-------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
</TABLE>


<TABLE>
<CAPTION>

Nine Months Ended August 31, 1998

                                           Principal
                                        Transactions and
                                          Net Interest                           Investment
                                                              Commissions          Banking         Other       Total
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
<S>                                         <C>                  <C>              <C>                <C>      <C>
Equity                                      $    102             $ 268            $   259            $   2    $   631
Fixed Income                                   1,062                20                484                3      1,569
Corporate Finance Advisory                       (13)                                 311                         298
Merchant Banking                                  (7)                                  35                          28
Other                                             27                12                 (1)              28         66
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
                                             $ 1,171             $ 300            $ 1,088             $ 33    $ 2,592
-------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
</TABLE>

Equity.   Equity  net  revenues  reflect  equity  underwriting,   customer  flow
activities (both institutional and high-net-worth retail), secondary trading and
derivative and financing  activities  related to equity products.  The Company's
equity net revenues  increased  40% to $883 million for the first nine months of
1999 from  $631  million  for the first  nine  months of 1998.  Higher  revenues
resulted from increased  customer flow activity in cash and derivative  products
and a strong  contribution  from equity arbitrage  partially offset by decreased
equity origination.

Fixed Income. The Company's fixed income net revenues reflect debt underwriting,
customer  flow  activities  (both  institutional  and  high-net-worth   retail),
secondary  trading and financing  activities  related to fixed income  products.
Fixed income  products  include  dollar- and non-dollar  government  securities,
mortgage  and  asset-backed  securities,  money  market  products,  dollar-  and
non-dollar  corporate debt  securities,  emerging market  securities,  municipal
securities,  financing  (global  access  to  debt  financing  sources  including
repurchase  and reverse  repurchase  agreements),  foreign  exchange,  and fixed
income  derivative  products.  Fixed  income net  revenues  decreased  to $1,301
million for the nine  months of 1999 from $1,569  million for the nine months of
1998,  reflecting  reduced customer flow from origination and secondary activity
across various products.


<PAGE>


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


Corporate Finance Advisory. Corporate finance advisory net revenues,  classified
in the  Consolidated  Statement of Income as a component of  investment  banking
revenues,  result  primarily  from  fees  earned by the  Company  in its role as
strategic  advisor to its  clients.  This role  consists of advising  clients on
mergers   and   acquisitions,   divestitures,   leveraged   buyouts,   financial
restructurings,  and a variety of cross-border  transactions.  Net revenues from
corporate finance advisory activities  decreased $258 million for the first nine
months of 1999,  versus the $298 million  recognized in the first nine months of
1998.

Merchant Banking.  The Company is the general partner for eleven active merchant
banking  partnerships  and also invests  directly in other merchant  banking and
venture  capital  transactions.  Current  merchant  banking and venture  capital
investments include both publicly traded and privately held companies.  Merchant
banking net revenues represent net realized and unrealized gains and losses from
the  revaluation  of these  investments.  Such  amounts  are  classified  in the
Consolidated  Statement of Income as a component of investment banking revenues.
Merchant  banking net revenues also reflect the net interest  expense related to
the financing of the Company's investment in the partnerships.  Merchant banking
net revenues  were $20 million for the first nine months of 1999,  down from $28
million  in the  first  nine  months  of 1998 due to lower  unrealized  gains on
several publicly traded positions.

Non-Interest  Expenses.  Non-interest expenses were $1,828 million for the first
nine months of 1999 and $1,762  million for the first nine months of 1998.  This
increase was primarily  attributable  to higher  compensation  and benefit costs
associated with higher revenues,  and an increase in net management fees paid to
affiliates. These fees increased as a result of changes in the mix of activities
between the Company and other affiliates of Holdings.

Income Taxes.  The Company's  income tax provision was $199 million for the nine
months  of 1999  compared  to $312  million  for the nine  months  of 1998.  The
effective  tax  rate was 31% for the  nine  months  of 1999 and 38% for the nine
months of 1998.  The decrease in the  effective tax rate reflects an increase in
tax benefits attributable to income and transactions subject to preferential tax
treatment.


<PAGE>

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

Funding, Capital Resources and Liquidity

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

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

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

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

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

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

Total Capital The Company's  Total Capital base at August 31, 1999  increased to
$7.0 billion from $6.8  billion at November  30, 1998,  due to the  retention of
earnings, offset by principal payments of subordinated indebtedness.


