<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-K

(MARK ONE)

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2000

                                       OR

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                FOR THE TRANSITION PERIOD FROM ______ TO ______
                         COMMISSION FILE NUMBER 1-6817

                            ------------------------

                              LEHMAN BROTHERS INC.

             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                                  <C>
                  DELAWARE                                        13-2518466
       (State or other jurisdiction of               (I.R.S. Employer Identification No.)
       incorporation or organization)
          3 WORLD FINANCIAL CENTER
             NEW YORK, NEW YORK                                     10285
  (Address of principal executive offices)                        (Zip Code)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<S>                                            <C>
                                                      NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                          ON WHICH REGISTERED
---------------------------------------        ------------------------------------
 7 5/8% Senior Subordinated Notes Due                New York Stock Exchange
                 2006
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

    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 / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/

    As the Registrant is a wholly-owned subsidiary of Lehman Brothers
Holdings Inc., none of the Registrant's outstanding common equity is held by
non-affiliates of the Registrant. As of February 28, 2001, 1,006 shares of the
Registrant's Common Stock, par value $0.10 per share, were issued and
outstanding.

    THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a)
AND (b) OF FORM 10-K AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE PERMITTED THEREBY.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE

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<PAGE>
                                     PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

    As used herein, "LBI" or the "Registrant" means Lehman Brothers Inc., a
Delaware corporation, incorporated on January 21, 1965. LBI and its subsidiaries
are collectively referred to as the "Company" or "Lehman Brothers." LBI is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc., a Delaware
corporation, which (together with its subsidiaries, as appropriate) is referred
to herein as "Holdings."

    The Company is one of the leading global investment banks, serving
institutional, corporate, government and high-net-worth individual clients and
customers. Its executive offices are located at 3 World Financial Center, New
York, New York 10285 and its telephone number is (212) 526-7000.

FORWARD-LOOKING STATEMENTS

    Some of the statements contained in this report, including those relating to
the Company's strategy and other statements that are predictive in nature, that
depend upon or refer to future events or conditions or that include words such
as "expects," "anticipates," "intends," "plans," "believes," "estimates" and
similar expressions are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements are not
historical facts but instead represent only the Company's expectations,
estimates and projections regarding future events. These statements are not
guarantees of future performance and involve certain risks and uncertainties
that are difficult to predict, which may include market, credit or counterparty,
liquidity, legal and operational risks. Market risks include changes in interest
and foreign exchange rates and securities valuations, global economic and
political trends and industry competition. The Company's actual results and
financial condition may differ, perhaps materially, from the anticipated results
and financial condition in any such forward-looking statements. For more
information concerning the risks and other factors that could affect the
Company's future results and financial condition, see "Management's Analysis of
Results of Operations" on pages 12-20 of this report. The Company undertakes no
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise.

LEHMAN BROTHERS

    Lehman Brothers 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. Affiliates of LBI provide investment
banking and capital markets services in Europe and Asia. The Company is engaged
primarily in providing financial services. Other businesses in which the Company
is engaged represent less than 10 percent of consolidated assets, revenues or
pre-tax income.

    The Company's business includes capital raising for clients through
securities underwriting and direct placements; corporate finance and strategic
advisory services; private equity investments; securities sales and trading;
research; and the trading of foreign exchange, derivative products and certain
commodities. The Company and its affiliates act as market-makers in all major
equity and fixed income products in both the domestic and international markets.
Lehman Brothers is a member of all principal securities and commodities
exchanges in the United States, as well as the National Association of
Securities Dealers, Inc. ("NASD"). Affiliates of LBI hold memberships or
associate memberships on several principal international securities and
commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Paris
and Milan stock exchanges.

    Lehman Brothers and its affiliates provide a full array of capital market
products and advisory services worldwide. Through the Company's banking,
research, trading, structuring and distribution capabilities of equity and fixed
income products the Company continues its focus of building its client/customer
business model. These "customer flow" activities represent a majority of the
Company's revenues. In addition to its customer flow activities, the Company
also takes proprietary positions, the success of which is dependent
<PAGE>
on its ability to anticipate economic and market trends. The Company believes
its customer flow orientation mitigates its overall revenue volatility.

    The Company operates in three business segments (each of which is described
below): Investment Banking, Capital Markets and Client Services. Financial
information concerning the Company for the fiscal years ended November 30, 2000,
November 30, 1999 and November 30, 1998, including the amount of net revenue
contributed by each segment in such periods, is set forth in the Consolidated
Financial Statements and the Notes thereto on pages F-1 to F-33 hereof.
Information with respect to the Company's operations by segment and by
geographic area is set forth in Note 12 to the Notes to Consolidated Financial
Statements on pages F-31 and F-32 hereof.

INVESTMENT BANKING

    Lehman Brothers' Investment Banking professionals are responsible for
developing and maintaining relationships with issuing clients, gaining a
thorough understanding of their specific needs and bringing together the full
resources of Lehman Brothers and its affiliates to accomplish their financial
objectives. Investment Banking is organized into industry, geographic and
product coverage groups, enabling individual bankers to develop specific
expertise in particular industries and markets. Global industry coverage groups
include Chemicals, Communications/Media, Consumer/Retailing, Financial
Institutions, Healthcare, Industrial, Natural Resources, Power, Real Estate and
Technology. Where appropriate, specialized product groups are partnered with the
global industry and geographic groups to provide tailor-made solutions for
Lehman Brothers' clients. These product groups include Equity Capital Markets,
which consists of equity and equity-related securities and derivatives, Fixed
Income Capital Markets, which incorporates expertise in syndicate, liability
management, derivatives, private placements, high yield debt and bank loan
syndication, and Mergers and Acquisitions/Strategic Advisory Services.
Geographically, Lehman Brothers and its affiliates maintain investment banking
offices in eight cities in the U.S. and in nineteen cities in Europe, the Middle
East, Asia and Latin America. The high degree of integration between the
Company's industry, product and geographic groups has allowed Lehman Brothers to
become a leading source of one-stop financial solutions for its global clients.

    MERGERS AND ACQUISITIONS/STRATEGIC ADVISORY.  Lehman Brothers has a long
history of providing strategic advisory services to corporate, institutional and
government clients around the world on a wide range of financial matters,
including mergers and acquisitions, restructurings and spin-offs, targeted stock
transactions, share repurchase strategies, government privatization programs,
takeover defenses and tax optimization strategies.

    UNDERWRITING.  The Company is a leading underwriter of initial public and
secondary offerings of equity and fixed income securities, including listed and
over-the-counter securities, government and agency securities and mortgage- and
asset-backed securities.

CAPITAL MARKETS

    Lehman Brothers combines professionals from the sales, trading and research
areas of its Equities and Fixed Income Divisions, together with investment
bankers, into teams to serve the financial needs of the Company's clients and
customers. This integrated approach enables Lehman Brothers to structure and
execute global transactions for clients and to provide worldwide liquidity in
marketable securities.

    EQUITIES

    The Equities group is responsible for the Company's equity operations and
all dollar and non-dollar equity and equity-related products worldwide. These
products include listed and over-the-counter ("OTC") securities, American
Depositary Receipts, convertibles, options, warrants and derivatives.

                                       2
<PAGE>
    EQUITY CASH PRODUCTS.  Lehman Brothers makes markets in equity and
equity-related securities, and executes block trades on behalf of clients and
customers. The Company and its affiliates participate in the global equity and
equity-related markets in all major currencies through their worldwide presence
and membership in major stock exchanges, including, among others, those in New
York, London, Tokyo, Hong Kong, Frankfurt, Paris and Milan.

    EQUITY DERIVATIVES.  Lehman Brothers offers equity derivative capabilities
across a wide spectrum of products and currencies, including domestic and
international program trading, listed options and futures and structured
derivatives. The Company's equity derivatives business is organized into two
major product areas: a global volatility business, encompassing options-related
products, and a global portfolio trading business that specializes in index
arbitrage, agency/risk baskets and other structured products.

    EQUITY FINANCE.  Lehman Brothers maintains an integrated Equity Financing
and Prime Broker business to provide liquidity to its clients and customers and
supply a source of secured financing for the Company. Equity Financing provides
financing in all markets on a margin basis for customer purchases of equities
and other capital markets products as well as securities lending and
short-selling facilitation. The Prime Broker business also engages in full
operations, clearing and processing services for that unit's customers.

    ARBITRAGE.  Lehman Brothers engages in a variety of arbitrage activities
including "riskless" arbitrage, where the Company seeks to benefit from
temporary price discrepancies that occur when a security is traded in two or
more markets and "risk" arbitrage activities, which involve the purchase of
securities at discounts from the expected values that would be realized if
certain proposed or anticipated corporate transactions (such as mergers,
acquisitions, recapitalizations, exchange offers, reorganizations, bankruptcies,
liquidations or spin-offs) were to occur. To the extent that these anticipated
transactions do not materialize in a manner consistent with the Company's
expectations, the Company is subject to the risk that the value of these
investments will decline. Lehman Brothers' arbitrage activities benefit from the
Company's presence in the global capital markets, access to advanced information
technology, in-depth market research, proprietary risk management tools and
general experience in assessing rapidly changing market conditions.

    FIXED INCOME

    Lehman Brothers actively participates in all key fixed income markets
worldwide and maintains a 24-hour trading presence in global fixed income
securities. The Company is a preeminent market-maker in new issue and other
fixed income securities.

    Fixed Income businesses include the following:

    GOVERNMENT AND AGENCY OBLIGATIONS.  Lehman Brothers is one of the leading
primary dealers in U.S. government securities, as designated by the Federal
Reserve Bank of New York, participating in the underwriting and market-making of
U.S. Treasury bills, notes and bonds, and securities of federal agencies. The
Company and its affiliates are also market-makers in the government securities
of all G7 countries, and participate in other major European and Asian
government bond markets.

    CORPORATE DEBT SECURITIES.  Lehman Brothers makes markets in fixed and
floating rate investment grade debt worldwide. The Company is also a major
participant in the preferred stock market, managing numerous offerings of
long-term and perpetual preferreds and auction rate securities.

    HIGH YIELD SECURITIES AND LEVERAGED BANK LOANS.  The Company also makes
markets in non-investment grade debt securities and bank loans. Lehman Brothers
provides "one-stop" leveraged financing solutions for corporate and financial
acquirers and high yield issuers, including multi-tranche, multi-product
acquisition financing. The Company remains one of the leading investment banks
in the syndication of leveraged loans.

                                       3
<PAGE>
    MONEY MARKET PRODUCTS.  Lehman Brothers holds leading market positions in
the origination and distribution of medium-term notes and commercial paper. The
Company is an appointed dealer for commercial paper programs on behalf of
companies and government agencies worldwide.

    MORTGAGE AND ASSET-BACKED SECURITIES.  The Company is a leading underwriter
of and market-maker in residential and commercial mortgage- and asset-backed
securities and is active in all areas of secured lending, structured finance and
securitized products. Lehman Brothers underwrites and makes markets in the full
range of U.S. agency-backed mortgage products, mortgage-backed securities,
asset-backed securities and whole loan products. It is a leader in the global
market for mortgage and asset-backed securities, leases, mortgages, multi-family
financing and commercial loans.

    MUNICIPAL AND TAX-EXEMPT SECURITIES.  Lehman Brothers is a major dealer in
municipal and tax-exempt securities, including general obligation and revenue
bonds, notes issued by states, counties, cities, and state and local
governmental agencies, municipal leases, tax-exempt commercial paper and put
bonds.

    FINANCING.  The Company's Financing unit engages in three primary functions:
managing the Company's matched book activities, supplying secured financing to
customers, and providing funding for the Company's activities. Matched book
funding involves borrowing and lending cash on a short-term basis to
institutional customers collateralized by marketable securities, typically
government or government agency securities. The Company enters into these
agreements in various currencies and seeks to generate profits from the
difference between interest earned and interest paid. The Financing unit works
with the Company's institutional sales force to identify customers that have
cash to invest and/or securities to pledge to meet the financing and investment
objectives of the Company and its customers. Financing also coordinates with the
Company's Treasury area to provide collateralized financing for a large portion
of the Company's securities and other financial instruments owned. In addition
to its activities on behalf of its U.S. clients and customers, the Company and
its affiliates are major participants in the European and Asian repurchase
agreement markets, providing secured financing for the Company's customers in
those regions.

    FIXED INCOME DERIVATIVES.  The Company and its affiliates offer a broad
range of derivative product services in all major currencies on a
24-hour-per-day global basis. Derivatives professionals are integrated into all
of the Company's fixed income areas in response to the worldwide convergence of
the cash and derivative markets.

    FOREIGN EXCHANGE.  The global foreign exchange operations of Lehman Brothers
and its affiliates provide market access and liquidity in all currencies for
spot, forward and over-the-counter options markets on a 24-hour-per-day basis.
Lehman Brothers offers its customers superior execution, market intelligence,
analysis and hedging capabilities, utilizing foreign exchange as well as foreign
exchange options and derivatives. Lehman Brothers and its affiliates also
provide advisory services to central banks, corporations, and investors
worldwide, structuring innovative products to fit their specific needs. The
Company makes extensive use of its worldwide macroeconomics research to advise
clients on the appropriate strategies to minimize interest rate and currency
risk.

    GLOBAL DISTRIBUTION

    Lehman Brothers' institutional sales organizations encompass distinct global
sales forces that have been integrated into the Fixed Income and Equities
businesses to provide investors with the full array of products and research
offered by the Company. Lehman Brothers has a strategic alliance with Fidelity
Investments that provides the Company access to Fidelity's retail brokerage
customers and a distribution channel for new issue and secondary products and
research to individual investors on-line. During 2000, the Company entered into
similar alliances with FINECO Online in Italy and Consors Discount-Broker in

                                       4
<PAGE>
Germany. Lehman Brothers also formed an alliance with ANZ Investment Bank to
provide capital markets access to their institutional clients in Australia and
New Zealand.

    EQUITY SALES.  Lehman Brothers' institutional Equity sales force provides an
extensive range of services to institutional investors. The Equity sales
organization focuses on developing long-term relationships through a
comprehensive understanding of customers' investment objectives, while providing
proficient execution and consistent liquidity in a wide range of global equity
securities and derivatives.

    FIXED INCOME SALES.  The Company's Fixed Income sales force is one of the
most productive in the industry, serving the investing and liquidity needs of
major institutional investors. Employing a relationship management approach that
provides superior information flow and product opportunities for the Company's
customers, the Fixed Income sales organization covers the major share of the
buying power in the global fixed income markets.

    RESEARCH

    EQUITY RESEARCH.  The Equity Research department is integrated with and
supports the Company's investment banking, sales and trading activities. To
ensure in-depth expertise within various markets, Equity Research has
established regional teams on a worldwide basis that are staffed with industry
and strategy specialists.

    FIXED INCOME RESEARCH.  Fixed Income research at Lehman Brothers encompasses
the full range of research disciplines: quantitative, economic, strategic,
credit, portfolio, relative value and market-specific analysis. Fixed Income
research is integrated with the Company's investment banking, sales and trading
activities. The department's specialists provide expertise in U.S., European and
Asian government and agency securities, derivatives, sovereign issues, corporate
securities, high yield, asset- and mortgage-backed securities, real estate,
emerging market debt and municipal securities.

