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

FORM 10-Q

(Mark one)
(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2002
For the Quarterly Period Ended February 28, 2003
OR
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
For the transition period from to

Commission file number 1-6817

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

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

As of ~~October~~April 1514, ~~2002~~2003, 1,006 shares of the Registrant's Common Stock, par value $0.10 per share, were outstanding.

LEHMAN BROTHERS INC. and SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED ~~AUGUST~~FEBRUARY 3128, ~~2002~~2003 ~~INDEX~~

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

CONTENTS

			Page Number
Available Information			2
Part I.	*FINANCIAL INFORMATION*
	Item 1.	Financial Statements—(unaudited)
		Consolidated Statement of Income— Three Months Ended February 28, 2003 and February 28, 2002	3
		Consolidated Statement of Financial Condition— February 28, 2003 and November 30, 2002	4
		Consolidated Statement of Cash Flows— Three Months Ended February 28, 2003 and February 28, 2002	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management's Analysis of Results of Operations	19
	Item 4.	Controls and Procedures	31
Part II.	*OTHER INFORMATION*
	Item 1.	Legal Proceedings	32
	Item 6.	Exhibits and Reports on Form 8-K	34
Signature			36
Certifications			38
Exhibit Index			40
Exhibits

AVAILABLE INFORMATION

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

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

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

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LEHMAN BROTHERS INC. and SUBSIDIARIES
PART I—FINANCIAL INFORMATION

ITEM 1 Financial Statements

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

			Three months ended
			August 31 2002			August 31 2001
			February 28 2003			February 28 2002
Revenues
	Principal transactions		$	~~(98~~296	)	$	~~(81~~500	)
	Investment banking			~~402~~277			~~278~~389
	Commissions			~~304~~209			~~206~~231
	Interest and dividends			21,~~271~~950			32,~~149~~274
	Other			78			158
		Total revenues		2,~~886~~740			3,~~567~~402
Interest expense				21,~~058~~751			2,~~893~~055
		Net revenues		~~828~~989			~~674~~1,347
Non-interest expenses
	Compensation and benefits			~~421~~504			~~344~~687
	Brokerage and clearance			6764			6659
	Technology and communications			5660			6438
	Occupancy			4446			2633
	Business development			2520			3221
	Management fees, net			19			(12	)
	Professional fees			17			11
	Professional fees			17			19
	Management fees, net			16			(7	)
	Other			617			1118
		Total non-interest expenses		~~655~~744			~~550~~860
Income before taxes				~~173~~245			~~124~~487
	Provision for income taxes			3056			17151
~~Net income~~		Net income	$	~~143~~189		$	~~107~~336

See notes to consolidated financial statements.

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

		February 28 2003		November 30 2002
ASSETS
Cash and cash equivalents		$	293	$	369
Cash and securities segregated and on deposit for regulatory and other purposes			1,797		1,896
Securities and other financial instruments owned (includes $25,850 at February 28, 2003 and $22,407 at November 30, 2002 pledged as collateral)			68,121		70,881
Collateralized agreements:
	Securities purchased under agreements to resell		91,552		75,769
	Securities borrowed		30,515		25,380
Receivables:
	Brokers, dealers and clearing organizations		7,963		5,783
	Customers		4,387		5,146
	Receivables from affiliates		12,363		9,884
	Others		275		378
Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $140 in 2003 and $129 in 2002)			133		138
Other assets			454		443
Excess of cost over fair value of net assets acquired (net of accumulated amortization of $135 in 2003 and $134 in 2002)			151		152

	Total assets	$	218,004	$	196,219

See notes to consolidated financial statements.

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

			February 28 2003		November 30 2002
LIABILITIES AND STOCKHOLDER'S EQUITY
Short-term debt			$	266	$	123
Securities and other financial instruments sold but not yet purchased				46,718		50,352
Collateralized financing:
	Securities sold under agreements to repurchase			86,520		83,343
	Securities loaned			27,470		23,682
	Other secured borrowings			1,316		1,666
Advances from Holdings and other affiliates				30,228		13,153
Payables:
	Brokers, dealers and clearing organizations			5,032		3,473
	Customers			6,430		6,474
Accrued liabilities and other payables				2,478		2,811
Long-term debt:
	Senior notes			3,511		3,511
	Subordinated indebtedness			4,644		4,479

		Total liabilities		214,613		193,067

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				1,788		1,738
Accumulated other comprehensive income (net of tax)				3		3
Retained earnings				1,600		1,411

		Total stockholder's equity		3,391		3,152

		Total liabilities and stockholder's equity	$	218,004	$	196,219

			Nine months ended
			August 31 2002		August 31 2001
Revenues
	Principal transactions		$	608	$	1,198
	Investment banking			1,135		1,054
	Commissions			806		644
	Interest and dividends			6,905		11,360
	Other			26		30
		Total revenues		9,480		14,286
Interest expense				6,263		10,808
		Net revenues		3,217		3,478
Non-interest expenses
	Compensation and benefits			1,639		1,773
	Brokerage and clearance			186		181
	Technology and communications			145		186
	Occupancy			138		80
	Business development			73		99
	Professional fees			46		57
	Other			31		39
	Management fees, net			30		(1	)
		Total non-interest expenses		2,288		2,414
Income before taxes				929		1,064
	Provision for income taxes			252		314
Net income			$	677	$	750

See notes to consolidated financial statements.

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

			August 31 2002			November 30 2001
			Three Months Ended
ASSETS
			February 28 2003			February 28 2002
Cash and cash equivalents			$	265		$	648
CASH FLOWS FROM OPERATING ACTIVITIES
Cash and securities segregated and on deposit for regulatory and other purposes				1,569			2,793
Net income			$	189		$	336
Securities and other financial instruments owned:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Pledged as collateral			19,046			19,105
	Depreciation and amortization			19			12
	Not pledged as collateral			54,210			48,562
	Other adjustments			11			5
				73,256			67,667
Net change in:
Collateralized short-term agreements:
	Cash and securities segregated and on deposit			99			(62	)
	Securities purchased under agreements to resell			86,599			75,185
	Securities and other financial instruments owned			2,799			(5,430	)
	Securities borrowed			23(5,~~108~~135	)		22(3,~~467~~475	)
Receivables:
	Other secured borrowings			(350	)		(675	)
	Brokers, dealers and clearing organizations			3,052			4,209
	Receivables from brokers, dealers and clearing organizations			(2,180	)		(113	)
	Customers			3,282			7,284
	Receivables from customers			759			2,232
	Others			9,695			9,846
	Securities and other financial instruments sold but not yet purchased			(3,634	)		12,040
Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $120 in 2002 and $140 in 2001)				142			273
	Securities loaned			3,788			1,407
Other assets				383			412
	Payables to brokers, dealers and clearing organizations			1,559			1,435
Excess of cost over fair value of net assets acquired (net of accumulated amortization of $133 in 2002 and $131 in 2001)				152			154
	Payables to customers			(44	)		(1,853	)
		Total assets	$	201,503		$	190,938
	Accrued liabilities and other payables			(347	)		(573	)
	Other operating assets and liabilities, net			136			(777	)
		Net cash provided by (used in) operating activities		(2,331	)		4,509
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes				—			1,745
Proceeds from issuance of subordinated indebtedness				126			—
Net proceeds from (payments for) short-term debt				143			(407	)
Resale agreements net of repurchase agreements				(12,606	)		(1,700	)
Advances due to affiliates net of affiliate receivables				14,596			(4,404	)
Dividends paid or accrued				—			(4	)
		Net cash provided by (used in) financing activities		2,259			(4,770	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements, net				(4	)		(5	)
		Net cash used in investment activities		(4	)		(5	)
		Net change in cash and cash equivalents		(76	)		(266	)
Cash and cash equivalents, beginning of period				369			648
	Cash and cash equivalents, end of period		$	293		$	382

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $1,724 and $2,070 for the three months ended February 28, 2003 and February 28, 2002, respectively. Income taxes paid totaled $23 and $15 for the three months ended February 28, 2003 and February 28, 2002, respectively.

See notes to consolidated financial statements.

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

			August 31 2002		November 30 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt			$	129	$	1,038
Securities and other financial instruments sold but not yet purchased				49,486		32,970
Collateralized short-term financing:
	Securities sold under agreements to repurchase			96,120		86,201
	Securities loaned			20,091		26,535
Advances from Holdings and other affiliates				13,639		21,487
Payables:
	Brokers, dealers and clearing organizations			3,633		3,599
	Customers			4,950		7,004
Accrued liabilities and other payables				2,129		2,537
Long-term debt:
	Senior notes			3,711		1,930
	Subordinated indebtedness			4,501		4,197
		Total liabilities		198,389		187,498
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value; 10,000 shares authorized; none outstanding
Common stock, $0.10 par value; 10,000 shares authorized; 1,006 shares issued and outstanding
Additional paid-in capital				1,682		1,682
Accumulated other comprehensive income				3		2
Retained earnings				1,429		1,756
		Total stockholders' equity		3,114		3,440
		Total liabilities and stockholders' equity	$	201,503	$	190,938

See notes to consolidated financial statements.

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

			Nine Months Ended
			August 31 2002			August 31 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income			$	677		$	750
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Depreciation and amortization			43			64
	Other adjustments			15			(20	)
Net change in:
	Cash and securities segregated and on deposit			1,224			(144	)
	Securities and other financial instruments owned			(5,553	)		2,396
	Securities borrowed			(641	)		(6,620	)
	Receivables from brokers, dealers and clearing organizations			1,157			(3,541	)
	Receivables from customers			4,002			1,784
	Securities and other financial instruments sold but not yet purchased			16,516			13,887
	Securities loaned			(6,444	)		1,832
	Payables to brokers, dealers and clearing organizations			34			(1,199	)
	Payables to customers			(2,054	)		792
	Other operating assets and liabilities, net			(136	)		(3,084	)
		Net cash provided by operating activities		8,840			6,897
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes				1,745			1,765
Principal payments of senior notes				—			(207	)
Proceeds from issuance of subordinated indebtedness				800			800
Principal payments of subordinated indebtedness				(505	)		(194	)
Net proceeds from (payments for) short-term debt				(909	)		85
Resale agreements net of repurchase agreements				(1,495	)		(17,283	)
Increase (decrease) in advances from Holdings and other affiliates				(7,848	)		7,376
Dividends paid				(1,002	)		(1,060	)
		Net cash used in financing activities		(9,214	)		(8,718	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements, net				(9	)		(71	)
		Net cash used in investment activities		(9	)		(71	)
		Net change in cash and cash equivalents		(383	)		(1,892	)
Cash and cash equivalents, beginning of period				648			2,323
		Cash and cash equivalents, end of period	$	265		$	431

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

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

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

See notes to consolidated financial statements

LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation:

The consolidated financial statements include the accounts of Lehman Brothers Inc., a registered broker-dealer ("LBI") and subsidiaries (collectively, the "Company"). LBI is a wholly-owned subsidiary of Lehman Brothers ~~Holding~~Holdings Inc. ("Holdings"). (Holdings and its subsidiaries are collectively referred to as "Lehman Brothers".) The Company is one of the leading global investment banks serving institutional, corporate, government and high-net-worth individual clients and customers. The Company's worldwide headquarters in New York are complemented by offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific Region. The Company is engaged primarily in providing financial services. All material intercompany accounts and transactions have been eliminated in consolidation. The Company's financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") with respect to the Form 10-Q and reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain footnote disclosures which are normally required under generally accepted accounting principles have been omitted. ItThese ~~is recommended that these~~ consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto (the "2002 Consolidated Financial Statements") included in LBI's Annual Report on Form 10-K for the twelve months ended November 30, ~~2001~~2002 (the "Form 10-K"). The Consolidated Statement of Financial Condition at November 30, ~~2001~~2002 was derived from the audited financial statements.

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

~~Consolidation~~2. Capital ~~Accounting Policies~~Requirements:

~~Operating~~ As ~~Companies~~ a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the Net Capital Rule, which requires LBI to maintain net capital of not less than the greater of 2% of aggregate debit items arising from customer transactions, as defined, or 4% of funds required to be segregated for customers' regulated commodity accounts, as defined. At February 28, 2003, LBI's regulatory net capital, as defined, of $1,710 million exceeded the minimum requirement by $1,587 million.

~~The~~As a clearing broker-dealer, the Company ~~follows~~has ~~Statement~~elected ofto ~~Financial~~compute ~~Accounting~~a ~~Standards~~reserve ~~("SFAS")~~requirement ~~No. 94,~~for ~~"Consolidation~~Proprietary Accounts of ~~All~~Introducing ~~Majority~~Broker-~~Owned~~Dealer ~~Subsidiaries~~(",PAIB ~~and~~calculation"). ~~consolidates operating~~The ~~entities~~PAIB ~~when~~calculation ~~the~~is completed ~~Company~~in ~~has~~order afor ~~controlling~~each ~~financial~~correspondent ~~interest~~firm ~~over~~that uses the ~~business~~Company ~~activities~~as ofits ~~such~~clearing ~~entities. Non~~broker-~~controlled~~dealer ~~operating~~to ~~entities~~classify ~~are~~its ~~accounted~~assets ~~for~~held ~~under~~by the ~~equity~~Company as allowable assets in the correspondent's net capital ~~method~~calculation. ~~when~~At February 28, 2003, the Company ishad ~~able~~a toreserve ~~exercise~~requirement ~~significant~~for ~~influence~~PAIB ~~over~~of $5 million. Additionally, the ~~business~~Company ~~activities~~had $55 million of ~~such~~qualified ~~entities.~~securities ~~The~~or ~~cost~~cash ~~method~~on deposit isin ~~applied~~a ~~when~~Special ~~the~~Reserve ~~ability~~Bank toAccount ~~exercise~~as ~~significant~~of ~~influence~~February 28, ~~is not present~~2003.

~~Special~~ The Company's ~~Purpose~~"AAA" ~~Entities~~ 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 February 28, 2003, LBFP and LBDP each had capital which exceeded the requirements of the rating agencies.

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

3. Derivative Financial Instruments:

In the normal course of business, the Company enters into derivative transactions both in a trading capacity and as an end-user. The Company's derivative activities (both trading and end-user) are recorded at fair value on the Company's Consolidated Statement of Financial Condition. As an end user, the Company utilizes derivatives to modify the market risk exposures of certain assets and liabilities. In this regard, the Company primarily enters into fair value hedges utilizing interest rate swaps to convert a substantial portion of the Company's fixed rate long-term debt and certain term fixed rate secured financing activities to a floating interest rate. The ineffective portion of the fair value hedges was included in "Interest expense" on the Consolidated Statement of Income and were immaterial for the three months ended February 28, 2003 and 2002.