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



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

    Senior Notes                     $    182                $    168
    Subordinated Indebtedness           3,924                   4,111
                                        -----                   -----
                                        4,106                   4,279

Stockholder's Equity                    2,934                   2,528

-------------------------------- --------------------- ------------------------
Total Capital                         $ 7,040                 $ 6,807
-------------------------------- --------------------- ------------------------

During  the  first  nine  months  of 1999,  the  Company  had no new  issuances.
Long-term debt decreased to $4.1 billion at August 31, 1999 from $4.3 billion at
November  30, 1998 with a  weighted-average  maturity of 4.7 years at August 31,
1999 and 4.6 years at November 30, 1998.

Secured  Funding.  The Company  strives to maximize the portion of the Company's
balance  sheet  that is funded  on a secured  basis.  Secured  Funding  includes
securities and other financial  instruments sold but not yet purchased,  as well
as  collateralized  short-term  financings,  defined  as  securities  sold under
agreements  to  repurchase  ("repos") and  securities  loaned.  Because of their
secured  nature,  OECD  government  repos and other  investment  grade  types of
collateralized borrowings are less credit-sensitive and have historically been a
stable financing source  irrespective of market  conditions.  At August 31, 1999
and  November  30, 1998,  $114  billion and $80  billion,  respectively,  of the
Company's  total  balance  sheet of $150  billion and $121 billion at August 31,
1999 and November 30, 1998, respectively, were financed on a secured basis.

By maximizing its use of secured funding,  the Company minimizes its reliance on
unsecured funding. As of August 31, 1999 and November 30, 1998,  short-term debt
outstanding  was $572  million  and $616  million,  respectively.  There  was no
commercial paper outstanding as of August 31, 1999 or November 30, 1998.

Year 2000 Funding Strategy.  The Company has expanded the focus of its Liquidity
Management  process  to include  the  effects of  potential  market  disruptions
related to Year 2000.

Although the Company can not anticipate all potential disruptions that may arise
due to the century  date change and their effect on  liquidity,  the Company has
implemented a Year 2000 liquidity  management  strategy,  including  contingency
plans  and  action  steps,  in an  attempt  to  mitigate  the  impact  of  these
disruptions on the Company.

Specific  action steps currently in progress  include  extending the maturity of
financing  trades,  both secured and  unsecured,  to build an  appropriate  term
structure  through  the  fourth  calendar  quarter  of 1999 and  into the  first

<PAGE>


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


calendar quarter of 2000. In addition,  the Company  continues to build a funded
surplus across currencies to meet unanticipated needs.

Balance Sheet.  The Company's total assets increased to $150.2 billion at August
31, 1999 from $120.8 billion at November 30, 1998. The Company's  adjusted total
assets,  defined as total assets less the lower of  securities  purchased  under
agreements to resell or  securities  sold under  agreements  to repurchase  were
$88.9 billion at August 31, 1999 compared to $72.9 billion at November 30, 1998.
The  Company  believes  adjusted  total  assets is a more  effective  measure of
evaluating  balance  sheet  usage when  comparing  companies  in the  securities
industry. The rise in adjusted total assets reflects increases in government and
agency and corporate equity inventory levels  associated with expanded  customer
flow activities.  The remaining  increase in total assets was driven by a higher
level of secured customer financing activities.

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






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


Credit Ratings

The Company, like other companies in the securities industry, relies on external
sources  to finance a  significant  portion of its  day-to-day  operations.  The
Company's  access to and cost of funding is generally  dependent upon its short-
and long- term debt  ratings.  On August 5,  1999,  Moody's  upgraded  the LBI's
senior  debt  from  (P)A3  to  (P)A2,  subordinated  debt  from  Baa1  to A3 and
commercial  paper from Prime-2 to Prime-1.  As of August 31, 1999 the short- and
long-term senior debt ratings of LBI were as follows:


                                                             LBI
                                             ----------------------------------
                                               Short-term        Long-term**
---------------------------------------- --- --------------- ------------------
Duff & Phelps Credit Rating Co.                   D-1                A/A-
Fitch IBCA, Inc.                                  F-1                A/A-
Moody's                                           P-2               A2*/A3
Standard & Poor's Corp.                           A-1               A+*/A
Thomson BankWatch                                TBW-1               A+/A