CLIENT SERVICES

    Client Services includes the Company's Private Client Services group, a
retail-based organization which primarily serves the investment needs of wealthy
individuals, and its Private Equity Division, which manages assets through a
series of private equity funds.

    PRIVATE CLIENT SERVICES

    The Company's Private Client Services group serves the investment needs of
private investors with substantial assets as well as mid-sized institutional
accounts worldwide. Among other services, investment professionals provide their
clients with direct access to fixed income, equity, foreign exchange and
derivative products, as well as the Company's research and execution
capabilities, thereby serving as a valuable extension of the Company's
institutional sales force. In October 2000, Lehman Brothers acquired SG Cowen's
high-net-worth group of 92 investment representatives.

    The Company also provides asset management services, including Investment
Consulting Services, a wrap-fee series of third party managed products,
management of multiple manager funds onshore and offshore and a managed futures
advisory business. The Company also has dealer agreements with a large number of
mutual fund families.

    PRIVATE EQUITY

    The Company currently has over $1.2 billion (and affiliates of the Company
have an additional $3.3 billion) in Private Equity assets under management in
four areas: Merchant Banking, Venture Capital, Communications and Real Estate.
The primary goal of each area is to make investments that provide

                                       5
<PAGE>
superior returns to investors, including institutions, high-net-worth
individuals, the Company and certain employees of the Company and its
affiliates.

    MERCHANT BANKING.  Lehman Brothers' merchant banking activities include
making principal investments in established companies worldwide, often in
partnership with clients of the Company, and managing these investments until
they are realized. The group partners with proven operating teams which have a
compelling business strategy or vision, with the aim of deriving long-term value
for our investors.

    VENTURE CAPITAL.  Lehman Brothers and its affiliates manage investments in
venture capital via their North American and European focused venture capital
funds. The primary investment objective of the venture capital activities is to
make growth-oriented equity or equity-related investments in privately held
companies. Specifically, the venture capital funds focus on investing in
companies capable of turning innovative technology and management solutions into
successful businesses. Accordingly, investment preference is not confined to
particular industries, but instead is directed to any industry capable of rapid
growth through the provision of innovative technology and/or services.

    COMMUNICATIONS.  Lehman Brothers Communications Partners, an affiliate,
raised and closed an $800 million fund in 2000. The Communications Fund seeks to
invest in early stage, growth-oriented communications service providers. This is
the first industry-focused fund Holdings has raised, and it will leverage the
expertise and contacts of Lehman Brothers' Communications/Media Investment
Banking Group.

    REAL ESTATE.  Affiliates of Lehman Brothers have closed on $590 million of
commitments to a real estate fund as of November 30, 2000. This fund is focused
on making equity investments in properties, real estate companies and related
service businesses.

    Commitments for all of the private equity funds are raised in private
placements not requiring registration under the Securities Act of 1933.

TECHNOLOGY AND E-COMMERCE

    The Company is committed to developing a technology platform to deliver a
full range of capital markets information and services to its institutional and
high-net-worth client base. The e-Commerce Committee, which brings together
senior management from all of the Company's global business areas, has developed
the Company's overall e-commerce strategy, approves all e-commerce investments
and provides a forum to share e-commerce knowledge and new developments across
the Company's businesses and geographies. The Company's e-commerce strategy
focuses on client and markets connectivity, content and strategic ventures.
During 2000, Lehman Brothers rolled out its integrated client web site,
LehmanLIVE. The Company also played a leading role in the advent of e-syndicates
in the Fixed Income area, co-lead-managing the first such deal; to date over
$50 billion of new issue bonds have been co-lead-managed by the Company in this
format. Lehman Brothers has made many strategic investments and is a participant
in a number of institutional trading networks. Notable investments include
TradeWeb, Market Axess and Securities.Hub in Fixed Income, and TheMarkets.com in
Equities. Additionally, Lehman Brothers supported the global expansion of NASDAQ
with an investment in its U.S. and Japanese ventures.

CORPORATE

    The Company's Corporate division provides support to its businesses through
the processing of certain securities and commodities transactions; receipt,
identification and delivery of funds and securities; safeguarding of customers'
securities; risk management; and compliance with regulatory and legal
requirements. In addition, this staff is responsible for technology
infrastructure and systems development, treasury operations, financial control
and analysis, tax planning and compliance, internal audit, expense management,
career development and recruiting and other support functions.

                                       6
<PAGE>
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. Lehman Brothers 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. As part of the Company's customer-flow
activities, Lehman Brothers takes positions in interest rates, foreign exchange,
and various securities, derivatives and commodities. Although the Company seeks
to mitigate risk associated with such positions through hedging activities,
consistent with its expectations of future events, it is subject to the risk
that actual market events may differ from the Company's expectations, which may
result in losses associated with such positions.

    Lehman Brothers has developed a control infrastructure to monitor and manage
each type of risk on a global basis throughout the Company. A full description
of the Company's Risk Management procedures is contained in "Management's
Analysis of Results of Operations--Risk Management" on pages 16-19 hereof, and
is incorporated herein by reference.

COMPETITION

    All aspects of the Company's business are highly competitive. The Company
competes in domestic and international markets directly with numerous other
brokers and dealers in securities and commodities, including online internet,
securities brokerage firms, investment banking firms, investment advisors and
certain commercial banks and, indirectly for investment funds, with insurance
companies and others.

    The financial services industry has become considerably more concentrated as
numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. In addition, several small and specialized
securities firms have been successful in raising significant amounts of capital
for their merger and acquisition activities and merchant banking investment
vehicles and for their own accounts. These developments have increased
competition from other firms, many of whom have significantly greater equity
capital than the Company. Recent legislative and regulatory changes in the
United States allow commercial banks to enter businesses previously limited to
investment banks, and several combinations between commercial banks and
investment banks have occurred, which may further increase competition.

REGULATION

    The securities industry in the United States is subject to extensive
regulation under both federal and state laws. LBI and certain other subsidiaries
of Holdings are registered as broker-dealers and investment advisors with the
Securities and Exchange Commission (the "SEC") and as such are subject to
regulation by the SEC and by self-regulatory organizations, principally the NASD
and national securities exchanges such as the New York Stock Exchange, which has
been designated by the SEC as LBI's primary regulator, and the Municipal
Securities Rulemaking Board. Securities firms are also subject to regulation by
state securities administrators in those states in which they conduct business.
LBI is a registered broker-dealer in all 50 states, the District of Columbia and
the Commonwealth of Puerto Rico. The SEC, self-regulatory organizations and
state securities commissions may conduct administrative proceedings, which may
result in censure, fine, the issuance of cease-and-desist orders or suspension
or expulsion of a broker-dealer or an investment advisor, its officers or
employees.

    LBI is also registered with the Commodity Futures Trading Commission (the
"CFTC") as a futures commission merchant and is subject to regulation as such by
the CFTC and various domestic boards of trade and other commodity exchanges. The
Company's U.S. commodity futures and options business is also regulated by the
National Futures Association, a not-for-profit membership corporation which has
been designated as a registered futures association by the CFTC.

                                       7
<PAGE>
    The Company believes that it is in material compliance with the regulations
described herein.

CAPITAL REQUIREMENTS

    LBI is subject to various securities, commodities and banking regulations
and capital adequacy requirements promulgated by regulatory and exchange
authorities. Reference is made to Note 5 of Notes to Consolidated Financial
Statements on page F-18 hereof.

EMPLOYEES

    As of November 30, 2000, LBI employed approximately 7,600 persons. The
Company considers its relationship with its employees to be good.

ITEM 2. PROPERTIES

    The Company's headquarters occupy approximately 1.1 million square feet of
space at 3 World Financial Center in New York, New York, which the Company and
Holdings occupy under a tenancy-in-common arrangement with American Express
Company and various American Express Company subsidiaries. Approximately 78,000
square feet of the Company's space at Three World Financial Center has been
subleased to a third-party tenant.

    The Company's headquarters also include leased space at One World Financial
Center and at One World Trade Center in New York. Located in the same office
complex as Three World Financial Center, the One World Financial Center space
will ultimately consist of approximately 700,000 square feet, of which the
Company currently occupies 100,000 square feet. Approximately 90,000 square feet
will be occupied during 2001, and 510,000 square feet will be occupied in stages
beginning in 2004. The lease terms at One World Financial Center expire at
various dates from December 2015 through 2024, with the exception of a lease for
140,000 square feet, which expires in 2006. The space at One World Trade Center
consists of approximately 115,000 square feet with a lease expiration date in
2015.

    Holdings leases approximately 400,000 square feet at 101 Hudson Street in
Jersey City, New Jersey (the "Operations Center"), of which approximately 67,000
square feet has been subleased to a third-party tenant. The Operations Center is
used by systems, operations, and certain administrative personnel. The lease
term expires in 2011.

    Facilities occupied by the Company and its subsidiaries are believed to be
adequate for the purposes for which they are currently used and are well
maintained.

                                       8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

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

    Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has a meritorious defense and will deny, liability in
all significant cases pending against it including the matters described below,
and 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 the
consolidated financial position or results of operations of the Company.

ACTIONS RELATING TO THE SALES AND MARKETING OF LIMITED PARTNERSHIPS

    Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify Holdings for liabilities which it may
incur in connection with any action relating to any business conducted by The
Balcor Company, a former Holdings subsidiary ("Balcor"), in which Holdings is
named as a parent company or control person of Balcor. Holdings believes that
the allegations in the action described below are covered by this indemnity.

    BRUSS, ET AL. V. LEHMAN BROTHERS INC., ET AL.  On January 25, 1999, a
purported class action complaint was filed in the Superior Court of New Jersey,
Law Division: Essex County, on behalf of investors in certain specified limited
partnerships sponsored by Balcor and sold by various entities, including, among
others, retail branches formerly owned by LBI and certain of its affiliates.
After dismissal of Plaintiffs' original complaint in September, 1999, Plaintiffs
filed an amended complaint on November 30, 1999. That complaint names as
defendants LBI, various affiliates of LBI, Smith Barney Holdings, Inc., Balcor,
a number of Balcor-originated limited partnerships and an individual and
entities affiliated with Balcor. The complaint alleges claims in connection with
the marketing, sale and operation of the limited partnerships for common law
fraud and deceit, equitable fraud, negligent misrepresentation, and violation of
certain New Jersey statutes relating to the sale of securities. The complaint
seeks compensatory damages for lost principal and interest, general damages and
punitive damages, and costs and attorneys' fees. LBI has moved to dismiss the
amended complaint.

LEHMAN BROTHERS COMMERCIAL CORPORATION AND LEHMAN BROTHERS SPECIAL
FINANCING INC. V. MINMETALS INTERNATIONAL NON-FERROUS METALS TRADING COMPANY

    On November 15, 1994, a Holdings subsidiary, Lehman Brothers Commercial
Corporation ("LBCC"), and a Lehman Brothers subsidiary, Lehman Brothers Special
Financing Inc. ("LBSF"), commenced an action against Minmetals International
Non-Ferrous Metals Trading Company ("Minmetals") and China National Metals and
Minerals Import and Export Company ("CNM") in the United States District Court
for the Southern District of New York alleging breach of contract against
Minmetals and breach of guarantee against CNM. The litigation arose from the
refusal by Minmetals and CNM to honor their obligations with respect to certain
foreign exchange and swap transactions. LBCC and LBSF seek to recover
approximately $52.5 million from Minmetals and/or CNM. Minmetals filed
counterclaims against Lehman entities based on violations of federal securities
and commodities laws and rules, and theories of fraud, breach of fiduciary duty
and conversion. Discovery is complete; no trial date has been set.

                                       9
<PAGE>
AIA HOLDING SA ET AL. V. LEHMAN BROTHERS INC. AND BEAR STEARNS & CO., INC.

    On July 9, 1997, LBI was served with a complaint in the United States
District Court for the Southern District of New York in which 277 named
plaintiffs assert 24 causes of action against LBI and Bear Stearns & Co., Inc.
The amount of damages claimed is unspecified. The claims arise from the
activities of an individual named Ahmad Daouk, who was employed by an
introducing broker which introduced accounts to LBI between 1988 and 1992. Daouk
allegedly perpetrated a fraud upon the claimants, who are mostly investors of
Middle Eastern origin, and the complaint alleges that LBI breached various
contractual and common law duties owed to the investors. On March 27, 1998, the
District Court dismissed without prejudice 18 of the 24 counts pleaded in the
complaint. On July 3, 1998 the plaintiffs served their First Amended Complaint
containing 18 causes of action against LBI and/or Bear Stearns. The Court has
ordered the plaintiffs divided into 14 groups of 20 for trial purposes. No trial
date has been set.

MCNAMARA ET AL. V. BRE-X MINERALS LTD. ET AL.

    On July 25, 1997, an Amended Class Action Complaint was filed in the United
States District Court for the Eastern District of Texas against 16 defendants,
including LBI, which seeks unspecified compensatory damages, interest, costs and
attorneys' fees on behalf of purchasers of Bre-X common stock and/or Bresea
common stock. The Complaint raises claims under the federal securities laws and
the common law of fraud and negligent misrepresentation. The Complaint's stated
basis for naming LBI is that one of its securities analysts published research
on Bre-X. On January 6, 1999, the Court dismissed the claims of Canadian
plaintiffs who bought their shares on Canadian exchanges. On July 13, 1999, the
District Court dismissed the case against LBI and certain other defendants. The
plaintiffs filed a Third Amended Complaint, and then a Fourth Amended Complaint,
which was filed on June 14, 2000. A motion to dismiss that Complaint is pending.

HAROLD GILLET, ET AL. V. GOLDMAN SACHS & CO., ET AL.; YAKOV PRAGER, ET AL. V.
GOLDMAN, SACHS & CO., ET AL.; DAVID HOLZMAN, ET AL. V. GOLDMAN, SACHS & CO., ET
AL.

    Beginning in November 1998, three class actions were filed in the United
States District Court for the Southern District of New York against in excess of
25 underwriters of initial public offering ("IPO") securities, including LBI.
Plaintiffs, alleged purchasers of securities issued in certain IPOs, seek
compensatory and injunctive relief for alleged violations of the antitrust laws
based on the theory that the defendants fixed and maintained fees for
underwriting certain IPO securities at supra-competitive levels. On March 15,
1999, plaintiffs filed a Consolidated Amended Complaint. By order dated
November 17, 1999, a fourth purported class action, also brought on behalf of
purchasers, was consolidated with the existing actions.

    By memorandum and order dated February 9, 2001 (the "Order"), the Court
granted defendants' motion to dismiss the Consolidated Amended Complaint and
denied plaintiffs' request for leave to file a Second Amended Complaint. In the
Order, the Court concluded that the purchaser plaintiffs lacked standing under
the antitrust laws to assert the claims. The Court indicated in the Order that
its decision did not apply to any claims brought on behalf of issuers of IPO
securities.

