UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
       (Mark one)
              [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended August 31, 1996

                                       or

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the transition period from ____ to ____

                         Commission File Number: 1-6817

                                 LEHMAN CMO INC.
             (Exact name of registrant as specified in its charter)



Maryland                                                           77-2022794
   (State or other jurisdiction of                             (I.R.S. Employer
    incorporation or organization)                           Identification No.)

200 Vesey Street, 20th Floor, New York, NY                       10285
(Address of principal executive offices)                      (Zip Code)

                                  212-526-5594
              (Registrant's telephone number, including area code)


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 ___

Registrant had 100 shares of common stock  outstanding  (all owned indirectly by
Lehman Brothers Holdings Inc.) as of October 1, 1996.

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

<PAGE>

                                 LEHMAN CMO INC.
                                    FORM 10-Q
                      FOR THE QUARTER ENDED AUGUST 31, 1996

                                      INDEX

Part I.           FINANCIAL INFORMATION                              Page Number

   Item 1.  Financial Statements - (unaudited)

           Statement of Operations -
             Three and Nine Months Ended August 31, 1996
             and 1995  .....................................................  3

           Statement of Financial Condition -
             August 31, 1996 and November 30, 1995 ......................     5

           Statement of Cash Flows -
             Nine Months Ended August 31, 1996
             and 1995  ..................................................     6
   
           Notes to Financial Statements.................................     7

   Item 2.  Management's Discussion and Analysis of
           Financial Condition and Results of Operations............         10
 
Part II.          OTHER INFORMATION

   Item 6. Exhibits and Reports on Form 8-K ..............................   11

Signatures   ............................................................... 12




<PAGE>


                                 LEHMAN CMO INC.
                             STATEMENT of OPERATIONS

                                   (Unaudited)



                                                 Three months ended
                                  ----------------------------------------------
                                      August 31,                   August 31,
                                         1996                         1995
                                  --------------------        ------------------

Revenues

    Interest                            $      79                  $       75
                                  --------------------        ------------------



Expenses
    Compensation                            1,250                       5,000

    General and administrative              5,026                       11,513
                                  --------------------        ------------------

                                            6,276                       16,513
                                  --------------------        ------------------

Loss before income tax benefit             (6,197)                      (16,438)

Income tax benefit                         (2,854)                       (7,570)
                                  --------------------        ------------------

Net loss                                  $(3,343)                      $(8,868)
                                  ====================        ==================



                       See notes to financial statements.


<PAGE>


                                 LEHMAN CMO INC.
                             STATEMENT of OPERATIONS

                                   (Unaudited)



                                                 Nine months ended
                                  ----------------------------------------------
                                      August 31,                   August 31,
                                         1996                         1995
                                  --------------------        ------------------

Revenues

    Interest                           $     235                    $    203
                                  --------------------        ------------------



Expenses
    Compensation                           4,250                      15,000

    General and administrative            16,514                      23,097
                                  --------------------        ------------------

                                          20,764                      38,097
                                  --------------------        ------------------

Loss before income tax benefit           (20,529)                    (37,894)

Income tax benefit                        (9,454)                    (17,450)
                                  --------------------        ------------------

Net loss                                $(11,075)                   $(20,444)
                                  ====================        ==================





                       See notes to financial statements.


<PAGE>


                                 LEHMAN CMO INC.
                        STATEMENT of FINANCIAL CONDITION
                                   (Unaudited)

                                     ASSETS



                                                August 31,          November 30,
                                                   1996                1995
                                            --------------------   -------------

Cash                                                $ 15,137          $  14,901
Income taxes receivable from affiliate               100,843             91,389
                                            --------------------   -------------

                                                    $115,980           $106,290
                                            ====================   =============


                      LIABILITIES and STOCKHOLDER'S EQUITY

Liabilities
   Payables to affiliates                          $  50,181           $ 40,615
   Other liabilities and accrued expenses              1,013                566
                                          --------------------   ---------------

                                                      51,194             41,181
                                          --------------------   ---------------

Stockholder's equity

   Common stock, $1 par value; 100 shares
      authorized, issued and outstanding                 100                100
   Additional paid-in capital                         55,656             44,904
   Retained earnings                                   9,030             20,105
                                          --------------------   ---------------

          Total stockholder's equity                  64,786             65,109
                                          --------------------        ----------

                                                    $115,980           $106,290
                                          ====================        ==========



                       See notes to financial statements.