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

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

		Fair Value* February 28, 2003				Fair Value* November 30, 2002
		Assets		Liabilities		Assets		Liabilities
		(in millions)
Interest rate, currency and credit default swaps and options (including caps, collars and floors)		$	9,884	$	8,572	$	7,594	$	6,832
Foreign exchange forward contracts and options			571		473		368		391
Other fixed income securities contracts (including futures contracts, options and TBAs)			412		812		247		214
Equity contracts (including equity swaps, warrants and options)			276		644		537		627

	Total	$	11,143	$	10,501	$	8,746	$	8,064

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

Assets included in the table above represent the Company's net receivable/payable for derivative financial instruments before consideration of collateral. Included within the $11,143 million fair value of assets at February 28, 2003 was $10,871 million related to swaps and other over-the-counter ("OTC") contracts and $272 million related to exchange-traded option and warrant contracts. Included within the $8,746 million fair value of assets at November 30, 2002 was $8,209 million related to swaps and other OTC contracts and $537 million related to exchange-traded option and warrant contracts.

With respect to OTC contracts, including swaps, the Company views its net credit exposure to be $8,927 million at February 28, 2003, representing the fair value of the Company's OTC contracts in an unrealized gain position, after consideration of collateral. Presented below is an analysis of the Company's net credit exposure at February 28, 2003 for OTC contracts based upon actual ratings made by external rating agencies or by equivalent ratings established and utilized by the Company's Credit Risk Management Department.

Counterparty Risk Rating	S&P/Moody's Equivalent	Net Credit Exposure
1	AAA/Aaa	14%
2	AA-/Aa3 or higher	25%
3	A-/A3 or higher	43%
4	BBB-/Baa3 or higher	13%
5	BB-/Ba3 or higher	5%
6	B+/B1 or lower	—

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

For a further discussion of the Company's derivative related activities, refer to "Management's Analysis of Results of Operations—Off-Balance Sheet Arrangements—Derivatives" and Notes 1 and 11 to the 2002 Consolidated Financial Statements, included in the Form 10-K.

4. Securitizations:

The Company is a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with these activities, the Company utilizes special purpose entities principally for (but not limited to) the securitization of commercial and residential mortgages, home equity loans, government and corporate bonds, and lease and trade receivables. The Company derecognizes financial assets transferred in securitizations provided that the Company has relinquished control over such assets. The Company may retain an interest in the financial assets it securitizes ("retained interests"), which may include assets in the form of residual interests in the special purpose entities established to facilitate the securitization. Any retained interests are included in Securities and other financial instruments owned (principally Mortgages and mortgage-backed) within the Company's Consolidated Statement of Financial Condition. For further information regarding the accounting for securitization transactions, see Note 1 to the 2002 Consolidated Financial Statements, included in the Form 10-K. During the three months ended February 28, 2003 and 2002, the Company securitized approximately $29 billion and $24 billion of financial assets, including: $25 billion and $15 billion of

~~Certain~~residential ~~special purpose entities do not meet the QSPE criteria due to their permitted activities not being sufficiently limited~~mortgages, or$1 billion ~~because the assets are not deemed qualifying financial instruments (e.g., real estate). In the limited instances~~ in ~~which~~each ~~the~~period ~~Company is either the sponsor~~ of orcommercial ~~transferor of assets to a non-qualifying SPE~~mortgages, ~~the~~and ~~Company~~$3 billion ~~follows~~and ~~the~~$8 billion ~~accounting guidance~~of ~~provided~~other ~~by EITF Topic D~~asset-14backed tofinancial ~~determine whether consolidation is required. Under this guidance~~instruments, ~~the Company would not consolidate such SPE if a third party investor made a~~respectively ~~substantial equity investment in the SPE~~ (~~minimum~~$1 billion ofand ~~3%)~~$2 billion, ~~was~~respectively, ~~subject to first dollar risk~~ of ~~loss~~securitizations ofwere ~~such~~transacted ~~SPE,~~on ~~and~~an ~~had~~agented ~~a controlling financial interest~~basis).

~~Transfers~~ As of February 28, 2003 and November 30, 2002, the Company had approximately $490 million and $1,050 million, respectively, of ~~Financial~~non-investment grade ~~Assets~~ retained interests from its securitization activities (principally junior security interests in securitizations) including $280 million of residential mortgages, $170 million of other asset-backed financial instruments and $40 million of commercial mortgages as of February 28, 2003 and $350 million of residential mortgages, $200 million of other asset-backed financial instruments and $500 million of commercial mortgages, as of November 30, 2002. The Company records its trading assets on a mark-to-market basis, including those assets held prior to securitization, as well as any retained interests post securitization. Mark-to-market gains or losses are recorded in "Principal transactions" in the Consolidated Statement of Income. Fair value is determined based upon listed market prices, if available. When market prices are not available, fair value is determined based on valuation pricing models which take into account relevant factors such as discount, credit and prepayment assumptions, and also considers comparisons to similar market transactions.

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

~~Revenue~~At ~~Recognition~~February 28, ~~Policies~~2003:

Principal Transactions

	Residential Mortgages	Other Asset-Backed	Commercial Mortgages
Weighted-average life	2 years	7 years	2 years
Annual prepayment rate	14 - 70 CPR	8 - 15 CPR	0 - 15 CPR
Credit loss assumption	.5 - 6%	3 - 10%	2 - 17%
Weighted-average discount rate	22%	9%	22%

~~Securities~~At ~~and other financial instruments owned and securities and other financial instruments sold but not yet purchased (both of which are recorded on a trade date basis) are valued at market or fair value~~November 30, as appropriate, with unrealized gains and losses reflected in Principal Transactions in the Consolidated Statement of Income. Market value is generally based on listed market prices. If listed market prices are not available, or if liquidating the Company's position is reasonably expected to affect market prices, fair value is determined based on broker quotes, internal valuation pricing models which take into account time value and volatility factors underlying the financial instruments, or management's estimate of the amounts that could be realized under current market conditions, assuming an orderly liquidation over a reasonable period of time. 2002:

Investment Banking

	Residential Mortgages	Other Asset-Backed	Commercial Mortgages
Weighted-average life	3 years	5 years	1 year
Annual prepayment rate	4 - 65 CPR	8 - 15 CPR	0 - 15 CPR
Credit loss assumption	.5 - 6%	3 - 10%	2 - 17%
Weighted-average discount rate	17%	5%	20%

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

Commissions

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

Interest Revenue/Expense

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

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

~~2. Events~~ The tables below outline the sensitivity of ~~September 11,~~the ~~2001~~fair value of the retained interests to immediate 10% and 20% adverse changes in the above assumptions (dollars in millions):

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

		At February 28, 2003						At November 30, 2002
		Residential Mortgages		Other Asset- Backed		Commercial Mortgages		Residential Mortgages		Other Asset- Backed		Commercial Mortgages
		(in millions)
Prepayment speed:
	Impact of 10% adverse change	$	2	$	—	$	—	$	4	$	1	$	—
	Impact of 20% adverse change	$	4	$	—	$	—	$	8	$	2	$	—

Assumed credit losses:
	Impact of 10% adverse change	$	16	$	10	$	—	$	17	$	12	$	—
	Impact of 20% adverse change	$	31	$	21	$	—	$	33	$	24	$	12

Discount rate:
	Impact of 10% adverse change	$	17	$	11	$	—	$	17	$	12	$	—
	Impact of 20% adverse change	$	33	$	22	$	—	$	34	$	24	$	—

~~During~~ The sensitivity analysis in the ~~fourth~~preceding ~~quarter~~table is hypothetical and should be used with caution as the above stresses are performed without consideration of ~~2001~~the impact of hedges, which serve to reduce the Company's ~~recognized~~actual risk. In addition, these results are calculated by stressing a ~~pretax~~particular ~~special~~economic ~~charge~~assumption independent of ~~$51 million~~changes in any other assumption (~~$29 million~~as ~~after-tax~~required by U.S. GAAP); ~~associated~~in ~~with~~reality, ~~the~~changes ~~net~~in ~~losses~~one ~~stemming from~~factor ~~the~~often ~~events~~result ofin ~~September 11~~changes in another (for example, ~~2001~~changes in discount rates will often impact expected prepayment speeds). ~~This~~Further, ~~charge~~changes ~~was~~in ~~comprised~~the offair ~~charges~~value ~~and~~based ~~costs~~upon ofa ~~$291 million,~~10% ~~less~~or ~~estimated~~20% ~~insurance~~variation ~~recoveries~~in an assumption should not be extrapolated because the relationship of ~~$240 million~~the change in the assumption to the change in fair value may not be linear.

~~During~~The ~~the~~following ~~first~~table ~~nine~~summarizes ~~months~~cash offlows ~~2002,~~from ~~the~~securitization ~~Company~~trusts ~~incurred~~for ~~additional costs resulting from~~ the ~~September 11,~~quarter ~~2001~~ended ~~terrorist attack of approximately $22~~February ~~million~~28, ~~primarily related~~2003: ~~to technology restoration and other costs associated with unusable facilities, which were fully offset by estimated insurance recoveries.~~

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

	Three months ended February 28, 2003
	Residential Mortgages		Commercial Mortgages		Other Asset- Backed
	(in millions)
Cash flows received on retained interests	$	47	$	1	$	38

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

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

3. Capital Requirements:

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

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

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

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

4 5. ~~Derivative~~ Financial Instruments:

InSecurities ~~the~~and ~~normal~~other ~~course~~financial ofinstruments ~~business,~~owned ~~the~~and ~~Company~~Securities ~~enters into derivative transactions both in a trading capacity~~ and asother anfinancial ~~end-user.~~instruments ~~The~~sold ~~Company's derivative~~but ~~activities~~not ~~(both~~yet ~~trading~~purchased ~~and end-user)~~ are recorded at fair value ~~on the Company's Consolidated Statement of Financial Condition. As an end user, the Company utilizes derivatives to modify the market risk exposures of certain assets~~ and ~~liabilities. In this regard, the Company primarily enters into fair value hedges utilizing interest rate swaps to convert a~~were ~~substantial~~comprised ~~portion~~ of the ~~Company's~~following: fixed rate long-term debt and certain term fixed rate secured financing activities to a floating interest rate. The ineffective portion of the fair value hedges were included in "Interest Expense" on the Consolidated Statement of Income and were immaterial for the three and nine months ended August 31, 2002 and 2001.

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

		February 28 2003		November 30 2002
		(in millions)
Securities and other financial instruments owned:
	Mortgages and mortgage backed	$	7,789	$	9,032
	Government and agencies		23,004		21,845
	Derivatives and other contractual agreements		11,143		8,746
	Corporate debt and other		12,405		11,065
	Corporate equities		12,508		17,562
	Certificates of deposits and other money market instruments		1,272		2,631

		$	68,121	$	70,881

Securities and other financial instruments sold but not yet purchased:
	Government and agencies	$	26,998	$	31,395
	Derivatives and other contractual agreements		10,501		8,064
	Corporate debt and other		6,296		7,101
	Corporate equities		2,923		3,792

		$	46,718	$	50,352

Unrealized gains and losses on derivative contracts are recorded on a net basis in the Consolidated Statement of Financial Condition for those transactions with counterparties executed under a legally enforceable master netting agreements and are netted across products when such provisions are stated in the master netting agreement6. Securities ~~Listed~~Pledged inas the following table is the fair value of the Company's derivative activities. Assets and liabilities represent net unrealized gains (amounts receivable from counterparties) and net unrealized losses (amounts payable to counterparties), respectively. Collateral:

		Fair Value* August 31, 2002				Fair Value* November 30, 2001
(in millions)
		Assets		Liabilities		Assets		Liabilities
Interest rate, currency and credit default swaps, and options (including caps, collars and floors)		$	7,768	$	7,173	$	5,474	$	5,025
Foreign exchange forward contracts and options			309		263		240		197
Other fixed income securities contracts (including futures contracts, options and TBAs)			398		371		476		226
Equity contracts (including equity swaps, warrants and options)			357		758		537		510
	Total	$	8,832	$	8,565	$	6,727	$	5,958

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

At February 28, 2003 and November 30, 2002, the fair value of securities received as collateral and securities owned that have not been sold, repledged or otherwise encumbered totaled approximately $16 billion and $13 billion, respectively. At February 28, 2003 and November 30, 2002, the gross fair value of securities received as collateral where the Company was permitted to sell or repledge the securities was approximately $254 billion and $290 billion, respectively. Of this collateral, approximately $246 billion and $286 billion at February 28, 2003 and November 30, 2002, respectively, has been sold or repledged, generally as collateral under repurchase agreements or to cover securities and other financial instruments sold but not yet purchased.

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

~~Assets~~The ~~included~~carrying invalue ~~the~~of ~~table~~securities ~~above~~and ~~represent~~other ~~the Company's net receivable/payable for derivative~~ financial instruments ~~before~~owned ~~consideration~~that ofhave ~~collateral~~been ~~held~~pledged byto ~~the~~counterparties ~~Company.~~where ~~Included within~~those ~~the~~counterparties ~~$8,832 million~~do ~~fair~~not ~~value~~have ofthe ~~assets~~right ~~at August 31, 2002 was $8,475 million related~~ to ~~swaps~~sell ~~and~~or ~~other~~repledge ~~over-the-counter ("OTC") contracts and~~were approximately $~~357~~23 ~~million~~billion ~~related to exchange-traded option~~ and ~~warrant contracts. Included within the~~ $~~6,727~~30 ~~million~~billion ~~fair~~at ~~value~~February 28, of2003 ~~assets~~and at November 30, ~~2001 was $6~~2002,~~239 million~~ ~~related to swaps and other OTC contracts and $488 million related to exchange-traded option and warrant contracts~~respectively.

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

Counterparty Risk Rating	S&P/Moody's Equivalent	Net Credit Exposure
1	AAA/Aaa	15%
2	AA-/Aa3 or higher	25%
3	A-/A3 or higher	41%
4	BBB-/Baa3 or higher	14%
5	BB-/Ba3 or higher	5%
6	B+/B1 or lower	—

In the normal course of business the Company enters into various commitments and guarantees, including lending commitments to high grade and high yield borrowers, liquidity commitments and other guarantees. In all instances, the Company marks-to-market these commitments and guarantees with changes in fair value recognized in Principal transactions revenue.

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

~~For a~~In ~~further~~connection ~~discussion~~with ofits financing activities, the Company's ~~derivative~~had ~~related~~outstanding ~~activities~~commitments under certain lending arrangements of approximately $2.1 billion and $1.1 billion at February 28, ~~refer~~2003 and November 30, 2002, respectively. These commitments require borrowers to provide acceptable collateral, as defined in the ~~Notes~~agreements, towhen amounts are drawn under the ~~Consolidated~~lending ~~Financial~~facilities. ~~Statements~~Advances ~~included~~made inunder the ~~Form 10~~above lending arrangements are typically at variable interest rates and generally provide for over-Kcollateralization based upon the borrowers' creditworthiness. In addition, at February 28, 2003 the Company had commitments to enter into forward starting secured reverse repurchase and repurchase agreements, principally secured by government and government agency obligations, of $86.6 billon and $48.5 billion, respectively, as compared to $68.6 billion and $38.1 billion, respectively, at November 30, 2002.