    On October 13, 2000, a related case was filed in the United States District
Court for the Southern District of New York by a bankrupt issuer of IPO
securities. That case, WEINMAN V. SALOMON SMITH BARNEY, ET AL., does not name
LBI as a defendant. However, another related case, entitled CHS ELECTRONICS,
INC. V. CREDIT SUISSE FIRST BOSTON CORP., ET AL., was transferred to the
Southern District of New York from the United States District Court for the
Southern District of Florida by order dated December 20, 2000. The CHS
ELECTRONICS case (discussed below) is brought by a bankrupt issuer of securities
and names LBI, among others, as a defendant. The Order did not dispose of the
CHS ELECTRONICS or WEINMAN cases, which are still pending.

                                       10
<PAGE>
CHS ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON CORP., ET AL.

    On August 3, 2000, a class action was filed in the United States District
Court for the Southern District of Florida against 18 underwriters of IPO
securities, including LBI. Plaintiff, a bankrupt issuer of IPO securities, seeks
the same relief, based on the same theories, as in the GILLET case above. With
consent of the parties, the case was transferred, by order dated January 4,
2001, to the United States District Court for the Southern District of New York.
By order dated January 12, 2001, the case was consolidated with the GILLET case.

MEXPO, S.A. V. LEHMAN BROTHERS INC., ET AL.

    In August 1999, Mexpo, S.A. filed an arbitration claim with the National
Association of Securities Dealers, naming as respondents LBI, Lehman Brothers
International (Europe), Lehman Brothers Securities, Holdings, and Lehman
Brothers Global Finance Limited. Mexpo alleges that respondents engaged in
unauthorized transactions, made unsuitable recommendations, failed to follow
client instructions and engaged in deceptive conduct in connection with Mexpo's
trading in emerging markets bonds, structured notes and other securities. The
legal claims asserted by Mexpo include various common law contractual and tort
claims as well as alleged violations of federal securities and commodities laws.
Mexpo seeks $28 million in compensatory damages, plus punitive damages,
interest, attorneys' fees and costs. A hearing is scheduled to start in
May 2001.

ISLAND VENTURE CORPORATION, ET AL. V. LEHMAN BROTHERS INC. AND LEHMAN BROTHERS
  SECURITIES ASIA, LTD.

    On February 9, 2001, Island Venture Corporation, Continental Resources
Corporation, Recola Investment Corporation, Grand Concord Corporation and
Goodwell Industrial Corporation filed a First Amended Complaint in the United
States District Court for the District of New Jersey against LBI and Lehman
Brothers Securities Asia, Ltd. The complaint arises in connection with the
plaintiffs' purchase of various promissory notes issued by Indonesian companies
in 1997 and upon which the issuers have defaulted. It also asserts claims
relating to an alleged unauthorized liquidation for $8.5 million of a
$10 million Asia Investment Grade Default Note ("Basket Note") issued by Lehman
Brothers Holdings PLC. The complaint seeks rescission and damages under various
common law theories of mutual mistake, breach of contract, breach of fiduciary
duty, negligence, negligent misrepresentation and constructive fraud, as well as
asserting claims under Section 10(b) of the Securities Exchange Act of 1934. The
plaintiffs seek to recover damages of approximately $60 million on all the notes
they purchased and the difference between the liquidation price and the face
value of the Basket Note plus lost coupon payments. The plaintiffs served the
complaint on LBI on February 22, 2001, but have not yet served Lehman Brothers
Securities Asia, Ltd.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    Pursuant to General Instruction I of Form 10-K, the information required by
Item 4 is omitted.

                                       11
<PAGE>
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
       STOCKHOLDER MATTERS

    All of the outstanding Common Stock, par value $0.10 per share, of the
Company is owned by Holdings. For information on payment of dividends by the
Company during the two most recent fiscal years, see Note 11 of Notes to
Consolidated Financial Statements on pages F-30 and F-31 hereof, which
information is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

    Pursuant to General Instruction I of Form 10-K, the information required by
Item 6 is omitted.

ITEM 7. MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

    Pursuant to General Instruction I of Form 10-K, set forth on the following
pages is Management's Analysis of Results of Operations for the twelve months
ended November 30, 2000, November 30, 1999, and November 30, 1998. Such
information should be read in conjunction with the Consolidated Financial
Statements of the Registrant and its Subsidiaries together with the Notes
thereto contained on pages F-1 to F-33 hereof.

                                       12
<PAGE>
                 MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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

RESULTS OF OPERATIONS

    The Company reported net income of $1,134 million in 2000, $696 million in
1999 and $575 million in 1998.

    NET REVENUES

    Net revenues were $4,735 million in 2000, $3,478 million in 1999 and $2,899
in 1998. The 36% increase in net revenues in 2000 reflects the continued
successful execution of the Company's overall strategy to grow its high margin
businesses and at the same time, maintain a strict discipline with regard to its
expenses and risk management.

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

TWELVE MONTHS ENDED NOVEMBER 30, 2000

<TABLE>
<CAPTION>
                                            PRINCIPAL TRANSACTIONS,
                                                COMMISSIONS AND
                                                 NET INTEREST         INVESTMENT BANKING    OTHER      TOTAL
                                            -----------------------   ------------------   --------   --------
                                                                      (IN MILLIONS)
<S>                                         <C>                       <C>                  <C>        <C>
Investment Banking........................                                  $1,609                     $1,609
Capital Markets...........................           $2,441                                 $  23       2,464
Client Services...........................              625                      5             32         662
                                                     ------                 ------          -----      ------
    Total.................................           $3,066                 $1,614          $  55      $4,735
                                                     ======                 ======          =====      ======
</TABLE>

                                       13
<PAGE>
TWELVE MONTHS ENDED NOVEMBER 30, 1999

<TABLE>
<CAPTION>
                                            PRINCIPAL TRANSACTIONS,
                                                COMMISSIONS AND
                                                 NET INTEREST         INVESTMENT BANKING    OTHER      TOTAL
                                            -----------------------   ------------------   --------   --------
                                                                      (IN MILLIONS)
<S>                                         <C>                       <C>                  <C>        <C>
Investment Banking........................                                  $1,135                     $1,135
Capital Markets...........................           $1,894                                 $   5       1,899
Client Services...........................              439                     (7)            12         444
                                                     ------                 ------          -----      ------
    Total.................................           $2,333                 $1,128          $  17      $3,478
                                                     ======                 ======          =====      ======
</TABLE>

TWELVE MONTHS ENDED NOVEMBER 30, 1998

<TABLE>
<CAPTION>
                                            PRINCIPAL TRANSACTIONS,
                                                COMMISSIONS AND
                                                 NET INTEREST         INVESTMENT BANKING    OTHER      TOTAL
                                            -----------------------   ------------------   --------   --------
                                                                      (IN MILLIONS)
<S>                                         <C>                       <C>                  <C>        <C>
Investment Banking........................                                  $1,096                     $1,096
Capital Markets...........................           $1,296                                 $   7       1,303
Client Services...........................              405                     60             35         500
                                                     ------                 ------          -----      ------
    Total.................................           $1,701                 $1,156          $  42      $2,899
                                                     ======                 ======          =====      ======
</TABLE>

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

    INVESTMENT BANKING  This segment's net revenues result from fees earned by
the Company for underwriting public and private offerings of fixed income and
equity securities, and advising clients on merger and acquisition activities and
other services. Investment Banking's net revenues increased 42% in 2000 to
$1,609 million from $1,135 million in 1999 and $1,096 million in 1998, due
principally to an increase in equity underwriting activities and merger and
acquisition advisory activities. This increase in net revenues reflects the
progress the Company has made in its strategy to build its global investment
banking franchise.

INVESTMENT BANKING NET REVENUES:

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Equity Underwriting.........................................   $  557     $  286     $  237
Debt Underwriting...........................................      481        527        470
Merger and Acquisition Advisory.............................      571        322        389
                                                               ------     ------     ------
                                                               $1,609     $1,135     $1,096
                                                               ======     ======     ======
</TABLE>

    Equity underwriting revenues increased 95% to $557 million driven by
increased issuances as well as the Company's improvement in lead-managed equity
issuances and corresponding improvement in competitive ranking per Thompson
Financial Securities Data Corp. ("TFSD"). Merger and acquisition advisory
revenues increased 77% to a record $571 million in 2000. These record results
were driven, in part, by an increase in the Company's global market share for
completed mergers and acquisition transactions from 7.6% in 1999 to 9.8% in
2000, per TFSD.

    Debt underwriting revenues decreased 9% to $481 million as a result of
challenging market conditions as rising interest rates led to decreased
underwriting volume across most fixed income products, most notably in the high
yield market where spreads were at their widest levels since 1991. Overall
market

                                       14
<PAGE>
volumes for global debt underwriting and high yield issuances in 2000 were down
14% and 52%, respectively, according to TFSD.

    CAPITAL MARKETS  This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to a broad
spectrum of equity and fixed income products. These products include a wide
range of cash, derivative, secured financing and structured instruments.

CAPITAL MARKETS NET REVENUES:

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Equities....................................................   $1,360     $  791     $  262
Fixed Income................................................    1,104      1,108      1,041
                                                               ------     ------     ------
                                                               $2,464     $1,899     $1,303
                                                               ======     ======     ======
</TABLE>

    Capital Markets' net revenues were $2,464 million for 2000, $1,899 million
for 1999 and $1,303 million for 1998. The 30% increase in net revenues in 2000
is primarily attributable to a significant increase in customer flow activity as
overall transaction volumes almost doubled 1999 levels.

    Net revenues from the equity component of Capital Markets increased 72% to
$1,360 million from $791 million in 1999. This performance reflects the success
of the continued development of the Company's equity franchise, a key component
of the Company's strategic focus on building high margin businesses. Revenues
benefited from strong customer flow activity across all equity products and
regions, in particular equity derivative and cash products. Also contributing to
the increase were higher revenues related to the Company's Private Equity
Investments.

    Net revenues from the fixed income component of Capital Markets remained
relatively unchanged in 2000 compared to 1999. The difficult fixed income
environment during 2000 was characterized by widening credit spreads resulting
from ongoing credit concerns. These concerns led many institutional investors
toward more liquid types of fixed income products, such as government and
mortgage-backed securities.

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

CLIENT SERVICES NET REVENUES:

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Private Client..............................................    $651       $449       $428
Private Equity..............................................      11         (5)        72
                                                                ----       ----       ----
                                                                $662       $444       $500
                                                                ====       ====       ====
</TABLE>

    Client Services' net revenues for 2000 were $662 million compared to
$444 million for 1999 and $500 million for 1998. The 49% increase in 2000 was
driven by record customer activity as the Company successfully increased the
headcount and productivity of its investment representatives. In October of
2000, the Company acquired SG Cowen's high-net-worth group of 92 investment
representatives. This, combined with the Company's own hiring initiatives,
increased the number of investment representatives to approximately 450 as of
November 30, 2000. This growth is part of the Company's strategic expansion of
its high margin businesses. In addition, Private Equity management fees
increased in 2000 due to the start up of several new investment partnerships.

                                       15
<PAGE>
    NON-INTEREST EXPENSES

    Non-interest expenses in 2000 totaled $3,118 million, up 26% over 1999's
non-interest expenses of $2,465 million. The increase in non-interest expenses
was more than offset by the 36% increase in net revenues highlighting the
Company's continued disciplined approach to expense management. This ongoing
focus on expenses is a key attribute of the Company's strategic objective of
increasing pretax operating margins. Nonpersonnel expenses as a percentage of
net revenues decreased to 17.2% in fiscal 2000 from 20.2% in 1999.

<TABLE>
<CAPTION>
                                                                   TWELVE MONTHS ENDED
                                                                       NOVEMBER 30
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Compensation and benefits...................................   $2,304     $1,764     $1,445
Nonpersonnel................................................      814        701        607
                                                               ------     ------     ------
    Total non-interest expenses.............................   $3,118     $2,465     $2,052
                                                               ------     ------     ------
Compensation and benefits/Net revenues......................     48.7%      50.7%      49.8%
Nonpersonnel expenses/Net revenues..........................     17.2%      20.2%      20.9%
                                                               ======     ======     ======
</TABLE>

    Compensation and benefits expense as a percentage of net revenues decreased
to 48.7% compared to 50.7% in 1999. Compensation and benefits expense includes
the cost of salaries, incentive compensation and employee benefit plans as well
as the amortization of deferred stock compensation awards.

    INCOME TAXES

    The Company's 2000 income tax provision of $483 million represented a 30%
effective tax rate. In 1999 and 1998, income tax provisions were $317 million
and $272 million, respectively, resulting in effective tax rates of 31% in 1999
and 32% in 1998. The effective tax rate decreased in 2000 primarily due to a
decrease in the state and local effective tax rate. Additional information about
the Company's income taxes can be found in Note 7 to the Consolidated Financial
Statements.

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 the Company are market, credit, liquidity,
legal and operational risks. Risk Management is considered to be of paramount
importance. Consequently, 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 Officer, the Chief Administrative Officer and the
Heads of Capital Markets and 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

                                       16
<PAGE>
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.

    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
valuation adjustments where appropriate. Credit limits are reviewed periodically
to ensure that they remain appropriate in light of market events or the
counterparty's financial condition.

    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 firm-wide Risk
Management Guidelines and evaluating adherence to these guidelines. These
guidelines provide a clear 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

                                       17
<PAGE>
to mitigate, whenever possible, excess market risk exposures through the use of
futures and option contracts and offsetting cash market instruments.

    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. Mortgages
and 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
through its market-making 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 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.

    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 discloses an entity-wide value-at-risk for virtually
all of its trading activities. In general, value-at-risk measures potential loss
of revenues at a given confidence level over a specified time horizon.
Value-at-risk over a one-day holding period measured at a 95% confidence level
implies that potential loss of daily trading revenue will be at least as large
as the value-at-risk amount on one out of every 20 trading days.

    The Company's methodology estimates a reporting day value-at-risk using
actual daily trading revenues over the previous 250 trading days. This estimate
is measured as the loss, relative to the median daily trading revenue. The
Company also estimates an average value-at-risk measure over 250 rolling
reporting days, thus looking back a total of 500 trading days.

                                       18
<PAGE>
    The Company's average value-at-risk for each component of market risk, and
in total was as follows (in millions):

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Interest rate risk..........................................   $10.6      $14.5
Equity price risk...........................................    10.2       10.3
Foreign exchange risk.......................................     0.7        1.7
Diversification benefit.....................................    (7.0)      (6.5)
                                                               -----      -----
Total Company...............................................   $14.5      $20.0
                                                               =====      =====
</TABLE>

    During 2000, the Company's value-at-risk varied from a high of
$16.7 million to a low of $13.1 million. During 1999, the Company's
value-at-risk varied from a high of $22.7 million to a low of $13.3 million.

    Average value-at-risk decreased in 2000 compared to 1999 due to the effects
on the 1999 value-at-risk related to the extreme market volatility during the
August-October 1998 period.

    Value-at-risk is one measure of potential loss in trading revenues that may
result from adverse market movements over a specified period of time with a
selected likelihood of occurrence. As with all measures of value-at-risk, the
Company's estimate has substantial limitations due to its reliance on historical
performance, which is not necessarily a predictor of the future. Consequently,
this value-at-risk estimate is only one of a number of tools the Company
utilizes in its daily risk management activities.