<PAGE>


                                 LEHMAN CMO INC.
                             STATEMENT of CASH FLOWS
                                   (Unaudited)


                                                            Nine months ended
                                             -----------------------------------
                                                 August 31,           August 31,
                                                    1996                  1995
                                             --------------------  -------------

Cash flows from operating activities

Net loss                                            $(11,075)         $(20,444)

  Net change in:
   Income taxes receivable from affiliate             (9,454)          (17,450)
   Payables to affiliates                              9,566            11,841
   Other liabilities and accrued expenses                447                29
                                             --------------------  -------------

      Net cash used in operating activities          (10,516)          (26,024)
                                             --------------------  -------------

Cash flows from financing activities
  Capital contributions by parent                     10,752            26,253
                                             --------------------  -------------

      Cash provided by financing activities           10,752            26,253
                                             --------------------  -------------

      Net change in cash                                 236               229

Cash, beginning of the period                         14,901            14,595
                                             --------------------  -------------

      Cash, end of the period                        $15,137        $   14,824
                                             ====================   ============




                       See notes to financial statements.


<PAGE>


                                 LEHMAN CMO INC.

                          NOTES to FINANCIAL STATEMENTS

                                   ----------




1.       Organization:

         Lehman  CMO  Inc.  (the   "Company")  is  a  limited   purpose  finance
         corporation   organized   for  the   purpose  of  issuing  and  selling
         Mortgage-Backed  Sequential  Pay  Bonds  (the  "Bonds")  collateralized
         primarily by pass-through  mortgage-backed certificates and/or mortgage
         loans (the  "Certificates").  All of the  outstanding  capital stock is
         owned  by  Lehman  Commercial  Paper  Inc.  ("LCPI"),  a  wholly  owned
         subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). The Company's
         financial  statements  have been prepared in accordance  with the rules
         and regulations of the Securities and Exchange  Commission with respect
         to the Form 10-Q and reflect  all normal  recurring  adjustments  which
         are, in the opinion of management, necessary for a fair presentation of
         the  results  for the  interim  periods  presented.  The  Statement  of
         Financial  Condition  at November 30, 1995 was derived from the audited
         financial statements. It is recommended that these financial statements
         be read in conjunction with the audited financial  statements  included
         in the Company's Annual Report on Form 10-K for the twelve months ended
         November 30, 1995.

         The Company  derives its income from trading and/or  interest earned on
         securities  owned.  Trading income  includes the profit (loss) from the
         issuance and sale of securities and valuing  securities  owned, if any,
         at market value.

         The  Company  has filed  registration  statements  on Form S-3 with the
         Securities and Exchange  Commission (the "Commission") which permit the
         Company to issue,  from time to time,  Bonds in principal amount not to
         exceed  $5.5  billion.  No Bonds have been  issued for the nine  months
         ended  August 31,  1996.  As of August  31,  1996,  approximately  $816
         million was available for issuance  under the  registration  statements
         referred to above.

         The  Company  has issued  Bonds  collateralized  by  Certificates.  The
         Company has  surrendered  all future  economic  interests in the Bonds,
         Certificates  and  collateral.  According  to the terms of the  various
         trust  agreements,  the Bond  Certificate  holders can look only to the
         related  collateral  for repayment of both  principal and interest.  In
         accordance with generally accepted accounting principles, the Bonds and
         Certificates  have been  removed  from the  accompanying  Statement  of
         Financial Condition.

         During  the nine  months  ended  August  31,  1996,  LCPI made  capital
         contributions to the Company of $10,752.



<PAGE>

                                 LEHMAN CMO INC.