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

The Company had credit risk associated with lending commitments to investment grade borrowers (after consideration of hedges) of $2.1 billion and $2.6 billion at February 28, 2003 and November 30, 2002, respectively. In addition, the Company had credit risk associated with lending commitments to non-investment grade borrowers (after consideration of hedges) of $1.2 billion and $1.1 billion at February 28, 2003 and November 30, 2002, respectively. Before consideration of hedges, the Company had commitments to investment and non-investment grade borrowers of $5.6 billion and $1.3 billion as compared to $6.2 billion and $1.2 billion at February 28, 2003 and November 30, 2002, respectively. The Company had available undrawn borrowing facilities with third parties of approximately $2.8 billion at both February 28, 2003 and November 30, 2002, which can be drawn upon to provide funding for these commitments. These funding facilities contain limits for certain concentrations of counterparty, industry or credit ratings of the underlying loans.

In addition, the Company provided high yield contingent commitments related to acquisition financing of approximately $0.5 billion and $2.8 billion at February 28, 2003 and November 30, 2002, respectively. The Company's intent is, and its past practice has been, to sell down significantly all the credit risk associated with these loans, if closed, through loan syndications consistent with the Company's credit facilitation framework. These commitments are not indicative of the Company's actual risk as the borrower's ability to draw is subject to there being no material adverse change in either market

5conditions or the borrower's financial condition, among other factors. ~~Securitizations:~~ In addition, these commitments contain certain flexible pricing features in order to further adjust for changing market conditions.

~~The Company is a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with these activities, the~~As ~~Company utilizes special purpose entities principally for (but not limited to) the securitization~~ of ~~commercial and residential mortgages~~February 28, ~~home~~2003 ~~equity~~and ~~loans~~November 30, ~~government and corporate bonds~~2002, ~~and lease and trade receivables. The Company derecognizes financial assets transferred in securitizations provided that~~ the Company ~~has~~had ~~relinquished~~pledged ~~control over such assets. For further information regarding the accounting for securitization transactions~~securities, ~~refer~~primarily tofixed ~~Note 1~~income, ~~Basis~~having ofa ~~Presentation—Consolidation~~market ~~Accounting~~value ~~Policies—Transfers~~ of ~~Financial Assets.~~approximately The Company may retain an interest in the financial assets it securitizes ("Retained Interests") which may include assets in the form of residual interests in the special purpose entities established to facilitate the securitization$21.8 billion ~~Any Retained Interests are included in Securities~~ and ~~Other Financial Instruments Owned (principally Mortgages and~~ ~~Mortgage-Backed) within the Company's Consolidated Statement of Financial Condition~~$23.4 billion, ~~During the first nine months of 2002~~respectively, ~~the~~as ~~Company~~collateral ~~securitized~~for ~~approximately~~securities ~~$98 billion~~borrowed ofhaving ~~financial~~a ~~assets including:~~market ~~$71 billion~~value of ~~residential~~approximately ~~mortgages,~~ $21.7 billion ~~of commercial mortgages~~ and $2023.3 billion, ~~of other asset-backed financial instruments~~respectively.

AsAt ~~of August~~February 3128, ~~2002~~2003 and November 30, ~~2001~~2002, the Company ~~held~~had ~~approximately~~commitments ~~$1.2 billion~~to ~~and~~invest ~~$1.4 billion,~~up ~~respectively,~~to ~~of non-investment grade Retained Interests from its securitization activities (principally a junior security interest in securitizations) including~~ $~~0.6~~136 ~~billion~~million and $~~0.9~~384 ~~billion of commercial mortgages~~million, ~~$0.4 billion~~ ~~and $0.3 billion of residential mortgages~~respectively, ~~and~~directly ~~$0.2 billion~~ and ~~$0.2 billion~~through partnerships ofin ~~other~~private ~~asset-backed~~equity ~~financial~~related ~~instruments, respectively~~investments. ~~The~~These ~~Company~~commitments ~~records~~will ~~its trading~~be ~~assets~~funded onas ~~a mark-to-market basis~~required, ~~including~~in ~~those~~whole ~~assets~~or ~~held~~in ~~prior to securitization~~part, asthrough ~~well~~the asend ~~any retained interest post securitization. Mark-to-market gains or losses are recorded as a component~~ of ~~"Principal Transactions" in~~ the ~~Consolidated~~respective ~~Statement~~investment ~~of Income. Fair value is determined based upon listed market prices~~periods, ifprincipally ~~available.~~expiring ~~When listed market prices are not available, fair value is determined based on other relevant factors, including broker or dealer price quotations and valuation pricing~~in ~~models which take into account time value and volatility factors underlying the financial instruments among other factors~~2004.

~~The tables~~Other ~~below~~Commitments ~~outline~~and ~~the key economic assumptions used in measuring the fair value of retained interests:~~ Guarantees

In accordance with FASB Interpretation 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), the Company is required to disclose guarantees, including derivative contracts, that require the Company to make payments to a Atcounterparty ~~August 31~~based on changes in an underlying (e.g. security prices, ~~2002:~~ interest rates and currency rates). Derivatives that meet the FIN 45 definition of a guarantee include credit default swaps, written put options, written foreign exchange ("FX") options and written interest rate caps and floors. According to FIN 45 derivatives are not considered guarantees if such contracts are cash settled and the Company has no basis to determine that it is probable that the derivative counterparty held the related underlying instrument. Accordingly, if these conditions were met, the Company has not included such derivative contracts in its guarantee disclosures.

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

At February 28, 2003, the maximum payout value of derivative contracts deemed to meet the FIN 45 definition of a guarantee was approximately $242 billion. For purposes of determining maximum payout, notional values were utilized; however, the Company believes that the fair value of these contracts is a more relevant measure of these obligations. At February 28, 2003, the fair value of such derivative contracts approximated $4.0 billion. The Company believes that the notional amounts greatly overstate the Company's expected payout. In addition, all amounts included above are before consideration of hedging transactions. These derivative contracts are generally highly liquid and the Company has substantially mitigated its risk on these contracts through hedges, such as other derivative contracts and/or cash instruments. The Company manages risk associated with derivative guarantees consistent with the Company's global risk management policies. The Company records derivative contracts, including those considered to be guarantees under FIN 45, on a fair value basis with related gains/losses recognized in Principal transactions revenues.

The Company had liquidity commitments of approximately $1.5 billion related to trust certificates backed by investment grade municipal securities at February 28, 2003, as Atcompared to $0.6 billion at November 30, ~~2001:~~ 2002. The Company's obligation under such liquidity commitments is generally less than one year and is typically further limited by the fact that the Company's obligation ceases if the underlying assets are downgraded below investment grade or default.

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

At both February 28, 2003 and November 30, 2002, the Company was contingently liable for $0.8 billion, of letters of credit, primarily used to provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodity exchanges.

~~The~~In ~~tables~~the ~~below~~normal ~~outline~~course of business, the ~~sensitivity~~Company ofprovides guarantees to securities clearinghouses and exchanges. These guarantees are generally required under the ~~fair~~standard ~~value~~membership agreements, such that members are required to guarantee the performance of other members. To mitigate these performance risks, the ~~retained~~exchanges ~~interests~~and clearinghouses often require members to ~~immediate~~post collateral. ~~10%~~The ~~and~~Company's ~~20%~~obligation ~~adverse~~under ~~changes~~such inguarantees could exceed the ~~above~~collateral ~~assumptions~~amounts ~~(dollars~~posted; inhowever ~~millions):~~the potential for the Company to be required to make payments under such guarantees is deemed remote.

		At August 31, 2002						At November 30, 2001
		Residential Mortgages		Commercial Mortgages		Other Asset Backed		Residential Mortgages		Commercial Mortgages		Other Asset Backed
Prepayment speed:
	Impact of 10% adverse change	$	4	$	—	$	1	$	9	$	—	$	—
	Impact of 20% adverse change	$	7	$	—	$	2	$	17	$	—	$	—
Assumed credit losses:
	Impact of 10% adverse change	$	21	$	—	$	6	$	16	$	—	$	2
	Impact of 20% adverse change	$	41	$	14	$	11	$	32	$	—	$	4
Discount rate:
	Impact of 10% adverse change	$	22	$	1	$	7	$	26	$	2	$	2
	Impact of 20% adverse change	$	44	$	1	$	14	$	52	$	4	$	3

In connection with certain asset sales and securitization transactions, the Company often makes representations and warranties about the assets conforming to specified guidelines. If it is later determined that the underlying assets fail to conform to the specified guidelines, the Company may have an obligation to repurchase the assets or indemnify the purchaser against any losses. To mitigate these risks, to the extent that the assets being securitized may have been originated by third parties, the Company seeks to obtain appropriate representations and warranties from these third parties upon acquisition of such assets.

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

~~The~~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 ~~following~~facts ~~table~~and ~~summarizes~~established reserves, in the opinion of the Company such litigation will not, in the aggregate, have a material adverse effect on the Company's consolidated financial position or cash flows, but ~~from~~may ~~securitization~~be ~~trusts~~material ~~for~~to the ~~quarter~~Company's ~~ended~~operating ~~August 31~~results for any particular period,~~2002:~~ depending on the level of income for such period.

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

Other Off-Balance-Sheet Arrangements

Special purpose entities ("SPEs") are corporations, trusts or partnerships which are established for a limited purpose. SPEs by their nature generally do not provide equity owners with significant voting powers, as the SPE documents govern all material decisions. The Company's primary involvement with SPEs relates to securitization transactions in which transferred assets, including mortgages, loans, receivables and other assets, are sold to an SPE and repackaged into securities (i.e., securitized). SPEs may also be utilized by the Company to create securities with a unique risk profile desired by investors and as a means of intermediating financial risk. In summary, in the normal course of business, the Company may establish SPEs; sell assets to SPEs; underwrite, distribute, and make a market in securities issued by SPEs; transact derivatives with SPEs; own securities or residual interests in SPEs; and provide liquidity or other guarantees for SPEs.

The majority of the Company's involvement with SPEs relates to securitization transactions meeting the SFAS 140 definition of a qualifying special purpose entity ("QSPE"). Based upon the guidance in SFAS 140, the Company is not required to and does not consolidate such QSPEs. Rather, the Company accounts for its involvement with QSPEs under a financial components approach in which the Company recognizes only its retained involvement with the QSPE.

Certain special purpose entities do not meet the QSPE criteria due to their permitted activities not being sufficiently limited, or because the assets are not deemed qualifying financial instruments (e.g., real estate). In instances in which the Company is either the sponsor of or transferor to a non-qualifying special purpose entity, the Company follows the accounting guidance provided by Emerging Issues Task Force ("EITF") Topic D-14 and FASB Interpretation No. 46, "Consolidation of Variable Interest Entities—an interpretation of ARB No. 51" ("FIN 46") (for a discussion of FIN 46, see below) to determine whether consolidation is required. Under this guidance, the Company would not be required to, and does not consolidate such SPE if a third party investor made a substantive equity investment in the SPE, was

6subject to first dollar risk of loss of such SPE, and had a controlling financial interest. ~~Financial~~ ~~Instruments~~Examples of the Company's involvement with such SPEs include: Collateralized Debt Obligations ("CDOs"), where the Company's role is principally limited to acting as structuring and placement agent, warehouse provider and underwriter for CDO transactions; and Synthetic Credit Transactions, where the Company's role is primarily that of underwriter and buyer of credit risk protection from SPEs.

~~Securities~~On January 17, ~~and~~2003, ~~other~~the ~~financial~~FASB ~~instruments~~issued ~~owned~~FIN ~~and~~46. ~~securities~~This ~~and~~interpretation ~~other~~provides ~~financial~~consolidation ~~instruments~~accounting ~~sold~~guidance for entities involved with SPEs. This guidance does not impact the accounting for securitizations transacted through QSPEs, but rather will replace EITF Topic D-14 as it is applied to non-QSPEs. This interpretation will require a primary beneficiary, defined as an entity which participates in either a majority of the risks or rewards of such SPE, to consolidate the SPE. An SPE would not ~~yet~~be ~~purchased~~subject ~~are~~to ~~recorded~~this interpretation if such entity has sufficient voting equity capital (presumed to require that total voting equity is at ~~fair~~least ~~value~~10% of total assets), such that the entity is able to finance its activities without the additional subordinated financial support from other parties. The interpretation became effective for all new transactions after January 31, 2003 and ~~were~~will be effective for all other existing transactions ~~comprised~~with SPEs beginning in the Company's fourth quarter of 2003. While the ~~following:~~Company has not yet completed its analysis of the impact of the new interpretation, the Company does not anticipate that the adoption of this interpretation will have a material impact to the Company's financial condition or its results of operations.

		August 31 2002		November 30 2001
Securities and other financial instruments owned:
	Mortgages and mortgage backed	$	9,966	$	8,079
	Government and agencies		27,736		19,868
	Derivatives and other contractual agreements		8,832		6,727
	Corporate debt and other		10,523		9,423
	Corporate equities		14,173		20,433
	Certificates of deposits and other money market instruments		2,026		3,137
		$	73,256	$	67,667
Securities and other financial instruments sold but not yet purchased:
	Government and agencies		32,586	$	19,294
	Derivatives and other contractual agreements		8,565		5,958
	Corporate debt and other		5,315		4,342
	Corporate equities		3,020		3,376
		$	49,486	$	32,970

8. Segments:

7. Securities Pledged as Collateral:

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

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

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

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

8. Other Commitments and Contingencies:

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

In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $1.5 billion at both August 31, 2002 and November 30, 2001, respectively. These commitments require borrowers to provide acceptable collateral, as defined in the agreements, when amounts are drawn under the lending facilities. Advances made under the above lending arrangements are typically at variable interest rates and generally provide for over-collateralization based upon the borrowers' creditworthiness. At August 31, 2002, the Company had commitments to enter into forward starting secured financing transactions including reverse repurchase agreements and repurchase agreements of approximately $54.1 billon and $36.0 billion, respectively, as compared to $43.6 billion and $21.5 billion, respectively, at November 30, 2001. In addition, the Company had other guarantees of approximately $2.0 billion at August 31, 2002. These other guarantees, which are principally overcollateralized with investment grade collateral, consist of liquidity facilities and default protection to investors.

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

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

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

In the normal course of its business, the Company has been named a defendant in a number of lawsuits and other legal proceedings. After considering all relevant facts, available insurance coverage, established reserves and the advice of counsel, in the opinion of the Company such litigation will not, in the aggregate, have a material adverse effect on the Company's consolidated financial position or cash flows, but may be material to the Company's operating results for any particular period, depending on the level of income for such period.