    As discussed throughout the Management's 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.

NEW ACCOUNTING DEVELOPMENTS

    In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which requires all derivatives
to be recorded on the balance sheet at fair value. In June 1999, the FASB issued
SFAS No. 137 which extended the implementation date of SFAS No. 133 by one year.
In June 2000, the FASB issued SFAS No. 138, which amended SFAS 133. The Company
will adopt SFAS 133 as amended on December 1, 2000 (Fiscal Year 2001).

    SFAS 133 will not affect the accounting for the Company's trading-related
derivative activities, as such derivatives are already recognized on a
mark-to-market basis through earnings. Rather, SFAS 133 will affect the
accounting for derivatives utilized as hedging instruments as part of the
Company's end-user activities. As an end user, the Company primarily utilizes
derivatives to modify the interest rate characteristics of its long-term debt
and secured financing activities ("end-user derivative activities"). The Company
currently accounts for its end-user derivative activities on an accrual basis
provided that the derivative is deemed a highly effective hedge. SFAS 133
generally will require the Company to recognize its end-user derivatives at fair
value through earnings, with an offset recognized through earnings for changes
in the fair value of the hedged item. Any ineffectiveness in a hedging
relationship generally will require immediate earnings recognition. In addition
to these changes, SFAS 133 will result in certain derivatives no longer
qualifying for hedge accounting, requiring such derivatives to be
marked-to-market through earnings without offset. Derivatives that will not
qualify for hedge accounting under SFAS 133 include U.S. dollar and foreign
currency basis swaps.

                                       19
<PAGE>
    The Company has devoted significant resources to prepare for the adoption of
SFAS 133. The adoption of SFAS 133 will not have a material impact to the
Company's financial position or results of operations.

    In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB No. 125." ("SFAS 140"). SFAS 140 carries over the
fundamental control premise of SFAS No. 125, which requires an entity to
recognize only assets it controls and to derecognize assets only when control
has been surrendered. SFAS 140 amends the control framework of SFAS 125 by
revising the criteria to be used for evaluating whether a financial asset is
controlled and providing new criteria necessary to meet the definition of a
Qualifying Special Purpose Entity ("QSPE"). A QSPE is a limited- purpose vehicle
often used for asset securitizations.

    SFAS 140 will also change the accounting for collateral. SFAS 140 will no
longer require entities to recognize controlled collateral as an asset on the
balance sheet. Rather, SFAS 140 will require entities to separately classify
financial assets owned and pledged as collateral. SFAS 140 also requires new
disclosures for collateral and retained interests in securitizations.

    SFAS 140 has multiple effective dates. The accounting for new transfers of
financial assets will begin after March 31, 2001 unless grandfathering
provisions have been met. The collateral accounting and disclosure rules are
effective for financial statements ending after December 15, 2000. The adoption
of SFAS 140 is not expected to have a material impact to the Company's financial
position or results of operations.

EFFECTS OF INFLATION

    Because the Company's assets are, to a large extent, liquid in nature, they
are not significantly affected by inflation. However, the rate of inflation
affects the Company's expenses, such as employee compensation, office space
leasing costs and communications charges, which may not be readily recoverable
in the price of services offered by the Company. To the extent inflation results
in rising interest rates and has other adverse effects upon the securities
markets, it may adversely affect the Company's financial position and results of
operations in certain businesses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The information under the caption "Management's Analysis of Results of
Operations--Risk Management" on pages 17-19 hereof is incorporated herein by
reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial statements and supplementary financial information required by
this Item and included in this Report are listed in the Index to Financial
Statements and Schedules appearing on page F-l and are incorporated herein by
reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

    None.

                                       20
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Pursuant to General Instruction I of Form 10-K, the information required by
Item 10 is omitted.

ITEM 11. EXECUTIVE COMPENSATION

    Pursuant to General Instruction I of Form 10-K, the information required by
Item 11 is omitted.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Pursuant to General Instruction I of Form 10-K, the information required by
Item 12 is omitted.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Pursuant to General Instruction I of Form 10-K, the information required by
Item 13 is omitted.

                                       21
<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements:

    See Index to Financial Statements and Schedules appearing on page F-l.

    2. Financial Statement Schedules:

    Schedules are omitted since they are not required or are not applicable.

    3. Exhibits:

<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C>                     <S>
         3.1            Restated Certificate of Incorporation of the Registrant
                        dated September 3, 1981 (incorporated by reference to
                        Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
                        for the year ended December 31, 1987)

         3.2            Certificate of Amendment to Restated Certificate of
                        Incorporation of the Registrant dated May 11, 1984
                        (incorporated by reference to Exhibit 3.2 to the
                        Registrant's Annual Report on Form 10-K for the year ended
                        December 31, 1988)

         3.3            Certificate of Amendment to Restated Certificate of
                        Incorporation of the Registrant, dated March 6, 1985
                        (incorporated by reference to Exhibit 3.3 to the
                        Registrant's Annual Report on Form 10-K for the year ended
                        December 31, 1985)

         3.4            Certificate of Amendment to Restated Certificate of
                        Incorporation of the Registrant, dated August 31, 1987
                        (incorporated by reference to Exhibit 3.4 to the
                        Registrant's Annual Report on Form 10-K for the year ended
                        December 31, 1987)

         3.5            Certificate of Amendment to Restated Certificate of
                        Incorporation of the Registrant, dated January 28, 1988
                        (incorporated by reference to Exhibit 3.5 to the
                        Registrant's Annual Report on Form 10-K for the year ended
                        December 31, 1987)

         3.6            Certificate of Amendment to Restated Certificate of
                        Incorporation of the Registrant, dated July 19, 1990.
                        (incorporated by reference to Exhibit 3.6 to the
                        Registrant's Annual Report on Form 10-K for the year ended
                        December 31, 1990)

         3.7            Certificate of Amendment to Restated Certificate of
                        Incorporation of the Registrant, dated August 2, 1993
                        (incorporated by reference to Exhibit 3 to the Registrant's
                        Quarterly Report on Form 10-Q for the quarter ended June 30,
                        1993)

         3.8            Certificate of Designations of Floating Rate Preferred
                        Stock, filed April 30, 1996 (incorporated by reference to
                        Exhibit 3.8 to the Registrant's Annual Report on Form 10-K
                        for the year ended December 31, 1996)

         3.9            By-Laws of the Registrant, amended as of January 30, 1997
                        (incorporated by reference to Exhibit 3.9 to the
                        Registrant's Annual Report on Form 10-K for the year ended
                        December 31, 1996)

         4.1            The instruments defining the rights of holders of the
                        long-term debt securities of the Registrant and its
                        subsidiaries are omitted pursuant to section (b) (4)
                        (iii) (A) of Item 601 of Regulation S-K. The Registrant
                        hereby agrees to furnish copies of these instruments to the
                        Securities and Exchange Commission upon request.
</TABLE>

                                       22
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C>                     <S>
        10.1            Agreement of Tenants-In-Common by and among American Express
                        Company, American Express Bank Ltd., American Express Travel
                        Related Services Company, Inc., Shearson Lehman Brothers
                        Inc., Shearson Lehman Government Securities, Inc. and
                        Shearson Lehman Commercial Paper Incorporated (incorporated
                        by reference to Exhibit 10.1 of Lehman Brothers Holdings
                        Inc.'s Transition Report on Form 10-K for the eleven months
                        ended November 30, 1994.)

          12            Computation in support of ratio of earnings to fixed
                        charges*

          21            Pursuant to General Instruction I of Form 10-K, the list of
                        the Registrant's Subsidiaries is omitted.

          23            Consent of Ernst & Young LLP*

          24            Powers of Attorney*
</TABLE>

------------------------

* Filed herewith.

(b) Reports on Form 8-K.

    None

                                       23
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S>                                                    <C>  <C>
                                                       LEHMAN BROTHERS INC.
                                                       (Registrant)

February 28, 2001                                      By:           /s/ JEFFREY A. WELIKSON
                                                            -----------------------------------------
                                                                       Jeffrey A. Welikson
                                                                      Senior Vice President
</TABLE>

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                     SIGNATURES                                   TITLE                    DATE
                     ----------                                   -----                    ----
<S>                                                    <C>                           <C>
                                                       Chief Executive Officer and
              /s/ RICHARD S. FULD, JR.                    Chairman of the Board of
     -------------------------------------------            Directors (principal     February 28, 2001
                Richard S. Fuld, Jr.                         executive officer)

                 /s/ DAVID GOLDFARB                      Chief Financial Officer
     -------------------------------------------          (principal financial and   February 28, 2001
                   David Goldfarb                           accounting officer)

                /s/ ROGER S. BERLIND
     -------------------------------------------                 Director            February 28, 2001
                  Roger S. Berlind

              /s/ HOWARD L. CLARK, JR.
     -------------------------------------------                 Director            February 28, 2001
                Howard L. Clark, Jr.

                 /s/ FREDERICK FRANK
     -------------------------------------------                 Director            February 28, 2001
                   Frederick Frank

                /s/ HARVEY M. KRUEGER
     -------------------------------------------                 Director            February 28, 2001
                  Harvey M. Krueger

              /s/ SHERMAN R. LEWIS, JR.
     -------------------------------------------                 Director            February 28, 2001
                Sherman R. Lewis, Jr.
</TABLE>

<TABLE>
<S>   <C>                                                    <C>                           <C>
*By:         --------------------------------------
                       Jeffrey A. Welikson                                                 February 28, 2001
                       (ATTORNEY-IN-FACT)
</TABLE>

                                       24
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Report of Independent Auditors..............................     F-2
Consolidated Statement of Income for the Twelve Months Ended
  November 30, 2000, November 30, 1999, and November 30,
  1998......................................................     F-3
Consolidated Statement of Financial Condition at
  November 30, 2000 and November 30, 1999...................     F-4
Consolidated Statement of Changes in Stockholder's Equity
  for the Twelve Months Ended November 30, 2000,
  November 30, 1999, and November 30, 1998..................     F-6
Consolidated Statement of Cash Flows for the Twelve Months
  Ended November 30, 2000, November 30, 1999, and
  November 30, 1998.........................................     F-7
Notes to Consolidated Financial Statements..................     F-8
</TABLE>

                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholder of
Lehman Brothers Inc.

    We have audited the accompanying consolidated statement of financial
condition of Lehman Brothers Inc. and Subsidiaries (the "Company") as of
November 30, 2000 and 1999, and the related consolidated statements of income,
changes in stockholder's equity, and cash flows for each of the three years in
the period ended November 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lehman
Brothers Inc. and Subsidiaries at November 30, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended November 30, 2000, in conformity with accounting
principles generally accepted in the United States.

                                          ERNST & YOUNG LLP

New York, New York
January 4, 2001

                                      F-2
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                   TWELVE MONTHS ENDED
                                                                       NOVEMBER 30
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Revenues:
  Principal transactions....................................   $1,938     $1,487     $  717
  Investment banking........................................    1,614      1,128      1,156
  Commissions...............................................      686        477        406
  Interest and dividends....................................   16,501     12,904     15,308
  Other.....................................................       55         17         42
                                                               ------     ------     ------
    Total revenues..........................................   20,794     16,013     17,629
  Interest expense..........................................   16,059     12,535     14,730
                                                               ------     ------     ------
    Net revenues............................................    4,735      3,478      2,899
                                                               ------     ------     ------
Non-interest expenses:
  Compensation and benefits.................................    2,304      1,764      1,445
  Brokerage and clearance...................................      212        183        192
  Technology and communications.............................      192        162        170
  Business development......................................      120         80         77
  Professional fees.........................................       90         58         50
  Management fees...........................................       88        121         42
  Occupancy.................................................       57         40         47
  Other.....................................................       55         57         29
                                                               ------     ------     ------
    Total non-interest expenses.............................    3,118      2,465      2,052
                                                               ------     ------     ------
Income before taxes.........................................    1,617      1,013        847
Provision for income taxes..................................      483        317        272
                                                               ------     ------     ------
Net income..................................................   $1,134     $  696     $  575
                                                               ======     ======     ======
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-3
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                  NOVEMBER 30
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
ASSETS
Cash and cash equivalents...................................  $  2,323   $  1,384

Cash and securities segregated and on deposit for regulatory
  and other purposes........................................     1,988      1,434

Securities and other financial instruments owned:
  Corporate equities........................................    21,278      9,144
  Governments and agencies..................................    18,101     21,603
  Mortgages and mortgage-backed.............................     8,328      8,457
  Corporate debt and other..................................     7,770      5,331
  Derivatives and other contractual agreements..............     5,285      5,249
  Certificates of deposit and other money market
    instruments.............................................     3,433      2,123
                                                              --------   --------
                                                                64,195     51,907
                                                              --------   --------
Collateralized short-term agreements:
  Securities purchased under agreements to resell...........    77,808     61,365
  Securities borrowed.......................................    18,876     11,243

Receivables:
  Brokers, dealers and clearing organizations...............     2,302      2,346
  Customers.................................................     4,302      2,922
  Others....................................................     7,511      5,920

Property, equipment and leasehold improvements (net of
  accumulated depreciation and amortization of $504 in 2000
  and $588 in 1999).........................................       318        280

Other assets................................................       417        261

Excess of cost over fair value of net assets acquired (net
  of accumulated amortization of $122 in 2000 and $115 in
  1999).....................................................       163        120
                                                              --------   --------
    Total assets............................................  $180,203   $139,182
                                                              ========   ========
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-4
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (CONTINUED)

<TABLE>
<CAPTION>
                                                                   NOVEMBER 30
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                              (IN MILLIONS, EXCEPT
                                                                   SHARE DATA)
<S>                                                           <C>         <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt........................  $    741    $    615
Securities and other financial instruments sold but not yet
  purchased:
  Governments and agencies..................................     8,542      10,237
  Derivatives and other contractual agreements..............     3,824       3,985
  Corporate debt and other..................................     2,909       1,218
  Corporate equities........................................     2,159       3,207
                                                              --------    --------
                                                                17,434      18,647
                                                              --------    --------

Collateralized short-term financing:
  Securities sold under agreements to repurchase............   105,611      76,587
  Securities loaned.........................................    24,082       9,809
Advances from Holdings and other affiliates.................    15,045      16,118
Payables:
  Brokers, dealers and clearing organizations...............     3,320       2,485
  Customers.................................................     4,058       5,535
Accrued liabilities and other payables......................     2,481       2,324
Long-term debt:
  Senior notes..............................................       207         186
  Subordinated indebtedness.................................     3,586       3,773
                                                              --------    --------
    Total liabilities.......................................   176,565     136,079
                                                              --------    --------