*   Provisional ratings on shelf registration
** Senior/subordinated





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

Other

High Yield Securities and Lending Activities.  The Company underwrites,  trades,
invests and makes markets in high yield corporate debt  securities.  The Company
also  syndicates,  trades and invests in loans to below  investment  grade-rated
companies.  For purposes of this  discussion,  high yield debt  instruments  are
defined as  securities or loans to companies  rated BB+ or lower,  or equivalent
ratings by recognized credit rating agencies, as well as non-rated securities or
loans  which,  in  the  opinion  of  management,   are   non-investment   grade.
Non-investment  grade securities generally involve greater risks than investment
grade securities due to the issuer's  creditworthiness  and the liquidity of the
market for such  securities.  In addition,  these  issuers have higher levels of
indebtedness,   resulting  in  an  increased  sensitivity  to  adverse  economic
conditions.  The Company  recognizes  these risks and aims to reduce  market and
credit risk through the diversification of its products and counterparties. High
yield debt  instruments  are carried at market value,  and  unrealized  gains or
losses  for  these  securities  are  reflected  in  the  Company's  Consolidated
Statement of Income.  The Company's  portfolio of such instruments at August 31,
1999 and November 30, 1998  included  long  positions  with an aggregate  market
value of approximately  $853 million and $1.2 billion,  respectively,  and short
positions with an aggregate market value of  approximately  $98 million and $173
million,  respectively.  The Company  may,  from time to time,  mitigate its net
exposure to any single issuer through the use of derivatives and other financial
instruments.

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

Merchant  Banking.  At August 31, 1999,  the  Company's  investment  in merchant
banking and venture capital partnerships totaled $48 million and direct merchant
banking and venture  capital  investments  totaled $273  million.  The Company's
merchant banking and venture capital  activities  include  investments in eleven
partnerships,  for which the Company acts as general partner,  as well as direct
investments.  The Company's  policy is to carry its  investments,  including its
partnership interests,  at fair value based upon the Company's assessment of the
underlying  investments.  Additional  information  about the Company's  merchant
banking activities, including related commitments, can be found in Note 4 to the
Consolidated Financial Statements (Other Commitments and Contingencies).




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


Risk Management

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

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

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

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

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



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

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

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

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

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



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


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

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

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

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

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

<PAGE>

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


average,  that daily  trading  revenues  or losses will  exceed  daily  expected
trading  revenues  by an amount  greater  than value at risk one out of every 20
trading days.

Average  value at risk  computed  in this  manner  was $20.9  million  and $13.5
million  for  the  periods   ended  August  31,  1999  and  November  30,  1998,
respectively.  Average value at risk  increased in 1999 compared to 1998 because
of the extreme market volatility during the August-October 1998 period.  Average
value at risk for the third  quarter ended August 31, 1999 was $16.0 million and
excludes the effects of the August-October 1998 period.

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

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



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


Year 2000 Readiness Disclosure

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

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

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

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

o         Inventory and Assessment
o         Remediation
o         Testing

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

Remediation  of critical  applications  was  completed  by the end of the second
quarter of 1999.  All  remediated  applications  are tested  for  non-year  2000
functionality to confirm they still run correctly prior to year 2000 testing. At
the time of remediation, applications are logged into a change management system
to further  ensure any  additional  changes are monitored and re-tested for year
2000 compliance.

Testing for year 2000  compliance  was organized  into three  phases.  Phase one
involved testing individual  applications or groups of applications on mainframe
or on distributed platforms. Consultants were engaged to assist with the testing
of distributed  applications  classified as highly critical.  Phase two involved
real-time testing across platforms (integration  testing).  Phase three involved
testing applications between firms (external testing).  Each of these phases has
been pursued in a worldwide  effort  coordinated  in New York,  London and Tokyo
where project teams and segregated lab environments were established.

<PAGE>

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


External testing itself was performed in three steps.  "Point-to-point"  testing
confirms that application interfaces between the Company and individual services
and utilities function correctly.  Point-to-point testing began in February 1998
and  every  scheduled  test  was  successfully  completed.  Several  firms  have
scheduled  additional  tests,  in which the  Company  will  participate.  "Beta"
testing for a product followed  Point-to-point testing and was a dress rehearsal
for  industrywide  testing.  Beta testing was only  performed in the U.S. and is
complete.  Many of the markets are not providing  Industrywide testing, but they
are providing  some amount of end-to-end  testing,  where data is passed to more
than one exchange or utility.  Industrywide testing followed beta testing as the
final external testing step, and is also complete.

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

In addition to its leadership in U.S. testing efforts, through membership in the
Executive  Committee of Global 2000, a group of  international  financial firms,
the Company is  participating  in the coordination of global year 2000 readiness
in the financial community.