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

9. Segments

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

The Investment Banking Division provides advice to corporate, institutional and government clients throughout the world on mergers, acquisitions and other financial matters. ~~The Division~~This 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~~this 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 derivatives products. ~~The~~This 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~~ business manages the Company's equity and fixed income matched book activities, supplies secured financing to institutional clients and customers, and provides secured funding for the Company's inventory of equity and fixed income products.

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

1816

The Company's segment information for the three ~~and nine~~ months ended ~~August~~February 3128, ~~2002~~2003 and ~~August~~February 3128, ~~2001~~2002 is prepared utilizing the following methodologies:

•: Revenues and expenses directly associated with each segment are included in determining pre-tax earnings.
•: Expenses not directly associated with specific segments are allocated based upon the most relevant measures applicable, including each segment's revenues, headcount and other factors.
•: Net revenues include allocations of interest revenue and interest expense to securities and other positions in relation to the cash generated by, or funding requirements of, the underlying positions.
•: Segment assets include an allocation of indirect corporate assets which have been fully allocated to the Company's business segments, generally based on each segment's respective headcount figures.

Segments (Three Months Ended):

(In millions)	Investment Banking		Capital Markets		Client Services		Total
	Investment Banking		Capital Markets		Client Services		Total
August 31, 2002
	(in millions)
Gross Revenues	$	401	$	2,284	$	201	$	2,886
February 28, 2003
Interest Expense		—		2,049		9		2,058
Gross Revenues	$	277	$	2,289	$	174	$	2,740
Net Revenue	$	401	$	235	$	192	$	828
Interest Expense		—		1,747		4		1,751
Depreciation and Amortization Expense		2		10		2		14
Net Revenue		277		542		170		989
Other Expenses		271		222		148		641
Depreciation and Amortization Expense		4		12		3		19
Earnings Before Taxes(1)	$	128	$	3	$	42	$	173
Other Expenses		211		387		127		725
Segment Assets (billions)	$	0.4	$	197.8	$	3.3	$	201.5
Earnings Before Taxes	$	62	$	143	$	40	$	245
Segment Assets (billions)	$	0.2	$	214.6	$	3.2	$	218.0

(In millions)	Investment Banking		Capital Markets		Client Services		Total
	Investment Banking		Capital Markets		Client Services		Total
August 31, 2001
	(in millions)
Gross Revenues	$	255	$	3,103	$	209	$	3,567
February 28, 2002
Interest Expense		—		2,879		14		2,893
Gross Revenues	$	389	$	2,816	$	197	$	3,402
Net Revenue	$	255	$	224	$	195	$	674
Interest Expense		—		2,049		6		2,055
Depreciation and Amortization Expense		4		19		2		25
Net Revenue		389		767		191		1,347
Other Expense		199		193		133		525
Depreciation and Amortization Expense		2		8		2		12
Earnings Before Taxes(1)	$	52	$	12	$	60	$	124
Other Expenses		259		456		133		848
Segment Assets (billions)	$	0.7	$	180.6	$	3.9	$	185.2
Earnings Before Taxes	$	128	$	303	$	56	$	487
Segment Assets (billions)	$	0.5	$	199.7	$	4.5	$	204.7

1917

Segments (Nine Months Ended):

(In millions)	Investment Banking		Capital Markets		Client Services		Total
August 31, 2002
Gross Revenues	$	1,133	$	7,744	$	603	$	9,480
Interest Expense		—		6,242		21		6,263
Net Revenue	$	1,133	$	1,502	$	582	$	3,217
Depreciation and Amortization Expense		6		31		6		43
Other Expense		787		1,030		428		2,245
Earnings Before Taxes(1)	$	340	$	441	$	148	$	929
Segment Assets (billions)	$	0.4	$	197.8	$	3.3	$	201.5

(In millions)	Investment Banking		Capital Markets		Client Services		Total
August 31, 2001
Gross Revenues	$	1,029	$	12,618	$	639	$	14,286
Interest Expense				10,736		72		10,808
Net Revenue	$	1,029	$	1,882	$	567	$	3,478
Depreciation and Amortization Expense		10		47		7		64
Other Expense		815		1,140		395		2,350
Earnings Before Taxes(1)	$	204	$	695	$	165	$	1,064
Segment Assets (billions)	$	0.7	$	180.6	$	3.9	$	185.2

The following are net revenues by geographic region:

		Three Months Ended				~~Nine Months Ended~~
(In millions)		Aug. 31 2002		Aug. 31 2001		Aug. 31 2002		Aug. 31 2001
		Feb. 28 2003		Feb. 28 2002
U.S.		$	559	$	562	$	2,558	$	3,029
		(in millions)
Europe			205		83		501		366
U.S.		$	737	$	1,220
Asia Pacific and other			64		29		158		83
Europe			202		85
	Total	$	828	$	674	$	3,217	$	3,478
Asia Pacific			50		42
	Total	$	989	$	1,347

10. Related Parties:

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

2018

ITEM 2 LEHMAN BROTHERS INC. and SUBSIDIARIES MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS

ITEM 2. MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS

Forward-Looking Statements

Some of the statements contained in this Management's Analysis of Results of Operations, including those relating to the Company's strategy and other statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are not historical facts but instead represent only the Company's expectations, estimates and projections regarding future events. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include ~~market~~, ~~credit~~but orare ~~counterparty,~~not ~~liquidity~~limited to, ~~legal~~market fluctuations and ~~operational~~volatility, ~~risks.~~industry ~~Market~~competition and ~~liquidity risks include~~ changes in ~~interest and foreign exchange rates and securities and commodities valuations,~~ the ~~availability~~competitive ~~and cost of capital and credit~~environment, ~~changes in~~ investor sentiment, ~~global~~liquidity ~~economic and political trends~~risks, ~~concerns about~~credit ~~possible~~ratings ~~military~~changes, ~~action~~credit exposure and ~~terrorist~~legal ~~activity~~ and ~~industry~~regulatory ~~competition~~changes. ~~Legal~~(For ~~risks~~further ~~include~~discussion ~~legislative~~of ~~and~~these ~~regulatory~~risks, ~~developments~~see in"Part I, ~~the~~Item ~~U.S.~~I—Business—Forward-Looking ~~and~~Statements" ~~throughout~~ in the ~~world~~Form 10-K.) The Company's actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements and, accordingly, readers are cautioned not to place undue reliance on such statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Results of Operations For the Three Months Ended ~~August~~February 3128, ~~2002~~2003 and ~~August~~February 3128, ~~2001~~2002

The Company reported net income of $~~143~~189 million for the quarter ended ~~August~~February 3128, ~~2002~~2003, ana ~~increase~~decrease of 3444% ~~from~~as compared to $336 million for the ~~third~~first quarter of ~~2001.~~2002, ~~These results~~reflecting ~~reflect~~the ancontinued ~~improvement~~significant market weakness in ~~the~~equity ~~Company's~~underwriting ~~investment~~and ~~banking~~mergers ~~activities~~and ~~offsetting~~acquisitions ~~the~~("M&A") ~~difficult~~advisory ~~market~~activities, ~~conditions~~as ~~experienced~~well inas ~~Capital~~lower ~~Markets~~mortgage ~~activities~~related revenues in 2003.

Net Revenues

Net revenues were $~~828~~989 million for the ~~third~~first quarter of ~~2002~~2003 as compared to $~~674~~1,347 million for the ~~third~~first quarter of ~~2001,~~2002. anNet ~~increase~~revenues ofdecreased 2327%~~. Despite~~ ~~the~~as ~~difficult~~compared ~~market~~to ~~conditions experienced in~~ the ~~third~~first quarter of 2002, the Company's strategy, of building a diversified set of high margin global businesses while maintaining strong discipline around expenses, liquidity and risk management, has resulted in improved market positions in a number of key areas such as mergers and acquisitions ("M&A"), debt and equity underwriting.

Principal Transactions, Commissions and Net Interest Revenues

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

Principal ~~Transactions~~transactions, Commissions and ~~Net~~net ~~Interest~~interest revenues ~~increased~~decreased 1026% to $~~419~~704 million for the ~~third~~first quarter of ~~2002~~2003 as compared to $~~381~~950 million for the ~~third~~first quarter of ~~2001.~~2002, ~~Despite~~reflecting ~~the~~a ~~negative~~decrease ~~market~~in ~~conditions,~~fixed ~~customer~~income ~~flow~~revenues ~~activity~~from ~~remained~~near ~~relatively~~record ~~strong~~performance in the first quarter of 2002.

21 Within these amounts, Principal transactions revenues were $296 million for the first quarter of 2003 as compared to $500 million for the first quarter of 2002. Commissions revenues were $209 million for the

Within these amounts, Principal Transactions revenues decreased to a loss of $98 million for the third quarter of 2002 as compared to a loss of $81 million in the third quarter of 2001. Commissions revenues were $304 million for the third quarter of 2002 as compared to $206 million for the third quarter of 2001. Interest and Dividend revenues were $2,271 million for the third quarter of 2002 as compared to $3,149 million for the third quarter of 2001. Interest expense was $2,058 million for the third quarter of 2002 as compared to $2,893 million for the third quarter 2001. The Company measures the performance of its Capital Markets and Client Services business in the aggregate, including Principal Transactions, Commissions and Net Interest. Decisions relating to these activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction, including any associated commissions, and the interest income or expense associated with financing or hedging the Company's positions; therefore caution should be utilized when analyzing revenue categories individually. 19

~~The~~first ~~decrease~~quarter inof ~~Principal~~2003 ~~Transactions~~as ~~revenues~~compared into ~~2002~~$231 million ~~resulted~~for ~~from~~the ~~poor~~first ~~market~~quarter ~~conditions~~of ~~for~~2002. ~~both~~Interest ~~fixed income~~ and ~~equity~~Dividend ~~products.~~revenues Inwere ~~addition~~$1,950 million ~~Principal~~for ~~Transactions~~the ~~revenues~~first ~~in 2002~~quarter ~~decreased~~of 2003 as acompared ~~result~~to $2,274 million offor the ~~transition~~first toquarter aof ~~commission-based~~2002. ~~revenue~~Interest ~~structure~~expense onwas ~~certain NASDAQ trades whereas in the prior year~~$1,751 million ~~the Company's NASDAQ trades~~ for ~~substantially~~the ~~all~~first quarter of ~~its institutional~~2003 ~~customers~~as ~~were~~compared ~~transacted~~to on$2,055 million afor ~~spread~~the ~~basis~~first ~~(with~~quarter ~~related~~of ~~revenues classified within Principal Transactions)~~2002.

~~Commissions~~The ~~revenues~~decrease ~~increased~~in asPrincipal ~~compared~~transactions torevenues over the prior year's ~~level~~first ~~principally~~quarter ~~due~~resulted tofrom lower mortgage related revenues recorded in the ~~transition~~first toquarter of 2002, partially offset by strong customer flow in interest rate and credit products. The decrease in Commissions revenues is principally a ~~commission-based~~result ~~revenue~~of ~~structure~~lower oncustomer ~~certain~~flow ~~NASDAQ~~activity ~~trades~~in equity trading volumes as investors continued to exit equity products for more defensive asset classes.

Interest and dividend revenues and ~~interest~~Interest expense are a function of the level and mix of total assets and liabilities, principally financial instruments owned and secured financing activities, the prevailing level of interest rates, as well as the term structure of the Company's financings. Interest and dividends revenues and ~~interest~~Interest expense are integral components of the Company's overall customer flow activities. The decline in interest revenue and interest expense from the previous year is principally due to a ~~substantial~~ decline in interest rates over the period. The decrease in net interest ~~income~~revenue ~~for~~of 9% to $199 million in the ~~third~~first quarter of ~~2002~~2003 ~~was~~from ~~primarily~~$219 million ~~due~~in tothe afirst ~~change~~quarter inof ~~the~~2002 ~~asset~~was ~~mix~~due, in part, to ~~generally~~tightening ~~higher~~of credit ~~quality~~spreads ~~assets,~~in ~~which~~the ~~usually~~investment ~~produce~~grade ~~lower~~and ~~yields~~high yield sectors.

Investment Banking

Investment Banking revenues were $~~402~~277 million for the ~~third~~first quarter of ~~2002~~2003 as compared to $~~278~~389 million for the ~~third~~first quarter of ~~2001~~2002. Investment Banking revenues result mainly from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, ~~and~~ advising clients on M&A activities and other services. Investment Banking revenues ~~increased~~decreased 4529% from the ~~third~~first quarter of ~~2001,~~2002 ~~primarily~~reflecting ~~due to~~ the ~~Company's~~continued ~~role~~significant asmarket ~~joint~~weakness ~~lead~~in ~~manager~~equity onunderwriting ~~the~~and ~~largest~~low ~~initial~~levels ~~public offering in the third quarter~~ of ~~2002 as well as strong~~ M&A advisory activities ~~in the third quarter of 2002~~.

~~Segments~~Non-Interest Expenses

~~The~~Non-interest ~~Company~~expenses iswere ~~segregated~~$744 million ~~into~~for ~~three~~the ~~business~~first ~~segments~~quarter ~~(each~~ of ~~which~~2003, isdown ~~described~~13% ~~below):~~from ~~Investment~~$860 million ~~Banking,~~for ~~Capital~~the ~~Markets~~first ~~and~~quarter ~~Client~~of ~~Services~~2002. ~~Each segment~~ ~~represents~~Compensation aand ~~group~~benefits expense of ~~activities~~$504 million ~~and~~decreased ~~products~~27% ~~with~~from ~~similar~~$687 million ~~characteristics.~~in ~~These~~the ~~business~~first ~~activities~~quarter ~~result~~of in2002 ~~revenues~~as ~~from~~a ~~both~~result ~~institutional~~of ~~and~~the ~~high-net-worth~~27% ~~retail clients,~~decrease ~~which~~in ~~are~~net ~~recognized~~revenues ~~across~~over ~~all~~the ~~revenue~~respective ~~categories~~period. Compensation ~~contained~~and inbenefit ~~the~~expense, ~~Company's~~as ~~Consolidated~~a ~~Statement~~percentage of ~~Income.~~net ~~(Net~~ revenues, ~~also~~remained ~~contain~~at ~~certain~~51% ~~internal~~for ~~allocations~~the quarter, ~~including~~consistent ~~funding costs,~~with ~~which~~the ~~are~~first ~~centrally~~quarter ~~managed~~of 2002.)

22 Nonpersonnel expenses were $240 million for the first quarter of 2003, up 39% compared to the first quarter of 2002. The increase is mainly attributable to higher technology and communications, occupancy and management fee expense. Technology and communications expense increased to $60 million for the first quarter of 2003 from $38 million for the first quarter of 2002, primarily due to amortization of new technology assets at the Company's new facilities and increased spending made to enhance the Company's capital markets trading platforms and technology infrastructure. Occupancy expense increased to $46 million during the first quarter of 2003 from $33 million during the first quarter of 2002, principally attributable to additional space to accommodate the growth in headcount resulting from the Company's expansion during the past several years as well as the increased cost of the Company's new facilities. Management fee expense increased in the first quarter of 2003 from the first quarter of 2002, primarily as a result of a net decrease in services provided by the Company to affiliates.