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................................     1,683       1,684
  Accumulated other comprehensive income....................         2           2
  Retained earnings.........................................     1,953       1,417
                                                              --------    --------
    Total stockholder's equity..............................     3,638       3,103
                                                              --------    --------
    Total liabilities and stockholder's equity..............  $180,203    $139,182
                                                              ========    ========
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-5
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                   TWELVE MONTHS ENDED
                                                                       NOVEMBER 30
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Additional paid-in capital
  Beginning balance.........................................   $1,684     $1,759     $1,756
  Capital contributions.....................................                              7
  Capital distributions.....................................       (1)       (75)        (4)
                                                               ------     ------     ------
Ending balance..............................................    1,683      1,684      1,759
                                                               ------     ------     ------
Accumulated other comprehensive income
  Beginning balance.........................................        2          3          3
  Foreign currency translation..............................                  (1)
                                                               ------     ------     ------
Ending balance..............................................        2          2          3
                                                               ------     ------     ------
Retained earnings
  Beginning balance.........................................    1,417        766        252
  Net income................................................    1,134        696        575
  Dividends.................................................     (598)       (45)       (61)
                                                               ------     ------     ------
Ending balance..............................................    1,953      1,417        766
                                                               ------     ------     ------
Total stockholder's equity..................................   $3,638     $3,103     $2,528
                                                               ======     ======     ======
</TABLE>

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-6
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               TWELVE MONTHS ENDED NOVEMBER 30
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
                                                                        (IN MILLIONS)
<S>                                                           <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................  $  1,134     $   696    $    575
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
  Depreciation and amortization.............................        39          37          32
  Deferred tax provision (benefit)..........................       (83)       (150)          1
  Other adjustments.........................................        49          72          66
Net change in:
  Cash and securities segregated and on deposit.............      (554)       (525)        219
  Securities and other financial instruments owned..........   (12,288)     (5,962)     (6,968)
  Securities borrowed.......................................    (7,633)      3,517      (1,099)
  Receivables from brokers, dealers and clearing
    organizations...........................................        44        (192)        994
  Receivables from customers................................    (1,380)        226         726
  Securities and other financial instruments sold but not
    yet purchased...........................................    (1,213)       (386)      2,004
  Securities loaned.........................................    14,273       4,335      (2,290)
  Payables to brokers, dealers and clearing organizations...       835         255        (897)
  Payables to customers.....................................    (1,477)        995      (1,578)
  Accrued liabilities and other payables....................       135         624        (536)
  Other operating assets and liabilities, net...............    (1,675)       (886)     (1,859)
                                                              --------     -------    --------
    Net cash provided by (used in) operating activities.....    (9,794)      2,656     (10,610)
                                                              --------     -------    --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes..........................                    (1)        (80)
Proceeds from issuance of subordinated indebtedness.........                   200         750
Principal payments of subordinated indebtedness.............      (192)       (559)       (963)
Net proceeds from (payments for) commercial paper and
  short-term debt...........................................       126          (1)       (124)
Resale agreements net of repurchase agreements..............    12,581       4,230       4,585
Increase (decrease) in advances from Holdings and other
  affiliates................................................    (1,073)     (5,442)      6,783
Capital contributions.......................................                                 7
Dividends and capital distributions paid....................      (598)       (120)        (65)
                                                              --------     -------    --------
    Net cash provided by (used in) financing activities.....    10,844      (1,693)     10,893
                                                              --------     -------    --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements,
  net.......................................................       (70)        (39)        (43)
Acquisition, net of cash acquired...........................       (41)
                                                              --------     -------    --------
    Net cash used in investing activities...................      (111)        (39)        (43)
                                                              --------     -------    --------
    Net change in cash and cash equivalents.................       939         924         240
                                                              --------     -------    --------
Cash and cash equivalents, beginning of period..............     1,384         460         220
                                                              --------     -------    --------
    Cash and cash equivalents, end of period................  $  2,323     $ 1,384    $    460
                                                              ========     =======    ========
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)

    Interest paid totaled $16,048 in 2000, $12,516 in 1999 and $14,793 in 1998.
Income taxes paid totaled $516 in 2000, $143 in 1999 and $342 in 1998.

                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-7
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                        --------
<S>       <C>                                                           <C>
Note 1.   Summary of Significant Accounting Policies..................     F-9
Note 2.   Short-term Financings.......................................    F-13
Note 3.   Long-term Debt..............................................    F-14
Note 4.   Holdings' Incentive Plans...................................    F-17
Note 5.   Capital Requirements........................................    F-18
Note 6.   Holdings' Employee Benefit Plans............................    F-19
Note 7.   Income Taxes................................................    F-20
Note 8.   Derivative Financial Instruments............................    F-21
Note 9.   Fair Value of Financial Instruments.........................    F-27
Note 10.  Other Commitments and Contingencies.........................    F-28
Note 11.  Related Party Transactions..................................    F-30
Note 12.  Segments....................................................    F-31
Note 13.  Quarterly Information (Unaudited)...........................    F-33
</TABLE>

                                      F-8
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Management believes that the estimates
utilized in preparing its financial statements are reasonable and prudent.
Actual results could differ from these estimates.

    The Company uses the trade date basis of accounting.

    Certain prior period amounts reflect reclassifications to conform to the
current period's presentation.

SECURITIES AND OTHER FINANCIAL INSTRUMENTS

    Securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased are valued at market or fair
value, as appropriate, with unrealized gains and losses reflected in Principal
transactions in the Consolidated Statement of Income. Market value is generally
based on listed market prices. If listed market prices are not available, fair
value is determined based on other relevant factors, including broker or dealer
price quotations and valuation pricing models which take into account time value
and volatility factors underlying the financial instruments.

DERIVATIVE FINANCIAL INSTRUMENTS

    A derivative is typically defined as an instrument whose value is "derived"
from an underlying instrument, index or rate, such as a future, forward, swap,
or option contract, or other financial instrument with similar characteristics.
A derivative contract generally represents future commitments to exchange
interest payment streams or currencies based on the contract or notional amount
or to purchase or sell other financial instruments at specified terms on a
specified date.

    Derivatives utilized for trading purposes are recorded at market or fair
value in the Consolidated Statement of Financial Condition on a net by
counterparty basis where a legal right of set-off exists and are netted across
products when such provisions are stated in the master netting agreement. The
market or fair value related to swap and forward transactions, as well as
options and warrants, is reported in the Consolidated Statement of Financial
Condition as an asset or liability in Derivatives and other contractual
agreements, as appropriate. Margin on futures contracts is included in
receivables and payables, as applicable. Changes in fair values of derivatives
are recorded as principal transactions revenues in the current period. 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

                                      F-9
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

    The Company enters into various derivative financial instruments for
non-trading purposes as an end user to modify the market risk exposures of
certain assets and liabilities. In this regard, the Company utilizes interest
rate and currency swaps to modify the interest rate and foreign currency
exposure of existing assets and liabilities. In addition to modifying the
interest rate and foreign currency exposure of existing assets and liabilities,
the Company utilizes derivative financial instruments as an end user to modify
the interest rate characteristics of certain anticipated transactions related to
its secured financing activities, where there is a high degree of certainty that
the Company will enter into such contracts.

    Derivatives that have been designated as non-trading related positions are
accounted for on an accrual basis. Under the accrual basis, interest is accrued
into income or expense over the life of the contract, resulting in the net
interest impact of the derivative and the underlying hedged item being
recognized in income throughout the hedge period. Related unrealized receivables
or payables due from or to counterparties are included in receivables from or
payables to brokers, dealers and clearing organizations.

    The Company also utilizes foreign exchange forward contracts to manage the
currency exposure related to its net monetary investment in non-U.S. dollar
functional currency operations. The gain or loss from revaluing these contracts
is deferred and reported within Accumulated other comprehensive income in
stockholder's equity. The related unrealized receivables or payables due from or
to counterparties are included in receivables from or payables to brokers,
dealers and clearing organizations.

    In the event that a hedge is no longer effective, the derivative transaction
is no longer accounted for as a hedge on an accrual basis. Instead, the Company
immediately recognizes the market or fair value of the derivative financial
instrument through earnings. Changes in the fair value of such derivative
contracts would then be accounted for as a derivative used for trading purposes
as discussed above. Realized gains or losses on early terminations of
derivatives that were classified as hedges are deferred and amortized to
interest income or interest expense over the remaining life of the instrument
being hedged.

REPURCHASE AND RESALE AGREEMENTS

    Securities purchased under agreements to resell and securities sold under
agreements to repurchase, which are treated as financing transactions for
financial reporting purposes, are collateralized primarily by government and
government agency securities and are carried net by counterparty, when
permitted, at the amounts at which the securities will be subsequently resold or
repurchased plus accrued interest. It is the policy of the Company to take
possession of securities purchased under agreements to resell. The Company
monitors the market value of the underlying positions on a daily basis as
compared to the related receivable or payable balances, including accrued
interest. The Company requires counterparties to deposit additional collateral
or return collateral pledged as necessary, to ensure that the market value of
the underlying collateral remains sufficient. Securities and other financial
instruments owned that are financed under repurchase agreements are carried at
market value with changes in market value reflected in the Consolidated
Statement of Income.

                                      F-10
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES BORROWED AND LOANED

    Securities borrowed and securities loaned are carried at the amount of cash
collateral advanced or received plus accrued interest. It is the Company's
policy to value the securities borrowed and loaned on a daily basis, and to
obtain additional cash as necessary to ensure such transactions are adequately
collateralized.

PRIVATE EQUITY INVESTMENTS

    The Company carries its private equity investments, including its
partnership interests, at fair value based upon the Company's assessment of the
underlying investments.

INVESTMENT BANKING

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

INCOME TAXES

    The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using the
provisions of the enacted tax laws. In this regard, deferred tax assets are
recognized for temporary differences that will result in deductible amounts in
future years and for tax loss and credit carry-forwards, if in the opinion of
management, it is more likely than not that the deferred tax asset will be
realized. SFAS 109 requires companies to set up a valuation allowance for that
component of net deferred tax assets which does not meet the "more likely than
not" criterion for realization. Deferred tax liabilities are recognized for
temporary differences that will result in taxable income in future years.

TRANSLATION OF FOREIGN CURRENCIES

    Assets and liabilities of foreign subsidiaries having non-U.S. dollar
functional currencies are translated at exchange rates at the statement of
financial condition date. Revenues and expenses are translated at average
exchange rates during the period. The gains or losses resulting from translating
foreign currency financial statements into U.S. dollars, net of hedging gains or
losses and taxes, are included in Accumulated other comprehensive income, a
separate component of stockholder's equity. Gains or losses resulting from
foreign currency transactions are included in the Consolidated Statement of
Income.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

    Property, equipment, and leasehold improvements are recorded at historical
cost, net of accumulated depreciation and amortization. Depreciation is
recognized on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the lesser of their
economic useful lives or the terms of the underlying leases. Internal use
software which qualifies for capitalization under AICPA Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", is capitalized and subsequently amortized over the software's
estimated useful life.

                                      F-11
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL

    Excess of cost over fair value of net assets acquired ("goodwill") is
amortized using the straight-line method over periods not exceeding 35 years.
Goodwill is evaluated periodically for impairment and also is reduced upon the
recognition of certain acquired net operating loss carryforward benefits.

STOCK-BASED AWARDS

    The Company's employees participate in Holdings' stock-based incentive
plans. Holdings accounts for these awards on a consolidated basis in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and its related interpretations. The Company records as
compensation and benefits the allocated share of Holdings' stock-based
compensation cost.

STATEMENT OF CASH FLOWS

    For purposes of the Consolidated Statement of Cash Flows, the Company
defines cash equivalents as highly liquid investments with original maturities
of three months or less, other than those held for sale in the ordinary course
of business.

DISCLOSURE CHANGE

    In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. See Note 12 of
Notes to Consolidated Financial Statements.

                                      F-12
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. SHORT-TERM FINANCINGS

    The Company obtains short-term financing on both a secured and unsecured
basis. The secured financing is obtained through the use of repurchase
agreements and securities loaned agreements, which are primarily collateralized
by government, agency and equity securities. The unsecured financing is
generally obtained through short-term debt and the issuance of commercial paper.

    The Company's commercial paper and short-term debt financing is comprised of
the following:

<TABLE>
<CAPTION>
                                                                  NOVEMBER 30
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
Short-term debt
  Payables to banks.........................................    $402       $358
  Master notes..............................................      89        132
  Bank loans................................................     250        125
                                                                ----       ----
Total.......................................................    $741       $615
                                                                ----       ----
</TABLE>

    The Company's weighted-average interest rates were as follows:

<TABLE>
<CAPTION>
                                                                   NOVEMBER
                                                                      30
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
Short-term debt(1)..........................................    6.2%       4.9%
Securities sold under agreements to repurchase..............    6.3%       5.6%
</TABLE>

------------------------

(1) Includes $51 million and $75 million of short-term debt with
    weighted-average interest rates of 0.4% and 0.1% as of November 30, 2000 and
    1999, respectively, related to non-U.S. dollar obligations.

                                      F-13
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                  U.S. DOLLAR           NOVEMBER 30
                                                              -------------------   -------------------
                                                               FIXED     FLOATING
                                                                RATE       RATE       2000       1999
                                                              --------   --------   --------   --------
                                                                            (IN MILLIONS)
<S>                                                           <C>        <C>        <C>        <C>
SENIOR NOTES
Maturing in Fiscal 2000
Maturing in Fiscal 2001.....................................   $  206                $  206     $  184
Maturing in Fiscal 2002.....................................        1                     1          2
Maturing in Fiscal 2003
Maturing in Fiscal 2004
Maturing in Fiscal 2005
December 1, 2005 and thereafter
                                                               ------      ----      ------     ------
  Senior Notes..............................................      207                   207        186
                                                               ------      ----      ------     ------
SUBORDINATED INDEBTEDNESS
Maturing in Fiscal 2000.....................................                                       548
Maturing in Fiscal 2001.....................................      195      $356         551        195
Maturing in Fiscal 2002.....................................      450       405         855        855
Maturing in Fiscal 2003.....................................      475                   475        475
Maturing in Fiscal 2004.....................................      191                   191        191
Maturing in Fiscal 2005.....................................       94                    94         94
December 1, 2005 and thereafter.............................    1,316       104       1,420      1,415
                                                               ------      ----      ------     ------
  Subordinated Indebtedness.................................    2,721       865       3,586      3,773
                                                               ------      ----      ------     ------
LONG-TERM DEBT..............................................   $2,928      $865      $3,793     $3,959
                                                               ======      ====      ======     ======
</TABLE>

    Of the Company's long-term debt outstanding as of November 30, 2000,
$200 million is repayable prior to maturity at the option of the holder, at par
value. These obligations are reflected in the above table as maturing at their
put dates of fiscal 2003, rather than at their contractual maturities of fiscal
2026.

    The Company's interest in 3 World Financial Center is financed with U.S.
dollar fixed-rate senior notes totaling $207 million as of November 30, 2000.
These notes are unconditionally guaranteed by American Express and
collateralized by a first mortgage on the property. During the first quarter of
2001, these notes were redeemed on their contractual maturity date.

    As of November 30, 2000, the Company had approximately $1.8 billion
available for the issuance of debt securities under various shelf registrations.