In 1998, the Company participated in two Beta tests in the U.S., for the SIA and
for the Futures Industry Association (FIA). The Company has also participated in
the  SIA  Money  Market  Beta  Test,  the  Mortgage-Backed  Securities  Clearing
Corporation Test, the Participant Trust Company Mortgage Test and the Government
Securities  Clearing  Corporation  Test,  and the SIA Market Data Beta Test.  In
March and April of 1999, the Company  participated in the SIA Industrywide Test,
as well as the Stock Loan Test. In May 1999, the Company participated in the SIA
Market  Data  Test.  The  Company  has  also   participated   in  a  variety  of
point-to-point  overseas  tests in the United  Kingdom,  Japan,  Hong Kong,  and
Singapore.  The Company  has also  participated  in testing in  Germany,  Italy,
Sweden, and France. In 1998 and 1999, the Company  participated in the following
tests in the United Kingdom: the Central Gilts Office (CGO), CREST, London Stock
Exchange, London International Financial Futures Exchange, and EuroClear.  Other
European  tests the  Company  has been  involved  in include  Cedborsa  (Italy),
Deutsche Borse Eurex  (Germany),  and  Sicovam/SBF/Matif  (France).  Asian tests
completed include the Tokyo Stock Exchange, Bank of Japan, Osaka Stock Exchange,
Tokyo  International  Financial  Futures  Exchange,  Hong Kong Futures Exchange,
Stock Exchange of Hong Kong, the Hong Kong Securities Clearing Corporation,  and
the Singapore International Monetary Exchange.

The Company also serves as a member of the Custody 2000 Working Group whose goal
is to assist the financial community in the assessment of year 2000 readiness of
custodians  in a variety of global  markets.  The Custody 2000 Working Group has
conducted  proxy  testing  of  selected  sub-custodians  in a number of  markets

<PAGE>


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


globally.  The Company has also  participated in the Custody 2000 testing effort
to check the readiness of cash and securities settlement systems globally.

All tests, in which the Company participated, were successfully completed.

Year 2000 also affects  building  and  infrastructure  systems.  The Company has
completed a global effort to make sure key headquarters and office locations are
compliant.  Critical  areas  include  facilities  components  such  as  building
management systems, elevators, heating systems, security and fire alarm systems,
electrical  and other building  services.  The Company's  Global  Infrastructure
Support  organization  managed the  upgrading  of  critical  telecommunications,
network, and other systems for year 2000 readiness.

However, even if these changes are successful,  the Company remains at risk from
year 2000 failures caused by third parties. Externally, the Company is an active
participant in the SIA Third Party Vendor Committee.  Internally, the Company is
evaluating efforts of key counterparties,  banks, exchanges, agencies, utilities
and suppliers,  among others, to assess and remediate their year 2000 issues. As
part of this effort,  the Third Party Vendor team has  inventoried  and has sent
surveys to vendors  whose  software and  hardware  products the Company uses and
whose  services  the Company  employs to  determine  their year 2000  readiness.
Vendors who did not supply adequate information were replaced. In addition,  the
Company  performed tests on certain  mission-critical  vendor products to ensure
year 2000  readiness.  To date the Company  has  received  information  from all
critical (materially important) vendors.

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

Additionally, general uncertainty regarding the success of remediation may cause
many market  participants to reduce their market activities  temporarily as they
address  and assess  their year 2000  efforts  in 1999.  This could  result in a
general  reduction in market  activities and revenue  opportunities in late 1999
and early 2000. Management cannot predict the magnitude of any such reduction or
its impact on the Company 's financial  results.  However,  the  Company's  Risk
Management  Department  continues to evaluate third party and credit risks posed
by Y2K.  Recognizing the uncertainty of external  dependencies,  the Company has
also  prepared  a  contingency  plan that  identifies  potential  Y2K  problems,
strategies to minimize either their  likelihood or impact and contingency  plans
to be invoked should they occur.  The plan includes backup processes that do not

<PAGE>


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


rely on computer  systems,  where  appropriate.  The contingency plans have been
completed and approved by management, but remain subject to revision in response
to new information about year 2000 risks as such information  becomes available.
Completion of risk mitigation  strategies and testing of contingency  plans will
continue through the fourth quarter.

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

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

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

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

New Accounting Standards

In September 1999, the FASB issued an Exposure Draft, "Business Combinations and
Intangible   Assets."   The   proposal   would   eliminate   the   use   of  the
pooling-of-interests  method  and  require  that all  business  combinations  be
accounted for using the purchase  method.  The Exposure Draft would also require
goodwill  arising from the  application of the purchase method to be written off
over a maximum 20-year  amortization  period,  which is shorter than the current
40-year  period.  The  provisions  of the  Exposure  Draft  related to  business
combinations  is expected  to be applied  only for those  business  combinations
initiated after the issuance of a final statement, projected to be late in 2000.