~~Segment Results—Three Months Ended August 31, 2002 and August 31, 2001~~ 20

	Three Months Ended August 31, 2002										Three Months Ended August 31, 2001
In millions	Investment Banking		Capital Markets			Client Services		Total			Investment Banking		Capital Markets			Client Services		Total
Principal Transactions	$	—	$	(225	)	$	127	$	(98	)	$	—	$	(196	)	$	115	$	(81	)
Interest and Dividend Income		—		2,262			9		2,271			—		3,131			18		3,149
Investment Banking		401		—			1		402			255		—			23		278
Commissions		—		244			60		304			—		159			47		206
Other		—		3			4		7			—		9			6		15
Total Revenues	$	401	$	2,284		$	201	$	2,886		$	255	$	3,103		$	209	$	3,567
Interest Expense		—		2,049			9		2,058			—		2,879			14		2,893
Net Revenues	$	401	$	235		$	192	$	828		$	255	$	224		$	195	$	674
Non-Interest Expenses		273		232			150		655			203		212			135		550
Earnings Before Taxes(1)	$	128	$	3		$	42	$	173		$	52	$	12		$	60	$	124

Income Taxes

The ~~following~~ ~~discussion~~Company ~~provides~~recorded an ~~analysis~~income tax provision of $56 million for the ~~Company's~~first ~~net~~quarter ~~revenues~~of ~~results~~2003 byversus ~~segment~~$151 million for the ~~periods~~first ~~above~~quarter of 2002. These provisions resulted in effective tax rates of 22.9% and 31.0% respectively. The decrease in the effective tax rate is primarily due to a greater impact of items subject to preferential tax treatment on a lower level of pretax income.

~~In assessing~~Segment ~~the~~Results—Three ~~performance~~Months ofEnded ~~Capital Markets and Client Services~~February 28, ~~the~~2003 ~~Company measures Principal Transactions, Commissions~~ and ~~Net Interest revenues in the aggregate. Decisions relating to capital markets and client services activities are based on an overall review of aggregate revenues~~February 28, which includes an assessment of the potential gain or loss associated with a transaction including any associated commissions, and the interest income or expense associated with financing or hedging the Company's positions. Therefore, the Company views net revenues from principal transactions, commissions and interest, offset by related interest expense, in the aggregate, because the revenue classifications, when analyzed individually, are not always indicative of the performance of the Company's Capital Markets and Client Services activities. 2002

The Company is segregated into three business segments (each of which is described below): Investment Banking ~~This~~, Capital Markets and Client Services. Each segment's represents ~~earnings~~a group of activities and products with similar characteristics. These business activities result in revenues from ~~fees~~both ~~earned~~institutional byand high-net-worth retail clients, which are recognized across all revenue categories contained in the Company's ~~for~~Consolidated ~~underwriting~~Statement of Income. (Segment net revenues also contain certain internal allocations, including ~~public~~funding ~~and~~costs, ~~private~~which ~~offerings~~are ofcentrally ~~fixed~~managed. ~~income~~For ~~and~~a ~~equity~~further ~~securities~~discussion of these allocations, ~~and~~see ~~advising~~Note 8 ~~clients~~to onthe ~~M&A~~Consolidated ~~activities~~Financial ~~and~~Statements ~~other~~included ~~services~~in this report.)

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

	Three Months Ended February 28, 2003											Three Months Ended February 28, 2002
	Investment Banking		Capital Markets			Client Services			Total			Investment Banking		Capital Markets			Client Services			Total
	In millions
Principal transactions	$	—	$	188		$	108		$	296		$	—	$	375		$	125		$	500
Interest and dividends		—		1,943			7			1,950			—		2,262			12			2,274
Investment banking		277		—			—			277			389		—			—			389
Commissions		—		155			54			209			—		177			54			231
Other		—		3			5			8			—		2			6			8

Total revenues		277		2,289			174			2,740			389		2,816			197			3,402
Interest expense		—		(1,747	)		(4	)		(1,751	)		—		(2,049	)		(6	)		(2,055	)

Net revenues		277		542			170			989			389		767			191			1,347
Non-interest expenses		215		399			130			744			261		464			135			860

Earnings before taxes (1)	$	62	$	143		$	40		$	245		$	128	$	303		$	56		$	487

(1): Before dividends on preferred securities

~~Debt~~The ~~underwriting~~following ~~revenues~~discussion ~~totaled~~provides ~~$201 million for the third quarter 0f 2002,~~ an ~~increase~~analysis of ~~10% from~~ the ~~third~~Company's ~~quarter~~results ofby ~~2001,~~segment ~~due~~for to the ~~continued~~above ~~strength in U~~periods.S. ~~investment grade debt underwriting driven by a favorable interest rate environment.~~

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

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 decreased 29% during the first quarter of 2003 to $277 million from $389 million in the first quarter of 2002. Fixed income underwriting activity remained strong; however, it was more than offset by a significant decrease in equity underwriting activity and a decline in M&A advisory activity.

INVESTMENT BANKING NET REVENUES

	Three Months Ended
In millions	August 31 2002		August 31 2001
	February 28 2003		February 28 2002
Debt Underwriting	$	201	$	182
	(in millions)
Equity Underwriting		111		29
Debt Underwriting	$	185	$	187
M&A Advisory		89		44
Equity Underwriting		38		133
	$	401	$	255
M&A Advisory		54		69
	$	277	$	389

23 Debt underwriting revenues of $185 million in the first quarter of 2003 remained relatively flat as compared to $187 million in the first quarter 2002. Fixed income originations remained at robust levels as low interest rates and the narrowing of credit spreads caused corporations to accelerate their financing activities, particularly ahead of a possible war with Iraq. Investment grade credit spreads tightened by approximately 30 bps during the first quarter of 2003 which also contributed to a favorable environment for new debt originations.

Equity underwriting revenues ~~increased~~were ~~substantially to~~ $~~111~~38 million in the ~~third~~first quarter of ~~2002~~2003, a decrease of 71% from $29133 million in the ~~third~~first quarter of ~~2001~~2002. ~~Although industry-wide~~The ~~equity~~decrease ~~market~~in ~~volumes~~equity origination ~~decreased~~was ~~during~~due to the ~~third~~continued ~~quarter~~weakness ofin ~~2002~~the ~~compared~~equity tomarkets, ~~the~~as ~~third~~industry-wide ~~quarter~~volumes ofdecreased ~~2001,~~during the ~~Company's~~first ~~quarterly~~quarter ~~volume~~of ~~increased.~~2003 ~~The~~compared ~~results~~to ~~for~~ the ~~third~~ first quarter of 2002, ~~reflect~~with particular ~~the~~weakness ~~Company's~~in ~~participation~~the asinitial ~~joint~~public ~~lead-manager~~offering ~~for~~sector ~~the~~as ~~largest~~corporations ~~initial~~delayed ~~public~~deals ~~offering~~amid ~~transaction~~the inslumping ~~the~~equity ~~quarter~~markets.

M&A advisory fees ~~for~~of $54 million in the ~~third~~first quarter of ~~2002~~2003 ~~were~~decreased ~~$89 million,~~22% up from $4469 million in the ~~third~~first quarter of ~~2001~~2002, ~~principally~~consistent with the decline in industry-wide volumes which continue to be depressed due to anweakened ~~increase~~demand infor ~~the~~strategic ~~Company's~~transactions, ~~market share~~partially indue to the Udevalued acquisition currency of clients.S.

~~Capital~~Investment Banking ~~Markets This~~pre-tax ~~segment's~~ earnings ~~reflect~~of ~~institutional~~$62 million ~~customer~~in ~~flow~~the ~~activities~~first ~~and~~quarter ~~secondary~~of 2003 decreased 52% from $128 million in the first quarter of 2002, as a 29% decrease ~~trading~~in ~~and~~net ~~financing~~revenues ~~activities~~was ~~related~~partially tooffset ~~fixed~~by ~~income~~an 18% decrease in non-interest expenses. The decrease in non-interest expenses primarily reflected reduced compensation and ~~equity~~benefits associated ~~products~~with lower revenue levels and reduced headcount. ~~These~~Nonpersonnel ~~products~~expenses ~~include~~were adown ~~wide~~slightly ~~range~~as compared to the first quarter of ~~cash,~~2002 ~~derivative,~~as ~~secured~~the ~~financing~~Company ~~and~~continued ~~structured~~to ~~instruments~~focus on minimizing discretionary spending in the current market environment.

Capital Markets This ~~pre-tax~~segment's earnings ofreflect ~~$3 million~~institutional ~~decreased~~customer ~~slightly~~flow ~~from~~activities ~~the~~and ~~third~~secondary trading ~~quarter~~and offinancing ~~2001.~~activities ~~Capital~~related ~~Markets~~to ~~non-interest~~fixed ~~expenses~~income ~~increased~~and 9%equity ~~during the~~products. ~~quarter~~These toproducts ~~$232 million~~include ~~from~~a ~~$212 million~~wide inrange ~~the third quarter~~ of ~~2001~~cash, ~~primarily~~derivative, ~~due~~secured tofinancing anand ~~increase~~structured ininstruments. ~~compensation~~This ~~and~~segment ~~benefits~~also includes ~~associated~~the ~~with~~Company's ~~higher~~risk ~~revenues~~arbitrage business, as well as ~~an increase~~realized inand ~~nonpersonnel~~unrealized ~~expenses,~~gains ~~particularly~~and ~~occupancy~~losses ~~costs~~related ~~associated with increased headcount levels, technology spending in order~~ to ~~enhance~~ the Company's ~~trading~~private ~~platforms~~equity ~~and technology infrastructure and a slight increase in brokerage and clearance costs due to higher volumes in certain fixed income structured products~~investments.

CAPITAL MARKETS NET REVENUES

	Three Months Ended August 31, 2002							Three Months Ended August 31, 2001
	Three Months Ended February 28, 2003							Three Months Ended February 28, 2002
(In millions)	Gross Revenues		Interest Expense			Net Revenues		Gross Revenues		Interest Expense			Net Revenues
	Gross Revenues		Interest Expense			Net Revenues		Gross Revenues		Interest Expense			Net Revenues
Fixed Income	$	1,899	$	(1,785	)	$	114	$	2,732	$	(2,555	)	$	177
	(in millions)
Equities		385		(264	)		121		371		(324	)		47
Fixed Income	$	1,918	$	(1,494	)	$	424	$	2,406	$	(1,709	)	$	697
	$	2,284	$	(2,049	)	$	235	$	3,103	$	(2,879	)	$	224
Equities		371		(253	)		118		410		(340	)		70
	$	2,289	$	(1,747	)	$	542	$	2,816	$	(2,049	)	$	767

Capital Markets' net revenues were $~~235~~542 million for the ~~third~~first quarter of ~~2002~~2003, upa 5decrease of 29% from the ~~third~~first quarter of ~~2001~~2002, ~~despite~~resulting from a decrease in fixed income revenues from the ~~extremely~~previous ~~difficult~~year's ~~market~~record ~~environment~~first quarter results, partially offset by an increase in equities net revenues.

Net revenues from the fixed income component of Capital Markets in the ~~third~~first quarter of ~~2002~~2003 decreased by 3639% from the ~~third~~record ~~quarter~~results ofrecognized ~~2001.~~in ~~Revenues~~the ~~from~~first ~~fixed~~quarter ~~income~~of ~~products~~2002, ~~were~~which ~~adversely~~included ~~affected~~higher bymortgage ~~price~~related ~~deterioration~~revenues. ~~associated~~During ~~with~~the ~~widening~~first ~~credit~~quarter ~~spreads,~~of ~~particularly~~2003 in the ~~investment~~Company ~~grade~~continued ~~and~~to ~~high~~experience ~~yield~~strong ~~sectors.~~levels ~~The~~of ~~weakness~~institutional incustomer ~~the~~flow ~~secondary~~activity ~~markets~~as ~~was~~narrowing ~~driven~~credit byspreads ~~historically~~contributed ~~high~~to ~~levels~~solid ofrevenues ~~downgrades~~from ascredit ~~well~~and asinterest ~~investor~~rate ~~uncertainty~~derivative ~~due~~products toas ~~corporate~~investors ~~governance~~sought ~~issues,~~to ~~geopolitical~~diversify ~~risks~~ and ~~continued~~hedge ~~global~~their ~~economic weakness~~risks.

Net revenues from the equities component of Capital Markets were $~~121~~118 million in the ~~third~~first quarter of ~~2002~~2003, up ~~157~~69% from ~~the~~first ~~third~~ quarter of ~~2001~~2002. ~~2002~~Favorable ~~net~~performance ~~revenues~~in ~~were~~convertible ~~positively~~products ~~impacted~~and byprivate ~~reduced~~equity ~~financing~~investments ~~costs~~contributed ~~associated~~to ~~with~~ the ~~lower~~increase ~~interest~~in ~~rate~~revenues ~~environment~~(convertible ~~and~~bonds, bya ~~the~~more ~~Company's~~defensive ~~ability~~asset toclass, ~~increase~~benefited ~~its~~from ~~market~~tightening ~~share~~credit inspreads ~~the listed~~ and ~~NASDAQ~~higher ~~markets.~~secondary Intrading ~~addition,~~activity ~~the~~resulting ~~increase~~from ~~reflects~~strong ~~higher~~new ~~revenues~~issuance ~~from~~activity), ~~institutional~~partially ~~trading,~~offset asby inweaker ~~2002~~U.S. ~~there~~cash ~~was~~product arevenues ~~change~~given tothe ~~commission-based~~current ~~pricing~~market onenvironment. ~~certain~~The ~~NASDAQ~~Company ~~trades~~continued to ~~compensate~~increase ~~for~~its ~~the compressed spreads~~secondary ~~(reflected~~market ~~within~~share ~~Principal~~in ~~Transactions)~~both ~~caused~~listed byand ~~decimalization,~~NASDAQ ~~which~~to 7.3% ~~had~~and ~~resulted~~3.8%, inrespectively, ~~historically low revenue levels~~ from ~~NASDAQ~~6.6% ~~customer~~and ~~flow~~3.7% ~~activities~~ in ~~2001.~~the ~~The~~first ~~increase~~quarter ~~was~~of ~~partially offset~~2002. byEquity acapital ~~decline~~markets inrevenues ~~convertible~~also ~~revenues~~improved as arevenues ~~result~~on ofprivate ~~spreads~~equity ~~widening~~investments inwere ~~the~~relatively ~~underlying~~flat ~~bonds,~~in as2003 versus ~~well~~losses asin ~~lower~~2002. ~~levels of secondary trading volumes consistent~~

Capital Markets pre-tax earnings of $143 million in the first quarter of 2003 decreased 53% from pre-tax earnings of $303 million in the first quarter of 2002, as net revenues decreased 29% while non-interest expenses declined only 14%. The decrease in non-interest expenses primarily reflected reduced compensation and benefits associated with lower revenue levels.