                          NOTES to FINANCIAL STATEMENTS

                                   ----------

  2.     Summary of Significant Accounting Policies:

         Income Taxes:

         The Company is included in the  consolidated  U.S.  federal  income tax
         return of Holdings and in combined  state and local  returns with other
         affiliates of Holdings.  The Company  computes its income tax (benefit)
         provision  on  a  separate  return  basis  in  accordance  with  a  tax
         allocation  agreement  between  Holdings  and  its  subsidiaries.   The
         (benefit) provision for income taxes is greater than that calculated by
         applying the statutory federal income tax rate principally due to state
         and local taxes.

3.       Related Party Transactions:

         All Certificates used to collateralize the Bonds are purchased from and
         recorded at the  affiliate's  carrying value,  which for  broker/dealer
         affiliates represents market value.

         Certain  directors  and officers of the Company are also  directors and
         officers of Lehman Brothers Inc., LCPI,  and/or other affiliates of the
         Company.

         Pursuant to a management  agreement (the  "Agreement"),  the Company is
         charged a management fee for various services rendered on its behalf by
         LCPI. The Agreement  provides for an allocation of costs based upon the
         level  of  activity  processed  by  LCPI  on  behalf  of  the  Company.
         Management  fees of $15,000 for the nine months  ended  August 31, 1996
         and 1995 are  included  in general and  administrative  expenses in the
         accompanying  Statement of Operations.  The Agreement is renewable each
         year unless expressly terminated or renegotiated by the parties.

         Compensation  expense includes amounts allocated to the Company by LCPI
         for  compensation  paid to certain common officers and directors of the
         Company and LCPI.

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

 4.      Financial Instruments with Off-Balance Sheet Risk and
         Concentration of Credit Risk:

         The  Company's  activities  are  principally  conducted  with  brokers,
         dealers and financial institutions. At August 31, 1996, the Company had
         no material  individual  counterparty  concentration of credit risk, or
         any financial instruments with off-balance-sheet risk.



<PAGE>

                                 LEHMAN CMO INC.

                          NOTES to FINANCIAL STATEMENTS

                                   ----------

 5.      Fair Value of Financial Instruments:

         Statement   of   Financial   Accounting   Standards   (SFAS)  No.  107,
         "Disclosures  About  Fair  Value of  Financial  Instruments,"  requires
         disclosure  of the  fair  values  of  most  on- and  off-balance  sheet
         financial  instruments,  for which it is  practicable  to estimate that
         fair  value.  The  scope of SFAS No.  107  excludes  certain  financial
         instruments,  such as trade  receivables and payables when the carrying
         value approximates the fair value, employee benefit obligations and all
         non-financial instruments,  such as fixed assets. The fair value of the
         Company's assets and liabilities which qualify as financial instruments
         under SFAS No. 107  approximate the carrying  amounts  presented in the
         Statement of Financial Condition.



<PAGE>

                                 LEHMAN CMO INC.

                          NOTES to FINANCIAL STATEMENTS

                                   ----------


         PART I - FINANCIAL INFORMATION, continued

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

           Set forth below is management's  discussion and analysis of financial
           condition and results of operations  for the nine months ended August
           31, 1996 and August 31, 1995.

           During the nine months ended August 31, 1996 and 1995, the Company
           had no issuances of securities.  As such, no related
           income was recorded.

           Interest  income  increased  from $203 and $75 during the nine months
           and  quarter  ended  August 31,  1995 to $235 and $79 during the nine
           months and quarter ended August 31, 1996.  Interest  income  reflects
           interest earned on interest bearing deposits during the period.

           General  and  administrative  expenses  includes  management  fees of
           $15,000 for the nine months ended August 31, 1996 and 1995.




<PAGE>


                                 LEHMAN CMO INC.

                                   ----------

                           PART II - OTHER INFORMATION




Item 6.  Exhibits and Reports on Form 8-K

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

(a)      Exhibits:

         27.      Financial Data Schedule


(b)      Reports on Form 8-K:

         None.


<PAGE>



                                   SIGNATURES



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



                                                       LEHMAN CMO INC.
                                                      (Registrant)







Date: October 11, 1996                                 /S/      Neal Leonard
                                                        Neal Leonard
                                                        President







Date: October 11, 1996                               /S/      Dave Goldfarb
                                                      Dave Goldfarb
                                                      Controller




<PAGE>


                                                                   Exhibit 27