In June 1997,  the  Financial  Accounting  Standards  Board (the "FASB")  issued
Statement of Financial  Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise  and Related  Information."  SFAS No. 131 is effective
for the Company in Fiscal 1999

<PAGE>

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



and establishes  standards for related  disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS No. 131 in its
1999 Annual Report.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities",  which  requires  all  derivatives  to be
recorded on the balance sheet at fair value. In June 1999, the FASB extended the
implementation  date of SFAS No. 133 by one year. As a result, SFAS No. 133 will
now be effective  for the Company on December 1, 2000  (Fiscal  Year 2001).  The
expected  impact of adoption on the Company's  results of operations has not yet
been  determined,  however  it is not  likely to be  material  since most of the
Company's derivatives are carried at fair value.


<PAGE>



                     LEHMAN BROTHERS INC. and SUBSIDIARIES

                           PART II - OTHER INFORMATION

      ITEM 1               Legal Proceedings

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

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

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

The hearing moved to October, 1999 has been further adjourned to November, 1999.

Actions Relating to the Sales and Marketing of Limited  Partnerships.  (Reported
in LBI's Annual Report on Form 10-K and First Quarter Report on Form 10-Q)

Klein, et al. v. Lehman Brothers Inc., et al.  Plaintiffs  withdrew their appeal
and it was dismissed with prejudice.

Bruss,  et al. v. Lehman  Brothers  Inc.,  et al. At a hearing on September  24,
1999, the court granted the defendants'  motion to dismiss the complaint without
prejudice and with leave to file an amended complaint by November 30, 1999.

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

The parties have reached an agreement in principle to settle the action, subject
to final documentation and court approval.

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

The Court has  ordered  the  plaintiffs  divided  into 14 groups of 20 for trial
purposes. The first trial is scheduled to commence in the third quarter of 2000.


<PAGE>


ITEM 6   Exhibits and Reports on Form 8-K

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

(a)      Exhibits:

         12       Computation in Support of Ratio of Earnings to Fixed Charges

         27       Financial Data Schedule

(b)      Reports on Form 8-K:

         None




<PAGE>



                                    SIGNATURE



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



                                          LEHMAN BROTHERS INC.
                                             (Registrant)








Date:    October 14, 1999            By:      /s/ David Goldfarb
                                          -----------------------------------
                                              Chief Financial Officer
                                              (Principal Financial Officer)





<PAGE>


                                  EXHIBIT INDEX



Exhibit No.        Exhibit

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

Exhibit 27         Financial Data Schedule







<PAGE>




                                                                     Exhibit 12

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


<TABLE>
<CAPTION>
                                             For the       For the       For the       For the        For the       For the
                                              Eleven        Twelve        Twelve        Twelve         Twelve         Nine
                                              Months        Months        Months        Months         Months        Months
                                              Ended         Ended         Ended         Ended          Ended         Ended
                                           November 30   November 30   November 30   November 30    November 30    August 31
                                               1994          1995          1996          1997           1998          1999
                                           ------------- ------------- ------------- -------------  ------------- -------------

<S>                                              <C>          <C>           <C>           <C>            <C>           <C>
Pre-tax earnings from continuing
operations                                       $    1       $    78       $   309       $   593        $   847       $   651

Add:  Fixed charges (excluding
      capitalized interest)                       5,873         9,980        10,140        12,233         14,746         9,560
                                           ------------- ------------- ------------- -------------  ------------- -------------

Pre-tax earnings before fixed charges             5,874        10,058        10,449        12,826         15,593        10,211
                                           ============= ============= ============= =============  ============= =============

Fixed charges:
     Interest                                     5,845         9,954        10,121        12,216         14,730         9,548
     Other (a)                                       80            27            25            19             20            12
                                           ------------- ------------- ------------- -------------  ------------- -------------
Total fixed charges                            $  5,925      $  9,981     $  10,146      $ 12,235       $ 14,750      $  9,560
                                           ============= ============= ============= =============  ============= =============

RATIO OF EARNINGS TO FIXED CHARGES                 (b)           1.01          1.03          1.05           1.06          1.07


</TABLE>


(a)  Other  fixed  charges  consist  of  the  interest  factor  in  rentals  and
     capitalized  interest.
(b)  Earnings were inadequate to cover fixed charges and would have had to
     increase  approximately $51 million in 1994 in order to cover deficiencies.