Interest and Dividends The Company evaluates the performance of its Capital Markets business revenues in the aggregate, including Principal transactions, Commissions and net interest. Substantially all of the Company's net interest is allocated to its Capital Markets segment. Decisions relating to these activities are based on an overall review of aggregate revenues, which includes an assessment of the potential gain or loss associated with a transaction, including associated commissions, and the interest revenue and expense associated with financing or hedging the Company's positions; therefore caution should be utilized when analyzing revenue categories individually.

Interest and dividend revenues and expenses for Capital Markets decreased by 14% and 15%, respectively from the first quarter of 2002, reflecting the decline in interest rates from the previous year's first quarter. Net interest revenue decreased 8% to $196 million in the first quarter of 2003, principally as result of tightening of credit spreads in the investment grade and high yield sectors.

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 as well as asset management fees. Private Equity net revenues include the management and incentive fees earned in the Company's role as general partner for private equity partnerships.

Client Services net revenues were $170 million in the first quarter of 2003, compared to $191 million in the first quarter of 2002. Private Client net revenues decreased 12% to $169 million in the first quarter of 2003 from the first quarter of 2002, as economic and geopolitical uncertainties led to reduced levels of equity activity by clients. However, customer flow in fixed income products reached record levels, as customers remained invested through re-positioning their portfolios into more defensive asset classes.

CLIENT SERVICES NET REVENUES

	Three Months Ended
	February 28 2003		February 28 2002
	(in millions)
Private Client	$	169	$	191
Private Equity		1		—

	$	170	$	191

Client Services pre-tax earnings of $40 million decreased 29% in the first quarter of 2003 from $56 million in the first quarter of 2002, as an 11% decrease in net revenues was partially offset by a 4% decrease in non-interest expenses. Non-interest expenses decreased 4% to $130 million in the first quarter of 2003 as compared to $135 million in the first quarter of 2002, primarily due to a decrease in compensation expenses as a result of a decline in average headcount from the previous year's first quarter.

Contingencies, Commitments and Other Guarantees

Lending Related Commitments

In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $2.1 billion and $1.1 billion at February 28, 2003 and November 30, 2002, 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. In addition, at February 28, 2003 the Company had commitments to enter into forward starting secured reverse repurchase and repurchase agreements, principally secured by government and government agency collateral, of $86.6 billon and $48.5 billion, respectively, as compared to $68.6 billion and $38.1 billion, respectively, at November 30, 2002.

The Company had credit risk associated with lending commitments to investment grade borrowers (after consideration of hedges) of $2.1 billion and $2.6 billion at ~~the~~February 28, ~~decrease~~2003 inand ~~origination~~November 30, ~~activity~~2002, respectively. In addition, the Company ~~recorded~~had ~~mark~~credit risk associated with lending commitments to non-investment grade borrowers (after consideration of hedges) of $1.2 billion and $1.1 billion at February 28, 2003 and November 30, 2002, respectively. Before consideration of hedges, the Company had commitments to investment and non-~~market~~investment ~~losses~~grade onborrowers ~~certain~~of ~~private~~$5.6 billion ~~equity~~and ~~investments~~$1.3 billion inas compared to $6.2 billion and $1.2 billion at February 28, 2003 and November 30, 2002, respectively. The Company had available undrawn borrowing facilities with third parties of approximately $2.8 billion at both February 28, 2003 and November 30, 2002, which can be drawn upon to ~~reflect~~provide ~~decreased~~funding for these commitments. These funding facilities contain limits for certain concentrations of ~~valuations~~counterparty, industry or credit ratings of the underlying loans.

~~Client~~In addition, ~~Services Client~~the ~~Services~~Company ~~earnings~~provided ~~reflect~~high ~~earnings~~yield ~~from~~contingent ~~the~~commitments related to acquisition financing of approximately $0.5 billion and $2.8 billion at February 28, 2003 and November 30, 2002. The Company's ~~Private~~intent ~~Client~~is, and ~~Private~~ ~~Equity~~its ~~businesses.~~past ~~Private~~practice ~~Client~~has ~~net~~been, ~~revenues~~to ~~reflect~~sell down significantly all the credit risk associated with these loans, if closed, through loan syndications consistent with the Company's ~~high-net-worth~~credit ~~retail~~facilitation ~~customer~~framework. ~~flow~~These ~~activities~~commitments asare ~~well~~not indicative of the Company's actual risk as ~~asset~~the ~~management~~borrower's ~~fees.~~ability ~~Private~~to ~~Equity~~draw ~~net revenues~~is ~~include~~subject ~~the~~to ~~management~~there ~~and~~being no ~~incentive~~material ~~fees~~adverse ~~earned~~change in either market conditions or the ~~Company~~borrower's ~~role~~financial ascondition, ~~general~~among ~~partner~~other factors. In addition, these commitments contain certain flexible pricing features in order to further adjust for ~~thirty-three~~changing ~~private~~market ~~equity~~conditions ~~banking~~prior ~~partnerships~~to closing.

~~Client~~Aggregate ~~Services~~lending ~~pre-tax~~related ~~earnings~~commitments ofas ~~$42 million decreased from $60 million in the third quarter~~ of ~~2001~~February 28, ~~primarily~~2003 ~~due~~by tomaturity anare ~~incentive fee recognized in Private Equity in 2001~~ as ~~well~~follows: ~~as an increase in non-interest expenses, including occupancy and compensation.~~

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

				Amount of Commitment Expiration Per Period
February 28, 2003		Total Contractual Amount		Remaining 2003		2004- 2006		2007- 2008		2009 Thereafter
		(in millions)
Lending commitments:
	High grade	$	5,611	$	3,186	$	1,612	$	813	$	—
	High yield lending		1,307		336		636		244		91
	Contingent acquisition facilities		476		476		—		—		—
	Secured lending transactions, including forward starting resale and repurchase agreements		137,240		127,223		9,088		800		129

Other Commitments ~~CLIENT~~and ~~SERVICES REVENUES~~ Guarantees

	Three Months Ended
In millions	August 31 2002		August 31 2001
Private Client	$	191	$	171
Private Equity		1		24
	$	192	$	195

In accordance with FIN 45, the Company is required to disclose guarantees, including derivative contracts, that require the Company to make payments to a counterpart based on changes in an underlying (e.g. security prices, interest rates and currency rates). Derivatives that meet the FIN 45 definition of a guarantee include credit default swaps, written put options, written FX options and written interest rate caps and floors. According to FIN 45, derivatives are not considered guarantees if such contracts are cash settled and the Company has no basis to determine that it is probable that the derivative counterparty held the related underlying instrument. Accordingly, if these conditions were met, the Company has not included such derivatives contracts in the table below.

~~Private~~At ~~equity~~February 28, ~~net~~2003, ~~revenues~~the ~~declined~~maximum ~~substantially~~payout invalue ~~the~~of ~~third~~derivative ~~quarter~~contracts ofdeemed ~~2002~~to ~~from~~meet the ~~third~~FIN ~~quarter~~45 definition of ~~2001~~a ~~primarily~~guarantee ~~due~~was toapproximately an$242 billion. ~~incentive~~For ~~fee~~purposes ~~recognized~~of determining ~~from~~maximum payout, notional values were utilized; however, the Company's ~~general partner~~believes ~~interest~~that inthe fair value of these contracts is a ~~single~~more ~~Merchant~~relevant ~~Banking~~measure ~~investment~~of inthese obligations. At February 28, 2003, the ~~third~~fair ~~quarter~~value of ~~2001~~such derivative contracts approximated $4.0 billion. The Company believes that these notional amounts greatly overstate

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

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

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

~~Results~~the Company's expected payout. In addition, all amounts included above are before consideration of ~~Operations For~~hedging transactions. These derivative contracts are generally highly liquid and the ~~Nine~~Company ~~Months~~has substantially ~~Ended~~mitigated ~~August 31~~its risk on these contracts through hedges, ~~2002~~such as other derivative contracts and/or ~~August 31~~cash instruments. The Company manages risk associated with derivative guarantees consistent with the Company's global risk management policies. The Company records derivative contracts, ~~2001~~ including those considered to be guarantees under FIN 45, on a fair value basis with related gains/losses recognized in Principal transactions revenues.

~~The~~At February 28, 2003, the Company ~~reported~~had ~~net~~liquidity ~~income~~commitments of approximately $~~677~~1.5 ~~million~~billion ~~for~~related ~~the~~to ~~nine~~trust ~~months~~certificates ~~ended~~backed ~~August 31,~~by ~~2002,~~investment agrade ~~decrease~~municipal ofsecurities, ~~10%~~as compared ~~from~~to ~~the~~$0.6 billion ~~nine~~at ~~months ended August~~November 3130, ~~2001~~2002. ~~These~~The ~~results~~Company's ~~reflect~~obligation ~~the~~under ~~difficult~~such ~~market~~liquidity ~~conditions~~commitments ~~experienced~~is ~~throughout~~generally ~~2002,~~less ~~led~~than byone ayear ~~decline in equity capital markets~~ and ~~M&A~~is ~~activities.~~typically ~~However,~~further ~~during~~limited ~~this~~by ~~nine month~~the ~~period,~~fact that the Company's ~~was~~obligation ~~generally~~ceases ~~able~~if tothe ~~continue~~underlying toassets ~~execute~~are ~~its~~downgraded ~~strategy~~below ofinvestment ~~building~~grade ~~market~~or ~~share while maintaining a strict discipline with regard to its expenses, capital and liquidity~~default.

~~Revenues~~ As of February 28, 2003 and November 30, 2002, the Company was contingently liable for $0.8 billion of letters of credit, primarily used to provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodity exchanges.

~~Net~~As of ~~revenues~~February 28, ~~were~~2003 ~~$3,217~~and November ~~million~~30, ~~for~~2002, the ~~fist~~Company ~~nine~~had ~~months~~commitments ofto ~~2002~~invest ~~compared~~up to $~~3,478~~136 million ~~for~~and ~~the~~$384 million, ~~first~~respectively, ~~nine~~directly ~~months~~and ofthrough partnerships ~~2001~~in private equity related investments. ~~Revenues~~These ~~declined~~commitments ~~8% as~~will ~~compared~~be tofunded, ~~the~~in ~~prior~~whole ~~year's~~or ~~levels~~in part, ~~reflecting~~as required through the ~~impact~~end of the ~~difficult~~respective ~~market~~investment ~~conditions~~periods, ~~throughout~~principally ~~the~~expiring ~~current fiscal year~~in 2004.

~~Principal~~ In the ~~Transactions~~normal course of business the Company provides guarantees to securities clearinghouses and exchanges. These guarantees are generally required under the standard membership agreements, ~~Commissions~~such that members are required to guarantee the performance of other members. To mitigate these performance risks, the exchanges and ~~Net~~clearinghouses ~~Interest~~often ~~Revenues~~ require members to post collateral. The Company's obligation under such guarantees could exceed the collateral amounts posted; however the potential for the Company to be required to make payments under such guarantees is deemed remote.

~~The~~In connection ~~Company~~with ~~measures~~certain ~~the~~asset ~~performance~~sales ~~of its Capital Markets~~ and ~~Client~~securitization ~~Services~~transactions, ~~activities~~the inCompany ~~the~~is ~~aggregate~~often ~~including~~required ~~Principal~~to ~~Transactions,~~make ~~Commissions~~representations and ~~Net Interest.~~warranties ~~Decisions~~about ~~relating~~the assets conforming to ~~these~~specified guidelines. ~~activities~~If ~~are~~it ~~based~~is onlater andetermined ~~overall~~that ~~review~~the ofunderlying ~~aggregate~~assets ~~revenues,~~fail ~~which~~to ~~includes~~conform anto ~~assessment~~the ofspecified guidelines, the ~~potential~~Company ~~gain~~may orhave ~~loss~~an ~~associated~~obligation ~~with~~to arepurchase ~~transaction, including~~the ~~associated~~assets ~~commissions,~~or ~~and~~indemnify the ~~interest~~purchaser against ~~income~~any orlosses. ~~expense~~To ~~associated~~mitigate ~~with~~these ~~financing~~risks, orto ~~hedging~~ the ~~Company's~~extent ~~positions.~~that ~~The~~the ~~Company~~assets ~~views~~being ~~these~~securitized ~~revenues~~may inhave ~~the~~been ~~aggregate,~~originated ~~because~~by ~~the revenue~~third ~~classifications~~parties, ~~when~~the ~~analyzed~~Company ~~individually,~~will ~~are~~seek ~~not~~to ~~always~~obtain ~~indicative~~appropriate ofrepresentations ~~the~~and warranties ~~performance~~from ofthese ~~the~~third ~~Company's~~parties ~~Capital~~upon ~~Markets~~acquisition ~~and~~of ~~Client~~such ~~Services activities~~assets.

~~Principal~~Other ~~Transactions,~~Commitments ~~Commissions~~ and ~~Net~~Guarantees ~~Interest revenues were $2,056 million for the first nine months of 2002~~ as ~~compared to $2,394 million for the first nine months~~ of ~~2001. Principal Transactions~~February 28, ~~Commissions~~2003 ~~and~~are ~~Net Interest revenues decreased 14% from the first nine months of 2001~~ as afollows: result of strong fixed income results being more than offset by weakness in the equity markets. Fixed income results were fueled by historically low interest rate levels and increased customer trading volumes, particularly in mortgage related products and investment grade debt, as investors rebalanced portfolios into fixed income products amid geopolitical and accounting uncertainties. The weakness in equity results were driven by declining equity indices and reduced customer flow, as investors had a bias against equity trading.

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

			Expiration Period
February 28, 2003	Notional Maximum Payout		Remaining 2003		2004- 2006		2007- 2008		2009 Thereafter
	(in millions)
Derivative contracts	$	241,581	$	56,027	$	80,913	$	37,343	$	67,298
Municipal securities related liquidity commitments		1,537		1,068		143		—		326
Standby letters of credit		788		573		215		—		—
Private equity investments		136		—		136		—		—
Long-term debt maturities		8,155		2,102		4,904		1,149		—

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

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

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

~~Investment~~ For ~~Banking~~ a discussion of the Company's use of derivative instruments and the risks related thereto, see Note 11 to the 2002 Consolidated Financial Statements (Derivative Financial Instruments) and the Off-Balance Sheet Arrangements section of Management's Analysis of Results of Operations included in the Form 10-K.