END USER DERIVATIVE ACTIVITIES

    The Company utilizes interest rate swaps as an end user to modify the
interest rate characteristics of its long-term debt portfolio. The Company
actively manages the interest rate exposure on its long-term debt portfolio
through the use of interest rate and currency swaps to more closely match the
terms of the assets being funded and to minimize interest rate risk. In certain
instances, two or more derivative contracts may be utilized by the Company to
manage the interest rate nature and/or currency exposure of an individual
long-term debt issuance. In these cases, the notional amount of the derivative
contracts may exceed the carrying value of the related long-term debt issuance.

                                      F-14
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. LONG-TERM DEBT (CONTINUED)
    At November 30, 2000 and 1999, the notional amounts of the Company's
interest rate swaps related to its long-term debt obligations were approximately
$2.6 billion and $3.0 billion, respectively. In terms of notional amounts
outstanding, these derivative products mature as follows:

<TABLE>
<CAPTION>
                                                                  NOVEMBER 30
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
Maturing in Fiscal 2000.....................................              $  384
Maturing in Fiscal 2001.....................................   $  194        194
Maturing in Fiscal 2002.....................................      450        450
Maturing in Fiscal 2003.....................................      475        475
Maturing in Fiscal 2004.....................................      191        191
Maturing in Fiscal 2005.....................................       94         94
December 1, 2005 and thereafter.............................    1,199      1,199
                                                               ------     ------
  Total.....................................................   $2,603     $2,987
                                                               ======     ======
Weighted-average interest rate at November 30:
Receive rate................................................     7.25%      7.30%
Pay rate....................................................     7.43%      6.39%
</TABLE>

    On an overall basis, the Company's long-term debt-related end user
derivative activities resulted in an increase (decrease) in interest expense of
approximately $8 million, $(34) million and $(24) million in 2000, 1999 and
1998, respectively. In addition, the Company's end user derivative activities
resulted in the

                                      F-15
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. LONG-TERM DEBT (CONTINUED)
following changes to the Company's mix of fixed and floating rate debt and
effective weighted-average rates of interest:

<TABLE>
<CAPTION>
                                                                       NOVEMBER 30, 2000
                                                   ---------------------------------------------------------
                                                       LONG-TERM DEBT               WEIGHTED-AVERAGE
                                                   -----------------------   -------------------------------
                                                     BEFORE       AFTER
                                                      END          END                       EFFECTIVE RATE
                                                      USER         USER       CONTRACTUAL    AFTER END USERS
                                                   ACTIVITIES   ACTIVITIES   INTEREST RATE     ACTIVITIES
                                                   ----------   ----------   -------------   ---------------
                                                                         (IN MILLIONS)
<S>                                                <C>          <C>          <C>             <C>
USD Obligations
  Fixed rate.....................................    $2,928       $  324
  Floating rate..................................       865        3,469
                                                     ------       ------          ----            ----
Total............................................    $3,793       $3,793          7.63%           7.76%
                                                     ======       ======          ====            ====
</TABLE>

<TABLE>
<CAPTION>
                                                                       NOVEMBER 30, 1999
                                                   ---------------------------------------------------------
                                                       LONG-TERM DEBT               WEIGHTED-AVERAGE
                                                   -----------------------   -------------------------------
                                                     BEFORE       AFTER
                                                      END          END                       EFFECTIVE RATE
                                                      USER         USER       CONTRACTUAL    AFTER END USERS
                                                   ACTIVITIES   ACTIVITIES   INTEREST RATE     ACTIVITIES
                                                   ----------   ----------   -------------   ---------------
                                                                         (IN MILLIONS)
<S>                                                <C>          <C>          <C>             <C>
USD Obligations
  Fixed rate.....................................    $3,095       $  300
  Floating rate..................................       864        3,659
                                                     ------       ------          ----            ----
Total............................................    $3,959       $3,959          7.55%           6.86%
                                                     ======       ======          ====            ====
</TABLE>

                                      F-16
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. HOLDINGS' INCENTIVE PLANS

    The Company's employees participate in Holdings' various incentive plans.
The Company records its allocated share of Holdings' stock-based compensation
cost. Holdings' stock-based compensation cost was $520 million, $363 million and
$221 million for the years ended November 30, 2000, 1999 and 1998, respectively.
The Company's allocated cost was $319 million, $236 million and $155 million for
the years ended November 30, 2000, 1999 and 1998, respectively. In accordance
with APB 25, Holdings has not recognized compensation cost for its stock option
awards and Employee Stock Purchase Plan (the "ESPP"). The following is a
description of Holdings' various incentive plans.

EMPLOYEE STOCK PURCHASE PLAN

    Holdings' ESPP allows employees to purchase Common Stock at a 15% discount
from market value, with a maximum of $25,000 in annual aggregate purchases by
any one individual. The number of shares of Common Stock authorized for purchase
by eligible employees is 12.0 million. As of November 30, 2000 and 1999,
5.2 million shares and 4.8 million shares, respectively, of Common Stock had
been purchased by eligible employees through the ESPP.

1994 INCENTIVE PLANS

    Holdings' 1994 Management Replacement Plan (the "Replacement Plan") provided
awards similar to the American Express common shares granted to Company
employees which were canceled as of the date of the spin-off from American
Express. Through November 30, 2000, a total of 3.9 million awards had been
granted under the Replacement Plan, including both stock options and restricted
stock; 0.4 million were outstanding at November 30, 2000. No future awards will
be granted under this plan.

    Holdings' 1994 Management Ownership Plan (the "1994 Plan") provides for the
issuance of restricted stock units ("RSUs"), performance stock units ("PSUs"),
stock options and other equity awards for a period of up to ten years to
eligible employees. A total of 33.3 million shares of Common Stock may be
granted under the 1994 Plan. At November 30, 2000, RSU and stock option awards
with respect to 31.3 million shares of Common Stock have been made under the
1994 Plan of which 2.9 million are outstanding and 28.4 million have been
converted to freely transferable Common Stock. The Company will utilize the
remaining authorization of 2.0 million shares to satisfy dividend reinvestment
requirements for outstanding awards and to fund the annual RSU awards for the
Company's non-employee directors.

1996 MANAGEMENT OWNERSHIP PLAN

    During 1996, Holdings' stockholders approved the 1996 Management Ownership
Plan (the "1996 Plan") under which awards similar to those of the 1994 Plan may
be granted, and under which up to 42.0 million shares of Common Stock may be
subject to awards. At November 30, 2000, RSU, PSU and stock option awards with
respect to 29.7 million shares of Common Stock have been made under the 1996
Plan of which 21.5 million are outstanding and 8.2 million have been converted
to freely transferable Common Stock.

EMPLOYEE INCENTIVE PLAN

    Holdings' Employee Incentive Plan ("EIP") has provisions similar to the 1994
Plan and the 1996 Plan, and authorization for up to 156.0 million shares of
Common Stock which may be subject to awards. At November 30, 2000, awards with
respect to 125.9 million shares of Common Stock have been made under the EIP of
which 112.5 million are outstanding and 13.4 million have been converted to
freely transferable

                                      F-17
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. HOLDINGS' INCENTIVE PLANS (CONTINUED)
Common Stock. Approximately 72.5 million of the outstanding awards consist of
RSUs and PSUs which have vesting and transfer restrictions extending through the
year 2006.

NOTE 5. CAPITAL REQUIREMENTS

    As a registered broker-dealer, LBI is subject to the Securities and Exchange
Commission ("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
November 30, 2000, LBI's regulatory net capital, as defined, of $1,984 million
exceeded the minimum requirement by $1,874 million.

    As a clearing broker-dealer, the Company has elected to compute a reserve
requirement for Proprietary Accounts of Introducing Broker-Dealers ("PAIB
calculation"), as defined. The PAIB calculation is completed in order for each
correspondent firm that uses the Company as its clearing broker-dealer to
classify its assets held by the Company as allowable assets in the
correspondents' net capital calculation. At November 30, 2000, the Company had a
reserve requirement for PAIB of $24 million. Additionally, the Company had
$132 million of qualified securities or cash on deposit in a Special Reserve
Bank Account as of November 30, 2000.

    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 November 30, 2000, LBFP and LBDP each
had capital which exceeded the requirement of the most stringent rating agency
by approximately $46 million and $26 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. At November 30, 2000, $3,083 million of net assets of the
Company were restricted as to the payment of dividends, principally as a result
of regulations of the SEC and other regulatory agencies. In addition, certain
covenants governing the indebtedness of LBI contractually limit its ability to
pay dividends.

                                      F-18
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. HOLDINGS' EMPLOYEE BENEFIT PLANS

    Holdings provides various pension plans for the majority of its employees
worldwide. In addition, Holdings provides certain other postretirement benefits,
primarily health care and life insurance, to eligible employees. The Company
records as compensation and benefits its allocated share of the cost of these
plans. The following summarizes Holdings' domestic employee benefit plans in
which the Company's employees participate:

<TABLE>
<CAPTION>
                                                                                              POSTRETIREMENT
                                                               PENSION BENEFITS                  BENEFITS
                                                                  NOVEMBER 30                   NOVEMBER 30
                                                            -----------------------       -----------------------
                                                              2000           1999           2000           1999
                                                            --------       --------       --------       --------
                                                                 (IN MILLIONS, EXCEPT FOR WEIGHTED-AVERAGE)
<S>                                                         <C>            <C>            <C>            <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year...................   $ 479          $ 522           $ 47           $ 50
Service cost before expenses..............................      10             12              1              1
Interest cost.............................................      36             35              4              3
Actuarial (gain) loss.....................................      --            (73)             1             (4)
Benefits paid.............................................     (19)           (17)            (3)            (3)
                                                             -----          -----           ----           ----
Benefit obligation at end of year.........................   $ 506          $ 479           $ 50           $ 47
                                                             =====          =====           ====           ====
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............   $ 750          $ 672
Actual return on plan assets, net of expenses.............      19             95
Benefits paid.............................................     (19)           (17)
                                                             -----          -----
Fair value of plan assets at end of year..................   $ 750          $ 750
                                                             =====          =====
Funded (underfunded) status...............................   $ 244          $ 271           $(50)          $(47)
Unrecognized net actuarial (gain) loss....................      13            (50)           (22)           (24)
Unrecognized prior service cost (credit)..................      15             15             (5)            (6)
                                                             -----          -----           ----           ----
Prepaid (accrued) benefit cost............................   $ 272          $ 236           $(77)          $(77)
                                                             =====          =====           ====           ====
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate.............................................    7.75%          7.75%          7.75%          7.75%
Expected return on plan assets............................   11.25%          9.25%
Rate of compensation increase.............................    5.00%          5.00%          5.00%          5.00%
</TABLE>

                                      F-19
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. HOLDINGS' EMPLOYEE BENEFIT PLANS (CONTINUED)
    For measurement purposes, the annual health care cost trend rate was assumed
to be 7.0% for the year ended November 30, 2001. The rate was assumed to
decrease at the rate of 0.5% per year to 5.5% in the year ended November 30,
2004 and remain at that level thereafter.

<TABLE>
<CAPTION>
                                                                                                   POSTRETIREMENT
                                                                                                      BENEFITS
                                                                 PENSION BENEFITS                  TWELVE MONTHS
                                                               TWELVE MONTHS ENDED                     ENDED
                                                                   NOVEMBER 30                      NOVEMBER 30
                                                          ------------------------------   ------------------------------
                                                            2000       1999       1998       2000       1999       1998
                                                          --------   --------   --------   --------   --------   --------
                                                                                   (IN MILLIONS)
<S>                                                       <C>        <C>        <C>        <C>        <C>        <C>
COMPONENTS OF NET PERIODIC BENEFIT (INCOME) COST
Service cost............................................    $ 10       $ 12       $  9       $ 1        $ 1        $ 1
Interest cost...........................................      36         35         32         4          3          3
Expected return on plan assets..........................     (82)       (62)       (54)
Recognized net actuarial (gain) loss....................       1          1         (1)       (2)        (1)        (1)
                                                            ----       ----       ----       ---        ---        ---
Net periodic benefit (income) cost......................    $(35)      $(14)      $(14)      $ 3        $ 3        $ 3
                                                            ====       ====       ====       ===        ===        ===
</TABLE>

    Assumed health care cost trend rates have an effect on the amount reported
for postretirement benefits. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
                                                              1% POINT INCREASE   1% POINT DECREASE
                                                              -----------------   -----------------
                                                                          (IN MILLIONS)
<S>                                                           <C>                 <C>
Effect on total service and interest cost Components in
  fiscal 2000...............................................         $0.3               $(0.3)
Effect on postretirement benefit obligation at November 30,
  2000......................................................         $4.0               $(3.9)
</TABLE>

NOTE 7. INCOME TAXES

    The Company's income is included in the consolidated U.S. federal income tax
return of Holdings and its subsidiaries. The income tax provision for the
Company is computed in accordance with the tax sharing agreement between
Holdings and its subsidiaries. In accordance with this agreement, the balances
due to Holdings at November 30, 2000 and 1999 were $531 million and
$483 million, respectively.

    The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                               TWELVE MONTHS ENDED
                                                                   NOVEMBER 30
                                                          ------------------------------
                                                            2000       1999       1998
                                                          --------   --------   --------
                                                                  (IN MILLIONS)
<S>                                                       <C>        <C>        <C>
CURRENT
  Federal...............................................    $300       $264       $102
  State.................................................     142        135         88
  Foreign...............................................     124         68         81
                                                            ----       ----       ----
                                                            $566       $467       $271
                                                            ====       ====       ====
DEFERRED
  Federal...............................................     (47)       (96)        16
  State.................................................     (36)       (54)       (15)
                                                            ----       ----       ----
                                                             (83)      (150)         1
                                                            ----       ----       ----
                                                            $483       $317       $272
                                                            ====       ====       ====
</TABLE>

                                      F-20
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. INCOME TAXES (CONTINUED)
    Income before taxes included $26 million, $35 million, and $79 million that
has also been subject to income taxes of foreign jurisdictions for 2000, 1999
and 1998, respectively.

    The income tax provision (benefit) differs from that computed by using the
statutory federal income tax rate for the reasons shown below:

<TABLE>
<CAPTION>
                                                               TWELVE MONTHS ENDED
                                                                   NOVEMBER 30
                                                          ------------------------------
                                                            2000       1999       1998
                                                          --------   --------   --------
                                                                  (IN MILLIONS)
<S>                                                       <C>        <C>        <C>
Federal income taxes at statutory rate..................    $566       $354       $296
State and local taxes...................................      69         53         47
Tax-exempt income.......................................    (130)       (95)       (70)
Amortization of goodwill................................       2          3          3
Other, net..............................................     (24)         2         (4)
                                                            ----       ----       ----
                                                            $483       $317       $272
                                                            ====       ====       ====
</TABLE>

    Deferred income taxes are provided for the differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated
financial statements. These temporary differences will result in future income
or deductions for income tax purposes and are measured using the enacted tax
rates that will be in effect when such items are expected to reverse. The
Company provides for deferred income taxes on undistributed earnings of foreign
subsidiaries.