~~Investment~~Involvement ~~Banking~~with ~~revenues~~SPEs Special ~~were~~purpose ~~$1,135 million~~entities ~~for~~("SPEs") ~~the~~are ~~first~~corporations, ~~nine~~trusts ~~months~~or ofpartnerships which ~~2002~~are asestablished ~~compared to $1,054 million~~ for ~~the~~a ~~first~~limited ~~nine months of 2001~~purpose. ~~Investment~~ ~~Banking~~SPEs ~~revenues result mainly from fees earned~~ by ~~the~~their ~~Company~~nature ~~for~~generally ~~underwriting~~do ~~public~~not ~~and~~provide ~~private~~equity ~~offerings~~owners ofwith ~~fixed~~significant ~~income~~voting ~~and equity securities~~powers, ~~and~~as ~~advising clients on M&A activities and other services. Investment Banking revenues increased 8% from~~ the ~~first~~SPE ~~nine~~documents ~~months~~govern ofall ~~2001~~material ~~primarily as a result of market share increases in fixed income and equity underwriting~~decisions.

~~Segments~~ The majority of the Company's involvement with SPEs relates to securitization transactions meeting the SFAS 140 definition of a qualifying special purpose entity ("QSPE"). A QSPE can generally be described as an entity with significantly limited powers which are intended to limit it to passively holding financial assets and distributing cash flows based upon pre-set terms. Based upon the guidance in SFAS 140, the Company is not required to and does not consolidate such QSPEs. Rather, the Company accounts for its involvement with QSPEs under a financial components approach in which the Company recognizes only its retained involvement with the QSPE. The Company accounts for such retained interests at fair value with changes in fair value reported in earnings.

The Company is ~~segregated~~a ~~into~~market ~~three~~leader ~~business~~in ~~segments~~mortgage (~~each~~both ofresidential and commercial), municipal and other asset-backed securitizations which isare ~~described~~principally ~~below):~~transacted ~~Investment~~through ~~Banking~~QSPEs. During the first three months ended February 2003 and 2002, ~~Capital~~the ~~Markets~~Company securitized approximately $29 billion and ~~Client~~$24 billion ~~Services.~~of ~~Each~~financial ~~segment~~assets, including: $25 billion and ~~represents~~$15 billion aof ~~group~~residential mortgages, $1 billion and $1 billion of ~~activities~~commercial mortgages, and ~~products~~$3 billion ~~with~~and ~~similar~~$8 billion ~~characteristics~~of other asset-backed financial instruments, respectively. ~~These~~As ~~business~~of ~~activities~~February 28, ~~result~~2003 inand ~~revenues~~November 30, ~~from~~2002, ~~both~~the ~~institutional~~Company had approximately $0.5 billion and ~~high~~$1.1 billion, respectively, of non-~~net-worth~~investment ~~retail~~grade ~~clients~~retained interests from its securitization activities. The Company records its trading assets, ~~which~~including ~~are~~retained ~~recognized~~interests, ~~across~~on ~~all~~a ~~revenue~~mark-to-market ~~categories~~basis, ~~contained~~with related gains or losses recognized in ~~the~~Principal ~~Company's~~transactions in the Consolidated Statement of Income. (~~Net~~See ~~revenues~~Note 4 ~~also~~to ~~contain~~the ~~certain~~Consolidated ~~internal~~Financial ~~allocations,~~Statements ~~including~~included ~~funding costs,~~in ~~which~~this ~~are centrally managed~~Report.)

~~Segment~~Critical ~~Results—Nine~~Accounting ~~Months Ended August 31, 2002 and August 31, 2001~~Policies

	Nine Months Ended August 31, 2002								Nine Months Ended August 31, 2001
In millions	Investment Banking		Capital Markets		Client Services		Total		Investment Banking		Capital Markets		Client Services		Total
Principal Transactions	$	—	$	225	$	383	$	608	$	—	$	845	$	353	$	1,198
Interest and Dividend Income		—		6,875		30		6,905		—		11,273		87		11,360
Investment Banking		1,133		—		2		1,135		1,029		—		25		1,054
Commissions		—		635		171		806		—		487		157		644
Other				9		17		26				13		17		30
Total Revenues	$	1,133	$	7,744	$	603	$	9,480	$	1,029	$	12,618	$	639	$	14,286
Interest Expense		—		6,242		21		6,263		—		10,736		72		10,808
Net Revenues	$	1,133	$	1,502	$	582	$	3,217	$	1,029	$	1,882	$	567	$	3,478
Non-Interest Expenses		793		1,061		434	$	2,288		825		1,187		402		2,414
Earnings Before Taxes(1)	$	340	$	441	$	148	$	929	$	204	$	695	$	165	$	1,064

The SEC has proposed rules to require disclosures associated with critical accounting polices which are most important in gaining an understanding of an entity's financial statements. The following is a summary of the Company's critical accounting policies. For a full description of these and other accounting policies, see Note 1 to the 2002 Consolidated Financial Statements (Summary of Significant Accounting Policies) included in the Form 10-K.

Use of Estimates The Company's financial statements are prepared in conformity with generally accepted accounting principles, ~~following~~many ~~discussion~~of ~~provides~~which anrequire ~~analysis~~the use of estimates and assumptions. Management believes that the ~~Company's~~estimates ~~net~~utilized ~~revenues~~in preparing its financial statements are reasonable and prudent. Actual results bycould differ ~~segment~~from ~~for~~these estimates particularly in light of the ~~periods~~industry ~~above~~in which the Company operates.

Fair Value The determination of fair value is a critical accounting policy which is fundamental to the Company's financial condition and results of operations. The Company records its inventory positions including Securities and other financial instruments owned and Securities sold but not yet purchased at market or fair value with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income. In all instances, the Company believes that it has established rigorous

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

~~Investment~~When evaluating ~~Banking This~~the ~~segment's~~extent ~~earnings~~to ~~result~~which ~~from~~management ~~fees~~estimates ~~earned~~may bybe ~~the~~required ~~Company~~to ~~for~~be ~~underwriting public~~utilized ~~and~~in ~~private~~preparing ~~offerings~~the ofCompany's ~~fixed~~financial ~~income~~statements, ~~and~~the ~~equity~~Company ~~securities~~believes ~~and~~it ~~advising~~is ~~clients~~useful onto ~~M&A~~analyze ~~activities~~the balance ~~and~~sheet ~~other~~as ~~services.~~follows:

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

February 28, 2003
	(in millions)
Assets
Securities and other financial instruments owned	$	68,121	31	%
Secured financings		122,067	56	%
Receivables and other assets		27,816	13	%

Total Assets	$	218,004	100	%

Liabilities & Equity
Securities and other financial instruments sold but not yet purchased	$	46,718	22	%
Secured financings		115,306	53	%
Payables and other liabilities		44,434	20	%
Total capital		11,546	5	%

Liabilities & Equity	$	218,004	100	%

~~Investment~~A ~~Banking~~significant majority of the Company's ~~net~~assets ~~revenues~~and ofliabilities $1are recorded at amounts for which significant management estimates are not utilized. The following balance sheet categories,~~133 million~~ ~~increased~~comprising 1069% inof ~~the~~total ~~first~~assets ~~nine~~and ~~months~~78% of ~~2002~~liabilities ~~when~~and ~~compared~~equity, toare $1valued at either historical cost or at contract value (including accrued interest),~~029 million~~ ~~for~~which, ~~the~~by ~~first~~their ~~nine~~nature, ~~months~~do not require the use of ~~2001~~significant estimates: Secured financings, Receivables/Payables and Other assets/liabilities and Total capital. The remaining balance sheet categories, comprised of Securities ~~increase~~and isother ~~mainly~~financial ~~due~~instruments toowned ~~higher~~and ~~underwriting~~Securities ~~revenues~~and asother afinancial ~~result~~instruments ofsold ~~continued~~but ~~strength~~not inyet ~~debt~~purchased ~~underwriting~~(long and ~~gains~~short ininventory positions, respectively), are recorded at market ~~share~~or fair value, the components of which may require, to varying degrees, the use of estimates in ~~equity~~determining ~~origination~~fair value.

The majority of the Company's long and short inventory is recorded at market value based upon listed market prices or utilizing third party broker quotes and therefore do not incorporate significant estimates. Examples of inventory valued in this manner include government securities, agency mortgage-backed securities, listed equities, money markets, municipal securities, corporate ~~INVESTMENT~~bonds ~~BANKING~~and ~~NET~~listed ~~REVENUES~~ futures.

	Nine Months Ended
(In millions)	August 31 2002		August 31 2001
Debt Underwriting	$	601	$	582
Equity Underwriting		326		224
Merger and Acquisition Advisory		206		223
	$	1,133	$	1,029

If listed market prices or broker quotes are not available, fair value is determined based on pricing models or other valuation techniques, including use of implied pricing from similar instruments. Pricing models are typically utilized to derive fair value based upon the net present value of estimated future cash flows including adjustments, where appropriate, for liquidity, credit and/or other factors. For the vast majority of instruments valued through pricing models, significant estimates are not required, as the market inputs into such models are readily observable and liquid trading markets provide clear evidence to support the valuations derived from such pricing models. Examples of inventory valued utilizing pricing models or other valuation techniques include: OTC derivatives, private equity investments, certain high yield positions, certain mortgage loans and direct real estate investments and non-investment grade retained interests.

~~M&A advisory~~OTC ~~revenues~~Derivatives The ~~decreased~~fair byvalue ~~8% to $206 million for the first nine months~~ of ~~2002 from $223 million for~~ the ~~first~~Company's ~~nine~~OTC ~~months~~derivative ofassets ~~2001.~~and ~~The~~liabilities ~~decrease~~at ~~reflected the extremely difficult market conditions~~February 28, ~~partially~~2003 ~~attributed~~were $11.1 billion ~~to weak equity share valuations~~ and ~~corporate governance issues~~$10.5 billion, asrespectively. ~~the~~OTC ~~market~~derivative ~~volume~~assets ~~was~~represent the ~~lowest~~Company's ~~it has been in several years.~~

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

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

unrealized gains, ~~CAPITAL~~net ~~MARKETS~~of ~~NET~~unrealized ~~REVENUES~~ losses for situations in which the Company has a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties.

	Nine Months Ended August 31, 2002							Nine Months Ended August 31, 2001
(in millions)	Gross Revenues		Interest Expense			Net Revenues		Gross Revenues		Interest Expense			Net Revenues
Fixed Income	$	6,422	($	5,280	)	$	1,142	$	10,760	($	9,636	)	$	1,124
Equities		1,322		(962	)		360		1,858		(1,100	)		758
	$	7,744	($	6,242	)	$	1,502	$	12,618	($	10,736	)	$	1,882

The vast majority of the Company's OTC derivatives are transacted in liquid trading markets for which fair value is determined utilizing pricing models with readily observable market inputs. Examples of such derivatives include: interest rate swaps contracts, TBA's (classified in the above table as other fixed income securities contracts), foreign exchange forward and option contracts in G-7 currencies and equity swap and option contracts on listed securities. However, the determination of fair value for certain less liquid derivatives requires the use of significant estimates and include: certain credit derivatives, equity option contracts greater than 5 years, and certain other complex derivatives utilized by the Company in providing clients with hedging alternatives to unique exposures. The Company strives to limit the use of significant judgment by using consistent pricing assumptions between reporting periods and utilizing observed market data for model inputs whenever possible. As the market for complex products develops, the Company refines its pricing models based upon market experience in order to utilize the most current indicators of fair value.

~~Capital Markets~~Private Equity Investments The Company's ~~net~~private ~~revenues~~equity ~~were~~investments of $~~1,502~~391 million ~~for~~at ~~the~~February 28, ~~first~~2003 include ~~nine~~both ~~months~~public and private equity positions. The determination of ~~2002,~~fair ~~down~~value ~~20%~~for ~~from~~these investments may require the ~~first~~use ~~nine~~of ~~months~~estimates and assumptions as these investments are generally less liquid and often contain trading restrictions. The determination of ~~2001~~fair ~~due~~value ~~principally~~for private equity investments is based on estimates incorporating valuations which take into account expected cash flows, earnings multiples and/or comparison to similar market transactions. Valuation adjustments are an ~~extremely~~integral ~~weak~~part ~~equities~~of pricing these instruments, reflecting consideration of credit quality, concentration ~~market~~risk, sale restrictions and other liquidity factors.

~~Net revenues~~High ~~from~~Yield At February 28, 2003, the ~~fixed~~Company ~~income~~had ~~component~~high ofyield ~~Capital~~long ~~Markets~~and short positions of $~~1,142~~2.8 ~~million~~billion inand $0.6 billion, ~~the~~respectively. ~~first~~The ~~nine~~majority ~~months~~ of ~~2002~~these ~~were~~positions upare ~~slightly~~valued asutilizing ~~compared~~broker toquotes ~~the~~or ~~first~~listed ~~nine~~market ~~months~~prices. ofIn ~~2001. These~~certain ~~results~~instances, ~~were~~when ~~driven~~broker byquotes ~~strong~~or ~~institutional~~listed ~~customer~~prices ~~flow~~are ~~activity~~not available the Company utilizes prudent judgment in ~~mortgage~~determining ~~and~~fair value which may involve the utilization of analysis of credit ~~related~~spreads ~~products~~associated with pricing of similar instruments, or other valuation techniques.

~~Net revenues~~Mortgage ~~from~~Loans ~~the~~and ~~equities~~Real ~~component of Capital Markets decreased 53% to $360 million in the first nine months of 2002 from $758 million in the comparable 2001 period.~~ Estate The ~~decrease~~Company ~~was~~is a ~~result of the difficult~~ market ~~conditions~~leader ~~over~~in ~~the~~mortgage-backed ~~first~~securities ~~nine~~trading ~~months of 2002, which were evidenced by declining equity indices~~ and ~~the historical lows in volatility levels, which~~mortgage ~~negatively~~securitizations ~~impacted~~(both ~~revenue~~residential ~~levels~~and commercial). ~~These~~The ~~negative~~Company's ~~market~~inventory ~~conditions~~of ~~resulted~~mortgage inloans ~~revenue~~principally ~~declines~~represents ~~across~~loans ~~most~~held ~~equity~~prior ~~products,~~to ~~including private equity investments~~securitization. ~~Within~~In ~~net~~this ~~revenues from equity capital markets products~~activity, ~~commissions revenues increased as a result of~~ the ~~increase~~Company inpurchases ~~the~~mortgage loans ~~portion of revenue derived~~ from ~~institutional~~loan ~~commission-based~~originators ~~pricing~~or in the ~~NASDAQ~~secondary ~~market~~markets ~~with~~and ~~related revenues~~then ~~classified~~aggregates ~~within~~pools ~~commissions,~~of ~~whereas~~mortgages infor ~~the~~securitization. ~~prior~~The ~~year,~~Company ~~the~~records ~~Company's~~mortgage ~~NASDAQ~~loans ~~trades~~and ~~for~~direct ~~institutional~~real ~~customers~~estate ~~were~~investments ~~primarily~~at ~~transacted~~fair onvalue, with arelated ~~spread~~mark-to-market ~~basis~~gains ~~with~~and ~~related~~losses ~~revenues~~recognized ~~classified within~~in ~~principal~~Principal transactions revenues.

~~Net~~As ~~interest~~the ~~income~~Company's ~~benefited~~inventory ~~due~~of toresidential aloans ~~steepening~~turns ~~yield~~over ~~curve~~through ~~environment~~sale ~~and~~to ~~higher~~securitization ~~interest~~trusts ~~earning~~rather ~~asset~~frequently, ~~levels~~such inloans ~~the~~are ~~first~~generally ~~nine~~valued ~~months~~without ~~of 2002 as compared to~~ the ~~first~~use ~~nine months~~ of ~~2001~~significant estimates.

~~Client~~In addition, ~~Services Client~~the ~~Services'~~Company ~~earnings~~held ~~reflect~~approximately ~~earnings~~$0.5 billion ~~from~~of ~~the~~non-investment ~~Company's~~grade ~~private~~retained ~~client~~interests ~~and private~~at ~~equity~~February 28, ~~businesses~~2003, down from $1.1 billion ~~Private~~at November 30, ~~client~~2002. ~~net~~As ~~revenues~~these ~~reflect~~interests primarily represent the ~~Company's~~junior ~~high-net-worth~~interests ~~retail~~in ~~customer~~commercial ~~flow~~and ~~activities~~residential asmortgage ~~well~~securitizations, asfor ~~asset~~which ~~management~~there ~~fees.~~are ~~Private~~not ~~equity~~active ~~net revenues~~trading ~~include~~markets, ~~the~~estimates are ~~management~~generally ~~and~~required ~~incentive~~to ~~fees~~be ~~earned~~utilized in ~~the~~determining fair value. The Company's ~~role~~values asthese ~~general~~instruments ~~partner~~using inprudent ~~its~~estimates ~~private~~of ~~equity~~expected ~~partnerships~~cash flows, and considers the valuation of similar transactions in the market.

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

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

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses accounting and reporting for costs associated with exit or disposal activities including the accounting for certain employee termination benefits, contract termination costs and costs to consolidate facilities ~~CLIENT~~or ~~SERVICES~~relocate ~~NET~~employees. ~~REVENUES~~ This statement is effective for exit and disposal activities initiated after December 31, 2002. The Company adopted this standard during the first quarter of 2003 and such adoption did not have a material impact to the Company's financial condition or results of operations.

	Nine Months Ended
(in millions)	August 31 2002		August 31 2001
Private Client	$	579	$	541
Private Equity		3		26
	$	582	$	567

In November 2002, the FASB issued FIN 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also provides additional guidance on the disclosure of guarantees. The recognition and measurement provisions are effective for guarantees made or modified after December 31, 2002. The disclosure provisions are effective for fiscal periods ending after December 15, 2002. The Company adopted FIN 45 during the first quarter of 2003, and the adoption did not have a material impact to the Company's financial condition or results of operations.

~~Non-Interest~~On January 17, ~~Expenses Non-interest~~2003 ~~expenses~~the ~~were~~FASB $2issued FIN 46,~~288~~ "Consolidation of Variable Interest Entities—an interpretation of ARB No. ~~million~~51" ~~for~~("FIN 46"). This interpretation provides new consolidation accounting guidance for entities involved with special purpose entities. This guidance does not impact the ~~first~~accounting ~~nine~~for ~~months~~securitizations oftransacted ~~2002~~through ~~compared~~QSPEs. toThis interpretation $2will require a primary beneficiary,~~414 million~~ ~~for~~defined as an entity which participates in either a majority of the ~~first~~risks ~~nine~~or ~~months~~rewards of ~~2001~~such SPE, to consolidate the SPE. ~~The~~An ~~decrease~~SPE inwould ~~non-interest~~not ~~expenses~~be ~~highlights~~subject to this interpretation if such entity had sufficient voting equity capital, such that the ~~Company's~~entity ~~continued~~is ~~disciplined approach~~able to ~~expense~~finance ~~management~~its activities without the additional subordinated financial support from other parties. ~~This~~FIN ~~ongoing~~46 ~~focus~~also isrequires aadditional ~~key~~disclosures ~~element~~related to involvement with SPEs. The accounting provisions of this interpretation are effective for new transactions executed after January 31, 2003. The interpretation will be effective for all existing transactions with SPEs beginning in the Company's ~~strategic~~fourth ~~objectives~~quarter of 2003. ~~Compensation~~While ~~and~~the ~~benefits~~Company ~~expense~~has not yet completed its analysis of ~~$1,639 million~~the ~~decreased~~impact 8%of ~~from $1,773 million~~the innew interpretation, the ~~first~~Company ~~nine~~does ~~months~~not anticipate that the adoption of ~~2001,~~this ~~consistent~~interpretation ~~with~~will have a material impact to the ~~decrease~~Company's infinancial ~~net~~condition ~~revenues~~or its results of operations.

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

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

Significant Accounting Policies

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

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

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

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

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

LEHMAN BROTHERS INC. and SUBSIDIARIES

PART I—FINANCIAL INFORMATION

ITEM 4. Controls and Procedures

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

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

3231

LEHMAN BROTHERS INC. and SUBSIDIARIES PART II—OTHER INFORMATION

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

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

Although there can be no assurance as to the ultimate outcome, the Company generally has denied, or believes it has a meritorious defense and will deny, liability in all significant cases pending against it including the matters described below, and it intends to defend vigorously each such case. Based on information currently available, ~~advice of counsel, available insurance coverage~~ and established reserves, the Company believes that the eventual outcome of the actions against it, including the matters described below, will not, in the aggregate, have a material adverse effect on the consolidated financial position or cash flows of the Company but may be material to the Company's operating results for any particular period, depending on the level of the Company's income for such period.

~~WorldCom~~ Reference is ~~Bondholders~~made ~~Litigation~~ to Part I, Item 3, Legal Proceedings, in the Form 10-K for a complete description of the proceedings reported therein; only significant subsequent developments in such proceedings, if any, are given below.

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

AIn ~~third~~February 2003, ~~lawsuit~~Arthur ~~was~~Andersen LLP filed bya ~~SunTrust~~third-party ~~Bank~~petition ~~and~~against ~~Trusco~~LBI, ~~Capital~~Holdings ~~Management~~and inother ~~the~~commercial Uor investment banks.S. ~~District~~The ~~Court~~third-party ~~for~~petition ~~the~~relates ~~Southern~~to an original petition filed against Anderson in the District Court of ~~Mississippi~~Harris onCounty, ~~September 16~~Texas, ~~2002.~~11th ~~Insofar~~Judicial asDistrict, ~~the claims~~by ~~against~~Al ~~LBI~~Rajhi ~~are~~Investment ~~concerned~~Corporation BV, ~~the~~making ~~Mississippi~~claims ~~action~~for ~~alleges~~fraud ~~violations~~and ofnegligent misrepresentation ~~the~~in ~~disclosure~~connection ~~requirements~~with ofallegedly ~~the~~materially ~~federal~~misleading ~~securities~~public ~~laws~~statements asconcerning ~~well~~Enron's asfinancial ~~common~~condition ~~law claims~~ in connection with ~~the plaintiffs'~~a ~~purchase~~metals ofsale ain ~~total~~which ofplaintiff allegedly extended $~~5,025,000~~100 million ~~principal~~of ~~amount~~credit ofto ~~WorldCom~~Enron. ~~bonds~~The inthird-party ~~offerings~~petition inseeks ~~which~~assessment ~~LBI~~of ~~was~~proportionate anliability ~~underwriter~~and incontribution ~~1998~~from LBI, Holdings and ~~2000.~~the ~~One~~other orthird-party ~~more~~defendants. ofThe ~~these~~third-party petition ~~three~~alleges ~~actions~~that ~~also~~the ~~name(s)~~third-party as defendants ~~WorldCom~~were involved in creating, ~~certain~~structuring, ofusing ~~WorldCom~~and managing Enron's ~~present~~special orpurpose ~~former~~entities ~~officers~~("SPEs"), ~~and/~~misrepresented or ~~directors~~failed to disclose information regarding the SPEs, made public statements about Enron, financially assisted Enron, assisted Enron in raising money, invested in the SPEs and~~/or~~ ~~WorldCom's~~engaged ~~outside~~in ~~accounting~~transactions ~~firm~~involving Enron's assets.

~~Each of~~Actions ~~these~~Regarding ~~actions~~Frank ~~seeks,~~Gruttadauria ~~among~~(reported ~~other~~in ~~things, compensatory damages. Requests to consolidate these and other pending litigation relating to WorldCom are pending before~~ the ~~Judicial Panel on Multidistrict Litigation. On July~~Form ~~21,~~10-K) ~~2002, WorldCom, Inc., filed for protection under the U.S. bankruptcy laws.~~

Another of the cases pending in the United States District Court for the Northern District of Illinois has been compelled to arbitration by order of the court.

WorldCom Bondholders Litigation (reported in the Form 10-K)

Several individual actions were recently filed in various counties in Mississippi state court by individuals alleging violations of state law by LBI in connection with the 1997, 1998, 2000 and 2001 WorldCom bond offerings. (LBI did not participate in the 1997 and 2001 offerings.) The complaints do not identify the amount of WorldCom bonds purchased and seek compensatory and punitive damages.

~~Research~~ITEM ~~Analyst~~6 Exhibits ~~Independence~~and ~~Investigations~~Reports on Form 8-K

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

In The refollowing ~~Metricom~~exhibits ~~Securities~~are ~~Litigation~~ filed as part of (or accompany, as indicated below) this Quarterly Report, or where indicated, were heretofore filed and are hereby incorporated by reference:

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

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

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

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

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

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

99.01: Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (included herewith) (This statement accompanies this Report in accordance with the Sarbanes-Oxley Act of 2002 and Commission Release No. 34-47551 and shall not be deemed "filed" with the Commission for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)
99.02: Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (included herewith) (This statement accompanies this Report in accordance with the Sarbanes-Oxley Act of 2002 and Commission Release No. 34-47551 and shall not be deemed "filed" with the Commission for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)

~~On September 9,~~(b) Reports ~~2002,~~on the Washington State Investment Board, which is a named plaintiff in the Enron Securities Litigation, filed a new purported class action which mirrors the claims in the Enron Securities Litigation. This new action, however, alleges a class period of SeptemberForm 9, 1997, to October 18, 1998, whereas the Enron Securities Litigation asserts a class action period of October 18, 1998, to November 27, 2001. This new action is an attempt to expand the class action period in the Enron Securities Litigation based upon the lengthened statute of limitations in the Sarbanes8-~~Oxley Act of 2002.~~ K

~~Actions~~The ~~Regarding~~following ~~Frank~~Current ~~Gruttadauria~~Reports ~~(reported in LBI's 2001 Annual Report~~ on Form 108-K ~~and~~were ~~Quarterly~~filed ~~Reports~~during ~~on Form 10-Q~~the ~~for~~fiscal ~~the~~quarter ~~quarters~~for ~~ended~~which ~~February 28~~this ~~and~~Report ~~May 31,~~is ~~2002)~~filed:

~~Settlements~~None ~~have been agreed to in two of the actions pending in the District Courts.~~

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

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

~~ITEM~~ ~~6. Exhibits~~ ~~and Reports on Form 8-K~~ SIGNATURE

~~The following~~ Pursuant ~~exhibits~~to ~~are~~the ~~filed~~requirements asof ~~part~~the ofSecurities ~~this~~Exchange ~~Quarterly~~Act ~~Report~~of 1934, orthe ~~where~~Registrant ~~indicated,~~has ~~were~~duly ~~heretofore~~caused ~~filed~~this ~~and~~report ~~are~~to ~~hereby~~be ~~incorporated~~signed on its behalf by ~~reference:~~the undersigned thereunto duly authorized.

3.01	Restated Certificate of Incorporation of the Registrant dated September 3, 1981 (incorporated by reference to Exhibit 3.01 to the Registrant's Annual Report on Form 10-K for the year ended November 30, 2001)
		LEHMAN BROTHERS INC.
3.02	Certificate of Amendment to Restated Certificate of Incorporation of the Registrant dated May 11, 1984 (incorporated by reference to Exhibit 3.02 to the Registrant's Annual Report on Form 10-K for the year ended November 30, 2001)
		(Registrant)
3.03	Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated March 6, 1985 (incorporated by reference to Exhibit 3.03 to the Registrant's Annual Report on Form 10-K for the year ended November 30, 2001)
Date: April 14, 2003	By:	/s/ DAVID GOLDFARB Chief Financial Officer (principal financial and accounting officer)
3.04	Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated August 31, 1987 (incorporated by reference to Exhibit 3.04 to the Registrant's Annual Report on Form 10-K for the year ended November 30, 2001))
3.05	Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated January 28, 1988 (incorporated by reference to Exhibit 3.05 to the Registrant's Annual Report on Form 10-K for the year ended November 30, 2001))
3.06	Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated July 19, 1990. (incorporated by reference to Exhibit 3.06 to the Registrant's Annual Report on Form 10-K for the year ended November 30, 2001)
3.07	Certificate of Amendment to Restated Certificate of Incorporation of the Registrant, dated August 2, 1993 (incorporated by reference to Exhibit 3.07 to the Registrant's Annual Report on Form 10-K for the year ended November 30, 2001)
3.08	Certificate of Designations of Floating Rate Preferred Stock, filed April 30, 1996 (incorporated by reference to Exhibit 3.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996)
3.09	By-Laws of the Registrant, amended as of January 30, 1997 (incorporated by reference to Exhibit 3.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996)
12.01	Computation of Ratio of Earnings to Fixed Charges (filed herewith)

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

(THIS PAGE INTENTIONALLY LEFT BLANK)

The following reports on Form 8-K were filed during the quarter for which this Quarterly Report is filed:

None

SIGNATURE

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

		LEHMAN BROTHERS INC. (Registrant)
Date: October 15, 2002		By:	/s/ DAVID GOLDFARB David Goldfarb Chief Financial Officer (Principal Financial Officer)

[THIS PAGE INTENTIONALLY LEFT BLANK]

CERTIFICATIONS

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

1.

I have reviewed this quarterly report on Form 10-Q of Lehman Brothers Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: ~~October 15~~ April 14, ~~2002~~2003 /s/ RICHARD S. FULD, JR. Richard S. Fuld, Jr. Chairman and Chief Executive Officer

~~/s/ RICHARD S. FULD, JR. Richard S. Fuld, Jr. Chairman and Chief Financial Officer~~38

I, David Goldfarb, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Lehman Brothers Inc.;

2.

3.

4.

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: ~~October 15~~ April 14, ~~2002~~2003 /s/ DAVID GOLDFARB David Goldfarb Chief Financial Officer

~~/s/ DAVID GOLDFARB David Goldfarb Chief Financial Officer~~39

EXHIBIT INDEX

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

4240

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