    At November 30, 2000 and 1999 the deferred tax assets and liabilities
consisted of the following:

<TABLE>
<CAPTION>
                                                                  NOVEMBER 30
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
DEFERRED TAX ASSETS:
  Unrealized trading and investment activity................    $140       $101
  Other.....................................................      20         19
                                                                ----       ----
  Deferred tax assets.......................................     160        120
  Deferred tax liabilities..................................      (1)        (2)
                                                                ----       ----
    Net deferred tax assets.................................    $159       $118
                                                                ====       ====
</TABLE>

    The net deferred tax assets are included in Other assets in the accompanying
Consolidated Statement of Financial Condition. It is anticipated that the
Company's net deferred tax assets will be realized through future earnings,
therefore no valuation allowance has been recorded against deferred tax assets.

    For tax return purposes, the Company has approximately $14 million of NOL
carryforwards, substantially all of which are attributable to the 1988
acquisition of E.F. Hutton Group Inc., (now known as LB 1 Group Inc.). For book
purposes, the NOL carryforward has been transferred to Holdings in accordance
with the tax sharing agreement.

    In accordance with the tax sharing agreement with Holdings, LBI was
reimbursed for $47 million and $140 million of net deferred tax assets in 2000
and 1999, respectively.

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

    Derivatives are financial instruments whose value is based upon an
underlying asset (e.g., treasury bond), index (e.g., S&P 500) or reference rate
(e.g., LIBOR). Over-the-counter ("OTC") derivative products are privately
negotiated contractual agreements that can be tailored to meet individual client

                                      F-21
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
needs and include forwards, swaps and certain options including caps, collars
and floors. Exchange-traded derivative products are standardized contracts
transacted through regulated exchanges and include futures and certain option
contracts listed on an exchange.

    In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a trading
capacity, the Company enters into derivative transactions to satisfy the needs
of its clients and to manage the Company's own exposure to market and credit
risk resulting from its trading activities (collectively, "Trading-Related
Derivative Activities"). As an end user, the Company primarily enters into
interest rate swap and option contracts to adjust the interest rate nature of
its funding sources from fixed to floating rates, and to change the index upon
which floating interest rates are based (e.g., Prime to LIBOR) (collectively,
"End User Derivative Activities").

    There is an extensive volume of derivative products available in the
marketplace, which can vary from a simple forward foreign exchange contract to a
complex derivative instrument with multiple risk characteristics involving the
aggregation of the risk characteristics of a number of derivative product types
including swap products, options and forwards. Listed below are examples of
various derivative product types along with a brief discussion of the
performance mechanics of certain specific derivative instruments.

SWAP PRODUCTS

    Interest rate swap products include interest rate and currency swaps,
leveraged swaps, swap options, and other interest rate option products including
caps, collars, and floors. An interest rate swap is a negotiated OTC contract in
which two parties agree to exchange periodic interest payments for a defined
period, calculated based upon a predetermined notional amount. Interest payments
are usually exchanged on a net basis throughout the duration of the swap
contract. A currency swap is an OTC agreement to exchange a fixed amount of one
currency for a specified amount of a second currency at the outset and
completion of the swap term. Leveraged swaps involve the multiplication of the
interest rate factor upon which the interest payment streams are based (e.g.,
Party A pays three times the six-month LIBOR). Caps are contractual commitments
that require the writer to pay the purchaser the amount by which an interest
reference rate exceeds a defined contractual rate, if any, at specified times
during the contract. Conversely, a floor is a contractual commitment that
requires the writer to pay the amount by which a defined contractual rate
exceeds an interest reference rate at specified times over the life of the
contract, if any. Equity swaps are contractual agreements whereby one party
agrees to receive the appreciation (or depreciation) value over a strike price
on an equity investment in return for paying another rate, which is usually
based upon equity index movements or interest rates. Commodity swaps are
contractual commitments to exchange the fixed price of a commodity for a
floating price (which is usually the prevailing spot price) throughout the swap
term.

OPTIONS

    Option contracts provide the option purchaser (holder) with the right but
not the obligation to buy or sell a financial instrument, commodity or currency
at a predetermined exercise price (strike price) during a defined period
(American Option) or at a specified date (European Option). The option purchaser
pays a premium to the option seller (writer) for the right to exercise the
option. The option seller is obligated to buy (put) or sell (call) the item
underlying the contract at a set price, if the option purchaser chooses to
exercise. Option contracts also exist for various indices and are similar to
options on a security or other instrument except that, rather than settling
physically with delivery of the underlying instrument, they are cash settled. As
a purchaser of an option contract, the Company is subject to credit risk, since
the counterparty is obligated to make payments under the terms of the option
contract, if the Company exercises the option. As the writer of an option
contract, the Company is not subject to credit risk but is

                                      F-22
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
subject to market risk, since the Company is obligated to make payments under
the terms of the option contract if exercised.

    Option contracts may be exchange-traded or OTC. Exchange-traded options are
the obligations of the exchange and generally have standardized terms and
performance mechanics. In contrast, all of the terms of an OTC option including
the method of settlement, term, strike price, premium and security are
determined by negotiation of the parties.

FUTURES AND FORWARDS

    Futures contracts are exchange-traded contractual commitments to either
receive (purchase) or deliver (sell) a standard amount or value of a financial
instrument or commodity at a specified future date and price. Maintaining a
futures contract requires the Company to deposit with the exchange an amount of
cash or other specified assets as security for its obligation. Additionally,
futures exchanges generally require the daily cash settlement of unrealized
gains/losses on open contracts with the futures exchange. Therefore, futures
contracts provide a reduced funding alternative to purchasing the underlying
cash position in the marketplace. Futures contracts may be settled by physical
delivery of the underlying asset or cash settlement (for index futures) on the
settlement date or by entering into an offsetting futures contract with the
futures exchange prior to the settlement date.

    Forwards are OTC contractual commitments to purchase or sell a specified
amount of a financial instrument, foreign currency or commodity at a future date
at a predetermined price. TBAs are forward contracts which give the
purchaser/seller an obligation to obtain/deliver mortgage securities in the
future. Therefore, TBAs subject the holder to both interest rate risk and
principal prepayment risk.

TRADING-RELATED DERIVATIVE ACTIVITIES

    Derivatives are subject to various risks similar to other financial
instruments including market, credit, and operational risk. In addition, the
Company may also be exposed to legal risks related to its derivative activities
including the possibility that a transaction may be unenforceable under
applicable law. The risks of derivatives should not be viewed in isolation, but
rather should be considered on an aggregate basis along with the Company's other
trading-related activities. The Company manages the risks associated with
derivatives on an aggregate basis along with the risks associated with its
proprietary trading and market-making activities in cash instruments as part of
its firm-wide risk management policies.

    Derivatives are generally based upon notional amounts. Notional amounts are
not recorded on-balance sheet, but rather are utilized solely as a basis for
determining future cash flows to be exchanged. Therefore, notional amounts
provide a measure of the Company's involvement with such instruments, but are
not indicative of actual or potential risk.

                                      F-23
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
    The following table reflects the notional/contract amounts of the Company's
Trading-Related Derivative Activities:

TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
                                                                                         WEIGHTED-
                                                             NOTIONAL/CONTRACT AMOUNTS    AVERAGE
                                                             -------------------------    MATURITY
                                                             NOVEMBER 30   NOVEMBER 30    NOV. 30
                                                                2000          1999          2000
                                                             -----------   -----------   ----------
                                                                   (IN MILLIONS)         (IN YEARS)
<S>                                                          <C>           <C>           <C>
Interest rate and currency swaps and options (including
  caps, collars and floors)................................  $2,391,235    $2,323,602       5.35
Foreign exchange forward and future contracts and
  options..................................................     193,456       210,294        .18
Other fixed income securities contracts (including futures
  contracts, options and TBAs).............................     366,917       229,850        .48
Equity contracts (including equity swaps, futures, warrants
  and options).............................................      11,556        22,940        .15
                                                             ----------    ----------       ----
Total......................................................  $2,963,164    $2,786,686       4.39
                                                             ==========    ==========       ====
</TABLE>

    Of the total notional amounts at November 30, 2000 and 1999, approximately
$2,741 billion and $2,648 billion are over-the-counter and $222 billion and
$139 billion are exchange-traded, respectively. The total weighted-average
maturity at November 30, 2000, for over-the-counter and exchange-traded
contracts was 4.69 years and 0.71 years, respectively. Approximately
$927 billion of the notional/contract amount of the Company's Trading-Related
Derivative Activities mature within the year ended November 30, 2001, of which
approximately 38% have maturities of less than one month.

    The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains and losses recognized
currently in Principal transactions in the Consolidated Statement of Income.
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. The Company offers equity, fixed income and foreign exchange products
to its customers. Because of the integrated nature of the market for such
products, each product area trades cash instruments as well as related
derivative products.

    Listed in the following table is the fair value of the Company's
Trading-Related Derivative Activities as of November 30, 2000 and 1999 as well
as the average fair value of these instruments. 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.

                                      F-24
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
                                                                                     AVERAGE FAIR VALUE*
                                                                                        TWELVE MONTHS
                                                                FAIR VALUE*                 ENDED
                                                             NOVEMBER 30, 2000        NOVEMBER 30, 2000
                                                           ----------------------   ----------------------
                                                            ASSETS    LIABILITIES    ASSETS    LIABILITIES
                                                           --------   -----------   --------   -----------
                                                                            (IN MILLIONS)
<S>                                                        <C>        <C>           <C>        <C>
Interest rate and currency swaps and options (including
  caps, collars and floors)..............................   $3,918      $2,331       $3,814      $2,440
Foreign exchange forward contracts and options...........      305         285          459         300
Other fixed income securities contracts (including
  options and TBAs)......................................      412         415        1,171       1,102
Equity contracts (including equity swaps, warrants and
  options)...............................................      650         793          798         618
                                                            ------      ------       ------      ------
Total....................................................   $5,285      $3,824       $6,242      $4,460
                                                            ======      ======       ======      ======
</TABLE>

<TABLE>
<CAPTION>
                                                                                     AVERAGE FAIR VALUE*
                                                                                        TWELVE MONTHS
                                                                FAIR VALUE*                 ENDED
                                                             NOVEMBER 30, 1999        NOVEMBER 30, 1999
                                                           ----------------------   ----------------------
                                                            ASSETS    LIABILITIES    ASSETS    LIABILITIES
                                                           --------   -----------   --------   -----------
                                                                            (IN MILLIONS)
<S>                                                        <C>        <C>           <C>        <C>
Interest rate and currency swaps and options (including
  caps, collars and floors)..............................   $3,409      $2,738       $3,620      $2,388
Foreign exchange forward contracts and options...........      650         424          678         582
Other fixed income securities contracts (including
  options and TBAs)......................................      256         192          243         232
Equity contracts (including equity swaps, warrants and
  options)...............................................      934         631          459         406
Commodity contracts (including swaps, forwards, and
  options)...............................................                                 3           1
                                                            ------      ------       ------      ------
Total....................................................   $5,249      $3,985       $5,003      $3,609
                                                            ======      ======       ======      ======
</TABLE>

------------------------

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

    Assets included in the table above 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 November 30, 2000 represents the Company's net
receivable/payable for derivative financial instruments before consideration of
collateral. Included within the $5,285 million fair value of assets at
November 30, 2000 was $4,638 million related to swaps and other OTC contracts
and $647 million related to exchange-traded option and warrant contracts.
Included within the $5,249 million fair value of assets at November 30, 1999 was
$4,489 million related to swaps and other OTC contracts and $760 million related
to exchange-traded option and warrant contracts.

    The primary difference in risks related to OTC and exchange-traded contracts
is credit risk. OTC contracts contain credit risk for unrealized gains from
various counterparties for the duration of the contract, net of collateral. With
respect to OTC contracts, including swaps, the Company views its net

                                      F-25
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
credit exposure to third-parties to be $3,097 million at November 30, 2000,
representing the fair value of the Company's OTC contracts in an unrealized gain
position, after consideration of amounts due from affiliates of $1,027 million
and collateral of $514 million.

    Counterparties to the Company's OTC derivative products are primarily
financial intermediaries (U.S. and foreign banks), securities firms,
corporations, governments and their agencies, finance companies, insurance
companies, investment companies and pension funds. Collateral held related to
OTC contracts generally includes cash and U.S. government and federal agency
securities. Presented below is an analysis of the Company's net credit exposure
at November 30, 2000 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.

<TABLE>
<CAPTION>
COUNTERPARTY             S&P/MOODY'S             NET CREDIT
RISK RATING              EQUIVALENT               EXPOSURE
------------  ---------------------------------  ----------
<S>           <C>                                <C>
     1                     AAA/Aaa                   16%
     2                AA-/Aa3 or higher              23%
     3                 A-/A3 or higher               34%
     4               BBB-/Baa3 or higher             21%
     5                BB-/Ba3 or higher               4%
     6                 B+/B1 or lower                 2%
</TABLE>

    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.

END USER DERIVATIVE ACTIVITIES

    The Company utilizes a variety of derivative products as an end user to
modify the interest rate characteristics of its long-term debt portfolio. The
Company actively manages the interest rate exposure on its long-term debt
portfolio through the use of interest rate and currency swaps to more closely
match the terms of its debt portfolio to the assets being funded and to minimize
interest rate risk. At November 30, 2000 and 1999, the notional amounts of the
Company's end user activities related to its long-term debt obligations were
approximately $2.6 billion and $3.0 billion, respectively. (For a further
discussion of the Company's long-term debt related end user derivative
activities see Note 3.)

    The Company also utilizes derivative products as an end user to modify its
interest rate exposure associated with its secured financing activities,
including securities purchased under agreements to resell, securities borrowed,
securities sold under agreements to repurchase and securities loaned. At
November 30, 2000 and 1999, the Company had $226 billion and $159 billion,
respectively, of such secured financing activities. As with the Company's
long-term debt, its secured financing activities expose the Company to interest
rate risk. The Company, as an end user, manages the interest rate risk related
to these activities by utilizing derivative financial instruments, including
interest rate swaps and purchased options. The Company designates certain
specific derivative transactions against specific assets and liabilities with

                                      F-26
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
matching maturities. In addition, the Company manages the interest rate risk of
anticipated secured financing transactions with derivative products. The Company
actively monitors the level of anticipated secured financing transactions to
ensure there is a high degree of certainty that such secured financing
transactions will be executed at levels at least equal to the designated
derivative product transactions. At November 30, 2000 and 1999, the Company, as
an end user, utilized derivative financial instruments with an aggregate
notional amount of $8.5 billion and $12.9 billion, respectively, to modify the
interest rate characteristics of its secured financing activities. The total
notional amount of these agreements had a weighted-average maturity of
3.5 years and 2.3 years as of November 30, 2000 and 1999, respectively. On an
overall basis, the Company's secured financing end user derivative activities
(decreased) increased net revenues by approximately $(14) million, $(13) million
and $4 million for 2000, 1999 and 1998, respectively.

NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires the Company to report the fair value of financial instruments, as
defined. Assets and liabilities that are carried at fair value include all of
the Company's trading assets and liabilities including derivative financial
instruments used for trading purposes as described in Note 1, which are recorded
as securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased.

    Assets and liabilities, which are recorded at contractual amounts that
approximate market or fair value include cash and cash equivalents, cash and
securities segregated and on deposit for regulatory and other purposes,
receivables, certain other assets, commercial paper and short-term debt, and
payables. The market value of such items is not materially sensitive to shifts
in market interest rates because of the limited term to maturity of these
instruments and their variable interest rates.

    Financial instruments which are recorded at amounts that do not necessarily
approximate market or fair value include long-term debt, certain secured
financing activities and the related financial instruments utilized by the
Company as an end user to manage the interest rate risk of these exposures. The
Company's long-term debt is recorded at contractual or historical amounts. The
following table provides a summary of the fair value of the Company's long-term
debt and related end user derivative activities. The fair value of the Company's
long-term debt was estimated using either quoted market prices or discounted
cash flow analyses based on the Company's current borrowing rates for similar
types of borrowing arrangements. The unrecognized net gain (loss) related to the
Company's end user derivative activities reflects estimated fair values based on
market rates at November 30, 2000 and 1999, respectively.

<TABLE>
<CAPTION>
                                                                  NOVEMBER 30
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
Carrying value of long-term debt............................   $3,793     $3,959
Fair value of long-term debt................................    3,784      3,944
                                                               ------     ------
Unrecognized net gain on long-term debt.....................   $    9     $   15
                                                               ======     ======
Unrecognized net gain (loss) on long-term debt end user
  activities................................................   $    3     $  (36)
                                                               ======     ======
</TABLE>

    The Company carries its secured financing activities, including securities
purchased under agreements to resell, securities borrowed, securities sold under
agreements to repurchase, and securities loaned, at their original contract
amount plus accrued interest. As the majority of such financing activities are

                                      F-27
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
short-term in nature, carrying value approximates fair value. At November 30,
2000 and 1999, the Company had $226 billion and $159 billion, respectively, of
such secured financing activities. As with the Company's long-term debt, its
secured financing activities expose the Company to interest rate risk.

    At November 30, 2000 and 1999, the Company, as an end user, utilized
derivative financial instruments with an aggregate notional amount of
$8.5 billion and $12.9 billion, respectively, to modify the interest rate
characteristics of its secured financing activities. The unrecognized net losses
related to these derivative financial instruments were $22 million and
$11 million at November 30, 2000 and 1999, respectively, which were
substantially offset by unrecognized net gains on the Company's secured
financing activities, including anticipated transactions during the hedge
period. Additionally, at November 30, 2000 the Company had approximately
$8 million of unrecognized losses related to approximately $1.4 billion of
long-term fixed rate repurchase agreements as compared to unrecognized net gains
of approximately $23 million on approximately $2.5 billion of such agreements at
November 30, 1999.

NOTE 10. OTHER COMMITMENTS AND CONTINGENCIES

    As of November 30, 2000 and 1999, the Company was contingently liable for
$1.5 billion and $1.9 billion, respectively, of letters of credit, primarily
used to provide collateral for securities and commodities borrowed and to
satisfy margin deposits at option and commodity exchanges, and other guarantees.

    In connection with its financing activities, the Company had outstanding
commitments under certain lending arrangements of approximately $2.7 billion and
$4.2 billion, at November 30, 2000 and 1999, respectively. These commitments
require borrowers to provide acceptable collateral, as defined in the
agreements, when amounts are drawn under the lending facilities. Advances made
under the above lending arrangements are typically at variable interest rates
and generally provide for over-collateralization based upon the borrowers'
creditworthiness.

    As of November 30, 2000, the Company had pledged securities, primarily fixed
income, having a market value of approximately $16.1 billion, as collateral for
securities borrowed having a market value of approximately $15.5 billion.

    Securities and other financial instruments sold but not yet purchased
represent obligations of the Company to purchase the securities at prevailing
market prices. Therefore, the future satisfaction of such obligations may be for
an amount greater or less than the amount recorded. The ultimate gain or loss is
dependent upon the price at which the underlying financial instrument is
purchased to settle its obligation under the sale commitment.

    In the normal course of business, the Company is exposed to off-balance
sheet credit and market risk as a result of executing, financing and settling
various customer security and commodity transactions. Off-balance sheet risk
arises from the potential that customers or counterparties fail to satisfy their
obligations and that the collateral obtained is insufficient. In such instances,
the Company may be required to purchase or sell financial instruments at
unfavorable market prices. The Company seeks to control these risks by obtaining
margin balances and other collateral in accordance with regulatory and internal
guidelines.

    The Company, through its high grade and high yield sales, trading and
underwriting activities, makes commitments to extend credit in loan syndication
transactions and then participates out a significant portion of these
commitments. The Company had lending commitments to high grade borrowers of

                                      F-28
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
$2.6 billion and $2.8 billion at November 30, 2000 and 1999, respectively. In
addition, lending commitments to high yield borrowers totaled $935 million and
$903 million at November 30, 2000 and 1999, respectively. All of these
commitments and any related draw downs of these facilities 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. 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.

    At November 30, 2000 and 1999, the Company had commitments to invest up to
$282 million and $302 million, respectively, directly and through partnerships
in private equity related investments. These commitments will be funded as
required through the end of the respective investment periods, principally
expiring in 2004.

    In addition to these specific commitments, the Company had various other
commitments of approximately $300 million at both November 30, 2000 and 1999,
respectively.

    Subsidiaries of the Company, as general partner, are contingently liable for
the obligations of certain public and private limited partnerships organized as
pooled investment funds or engaged primarily in real estate activities. In the
opinion of the Company, contingent liabilities, if any, for the obligations of
such partnerships will not in the aggregate have a material adverse effect on
the Company's consolidated financial position or results of operations.

    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.

CONCENTRATIONS OF CREDIT RISK

    As a major international securities firm, the Company is actively involved
in securities underwriting, brokerage, distribution and trading. These and other
related services are provided on a worldwide basis to a large and diversified
group of clients and customers, including multinational corporations,
governments, emerging growth companies, financial institutions and individual
investors.

    A substantial portion of the Company's securities and commodities
transactions is collateralized and is executed with, and on behalf of,
commercial banks and other institutional investors, including other brokers and
dealers. The Company's exposure to credit risk associated with the
non-performance of these customers and counterparties in fulfilling their
contractual obligations pursuant to securities transactions can be directly
impacted by volatile or illiquid trading markets, which may impair the ability
of customers and counterparties to satisfy their obligations to the Company.

    Securities and other financial instruments owned by the Company include U.S.
government and agency securities, and securities issued by non-U.S. governments,
which in the aggregate, represented 10% of the Company's total assets at
November 30, 2000. In addition, primarily all of the collateral held by the
Company for resale agreements represented 43% of total assets at November 30,
2000, and consisted of securities issued by the U.S. government, federal
agencies or non-U.S. governments. The Company's most significant industry
concentration is financial institutions, which include other brokers and
dealers, commercial banks and institutional clients. This concentration arises
in the normal course of the Company's business.

                                      F-29
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS

    The Company leases office space and equipment throughout the world and is a
party to a ground lease with the Battery Park City Authority covering its
headquarters at 3 World Financial Center which extends through 2069. Total rent
expense for 2000, 1999 and 1998 was $13 million, $12 million and $12 million,
respectively. Certain leases on office space contain escalation clauses
providing for additional rentals based upon maintenance, utility and tax
increases.

    Minimum future rental commitments under non-cancelable operating leases (net
of subleases of $19 million) are as follows:

<TABLE>
<CAPTION>
                                                              (IN MILLIONS)
<S>                                                           <C>
Fiscal 2001.................................................       $ 30
Fiscal 2002.................................................         30
Fiscal 2003.................................................         27
Fiscal 2004.................................................         41
Fiscal 2005.................................................         43
December 1, 2005 and thereafter.............................        741
                                                                   ----
                                                                   $912
                                                                   ====
</TABLE>

NOTE 11. RELATED PARTY TRANSACTIONS

    In the normal course of business, the Company engages in various securities
trading, investment banking and financing activities with Holdings and many of
its 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.

    Holdings has allocated to the Company the cost of certain employees and
space in the World Financial Center and 101 Hudson Street, Jersey City, New
Jersey. In addition, the Company charges other affiliates of Holdings for
services it provides and has certain revenue sharing arrangements. A portion of
these reimbursements are variable in nature. These amounts, including any
reimbursements, are classified in the Consolidated Statement of Income as
Management fees, Compensation and benefits, or Revenues as appropriate.

    In addition, Holdings and subsidiaries of Holdings raise money through
short- and long-term funding in the capital markets, which is used to fund the
operations of certain of the Company's wholly owned subsidiaries. Advances from
Holdings and other affiliates were $15.0 billion and $16.1 billion at
November 30, 2000 and 1999, respectively.

    In connection therewith, advances from Holdings aggregating approximately
$12.7 billion and $13.2 billion at November 30, 2000 and 1999, respectively, are
generally payable on demand. The average interest rate charged on these advances
is primarily based on Holdings' average daily cost of funds, which was 6.7% and
5.5% for the twelve months ended November 30, 2000 and 1999, respectively. In
addition, the Company had borrowings from Holdings and subsidiaries of Holdings,
classified as subordinated indebtedness, of approximately $764 million at both
November 30, 2000 and 1999. In addition, the Company has advances from other
subsidiaries of Holdings aggregating approximately $2.3 billion and
$2.9 billion at November 30, 2000 and 1999, respectively, with various repayment
terms. The Company had

                                      F-30
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11. RELATED PARTY TRANSACTIONS (CONTINUED)
notes and other receivables due from Holdings and subsidiaries of Holdings
aggregating approximately $7.2 billion and $5.1 billion at November 30, 2000 and
1999, respectively, with various interest rates and repayment terms.

    At November 30, 2000, the Company has $14.3 billion of securities purchased
under agreements to resell and $24.8 billion of securities sold under agreements
to repurchase with Holdings and subsidiaries of Holdings.

    The Company believes that amounts arising through related party
transactions, including those allocated expenses referred to above, are
reasonable and approximate the amounts that would have been recorded if the
Company operated as an unaffiliated entity.

    During 2000, the Company distributed $598 million to Holdings as dividends.
In 1999, the Company distributed $120 million to Holdings, $75 million as a
return of capital and $45 million as dividends.

NOTE 12. SEGMENTS

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

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

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

    Clients Services revenues reflect earnings from the Company's private client
and private equity businesses. Private client revenues reflect the Company's
high-net-worth retail customer flow activities as well as asset management fees
earned from these clients. Private equity revenue include the management and
incentive fees earned in the Company's role as General Partner for twenty
private equity partnerships. In addition, these revenues also include the
appreciation of its general partnership interests.

    Certain prior period segment information has been reclassified to conform to
the current period presentation.

                                      F-31
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12. SEGMENTS (CONTINUED)

    The Company's segment information for fiscal years 2000, 1999 and 1998 is
presented below and was developed consistent with the accounting policies used
to prepare the Company's consolidated financial statements.

<TABLE>
<CAPTION>
                                                           INVESTMENT   CAPITAL     CLIENT
                                                            BANKING     MARKETS    SERVICES    TOTAL
                                                           ----------   --------   --------   --------
                                                                          (IN MILLIONS)
<S>                                                        <C>          <C>        <C>        <C>
NOVEMBER 30, 2000
Net revenue..............................................    $1,609      $2,464      $662      $4,735
                                                             ======      ======      ====      ======
Earnings before taxes....................................    $  497      $  909      $211      $1,617
                                                             ======      ======      ====      ======
Segment assets (billions)................................    $  0.4      $172.3      $7.5      $180.2
                                                             ======      ======      ====      ======
NOVEMBER 30, 1999
Net revenue..............................................    $1,135      $1,899      $444      $3,478
                                                             ======      ======      ====      ======
Earnings before taxes....................................    $  430      $  489      $ 94      $1,013
                                                             ======      ======      ====      ======
Segment assets (billions)................................    $  0.3      $134.1      $4.8      $139.2
                                                             ======      ======      ====      ======
NOVEMBER 30, 1998
Net revenue..............................................    $1,096      $1,303      $500      $2,899
                                                             ======      ======      ====      ======
Earnings before taxes....................................    $  322      $  372      $153      $  847
                                                             ======      ======      ====      ======
Segment assets (billions)................................    $  0.6      $117.2      $3.0      $120.8
                                                             ======      ======      ====      ======
</TABLE>

    The following are net revenues by geographic region:

<TABLE>
<CAPTION>
                                                                   TWELVE MONTHS ENDED
                                                                       NOVEMBER 30
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
U.S.........................................................   $4,352     $3,160     $2,672
Europe......................................................      181        207         40
Asia Pacific................................................      159         89        152
Other Americas..............................................       43         22         35
                                                               ------     ------     ------
Total.......................................................   $4,735     $3,478     $2,899
                                                               ======     ======     ======
</TABLE>

    The following information describes the Company's methods of allocating
consolidated net revenues to geographic regions. Net revenues, if syndicated or
trading-related, have been distributed based upon the location where the primary
or secondary position was fundamentally risk managed: if fee-related, by the
location of the senior coverage banker; if commission-related, by the location
of the salespeople. In addition, certain revenues associated with domestic
products and services which resulted from relationships with international
clients and customers have been reclassified as international revenues using an
allocation consistent with the Company's internal accounting.

                                      F-32
<PAGE>
                     LEHMAN BROTHERS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13. QUARTERLY INFORMATION (UNAUDITED)

    The following information represents the Company's unaudited quarterly
results of operations for 2000 and 1999. Certain amounts reflect
reclassifications to conform to the current period's presentation. These
quarterly results reflect all normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the results.
Revenues and earnings of the Company can vary significantly from quarter to
quarter due to the nature of the Company's business activities.

<TABLE>
<CAPTION>
                                                         2000                                        1999
                                       -----------------------------------------   -----------------------------------------
                                       NOV. 30    AUG. 31     MAY 31    FEB. 29    NOV. 30    AUG. 31     MAY 31    FEB. 28
                                       --------   --------   --------   --------   --------   --------   --------   --------
                                                                           (IN MILLIONS)
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Total revenue........................   $5,382     $5,282     $5,087     $5,043     $3,982     $3,999     $4,028     $4,004
Interest expense.....................    4,141      4,028      4,185      3,705      2,987      3,100      3,272      3,176
                                        ------     ------     ------     ------     ------     ------     ------     ------
Net revenues.........................    1,241      1,254        902      1,338        995        899        756        828
Non-interest expenses
  Compensation and benefits..........      485        652        471        696        508        446        434        376
  Other expenses.....................      238        164        200        212        125        244        104        228
                                        ------     ------     ------     ------     ------     ------     ------     ------
Total non-interest expenses..........      723        816        671        908        633        690        538        604
                                        ------     ------     ------     ------     ------     ------     ------     ------
Income before taxes..................      518        438        231        430        362        209        218        224
Provision for (benefit from) income
  taxes..............................      121        134         69        159        118         70         62         67
                                        ------     ------     ------     ------     ------     ------     ------     ------
Net income...........................   $  397     $  304     $  162     $  271     $  244     $  139     $  156     $  157
                                        ======     ======     ======     ======     ======     ======     ======     ======
</TABLE>

                                      F-33