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Where Vision Gets Built SM ANNUAL REPORT 2000
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Page 1: Where Vision Gets Built

Where Vision Gets Built SM

ANNUAL REPORT 20003 WORLD FINANCIAL CENTER, NEW YORK, NY 10285 WWW.LEHMAN.COM

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Lehman Brothers. The Mission.

Our Firm.We are a rapidly growing global institutional investment bank with a heritage of over 150 years of success. As a growthcompany in a growth industry, our atmosphere is charged with entrepreneurial energy. We are a culture of “we’s”, not“I’s”, with a commitment to access and teamwork. The hallmark of our success will be our reputation as a firm that generates and supports exceptional levels of opportunity and initiative.

Our Clients.Our One-Firm culture allows us to team up and bring together the best of Lehman Brothers to meet our clients’ mostimportant needs. We do this by taking the initiative to reach out to our clients; by listening carefully to understand theirneeds; by developing innovative and tailored solutions; and by delivering the full resources and strength of the Firm to provide superb execution of those solutions. The hallmark of our success will be that our clients look to us first as theirlead investment bank.

Our People.Our success depends on the strength of our people. Our goal is to attract and develop exceptionally talented people whoshare our passion for individual excellence and our commitment to teamwork. We do this by attracting the best person tofill every role within the Firm; by developing everyone to reach their full potential; by fostering the mindset that finishingsecond is unacceptable; and by working together in an environment of integrity, respect and trust as One Firm. The hall-mark of our success will be our wide recognition as a unique firm in which exceptional people build rewarding careers.

Our Shareholders.As employees, we are all shareholders of Lehman Brothers and are deeply committed to building the value of the Firm.Our goal is to deliver superior returns to all of our shareholders. We do this by committing to opportunities that offerexceptional returns; by focusing on productivity, expense discipline and profitability; by managing our risks and maintain-ing our financial strength; and by preserving our reputation. The hallmark of our success will be the strength of our long-term record of value creation for our shareholders.

TABLE OF CONTENTS

Financial Highlights 1Letter to Stockholders and Clients 2Creating Opportunity 6Building Value 10Delivering Performance 22Business Review 26Financial Review 36Board Members and Officers 89Locations Worldwide 92Other Stockholder Information 96 D

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Financial Highlights

Twelve Months ended November 30

(in millions, except per common share and selected data) 2000 1999 1998 1997 1996

FINANCIAL INFORMATION

Net revenues $ 7,707 $ 5,340 $ 4,113 $ 3,873 $ 3,444

Net income(1) 1,775 1,132 736 647 416

Total capital(2) 43,874 37,684 32,754 24,784 19,796

PER COMMON SHARE DATA(3)

Earnings(4) $ 6.38 $ 4.08 $ 2.60 $ 2.36 $ 1.62

Dividends declared $ 0.22 $ 0.18 $ 0.15 $ 0.12 $ 0.10

Book value $ 28.78 $ 22.75 $ 18.53 $ 16.70 $ 14.42

Ending stock price $ 49.56 $ 38.19 $ 25.00 $ 25.28 $ 14.56

SELECTED DATA

Return on average common equity

Before redeemable preferred dividend 27.4% 21.8% 16.3% 17.0% 12.3%

After redeemable preferred dividend 26.6% 20.8% 15.2% 15.6% 12.1%

Pretax operating margin 33.5% 30.5% 25.6% 24.2% 18.5%

Adjusted leverage ratio(5) 16.6X 18.6X 20.6X 23.9X 24.8x

Weighted-average common

and equivalent shares(4) 264,163,612 258,565,344 249,983,662 242,129,858 232,747,170

Employees 11,326 8,893 8,873 8,340 7,556

(1) 1996 results include an after-tax special charge of $50 million.

(2) Total capital includes long-term debt, stockholders’ equity and preferred securities subject to mandatory redemption.

(3) All share and per share data have been restated for the two-for-one common stock split effective October 20, 2000.

(4) For the years ended November 30, 2000 and 1999, the assumed conversion of Series A and B Convertible Preferred Stock into 2,438,375 and 5,559,474 common shares had

the effect of decreasing diluted earnings per share by $0.03 and $0.02, respectively.

(5) Ratio of total assets excluding matched book to total stockholders’ equity and other preferred securities.

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Lehman Brothers had an exceptional year in 2000.We achieved the best financial performance in the history of the Firm, hitting a record level of revenues,earnings, and returns. We realized significant growthas a franchise, not only in transaction volumes, butalso in terms of the breadth and depth of our globalenterprise. We continued to expand our roster of global clients and attracted a large number ofextraordinary people to the Firm. Our strong financialposition provides a solid foundation to support ourexpansion and our high rate of growth. We are veryproud of these results in light of last year’s marketvolatility, demonstrating the growing power of our franchise.

Lehman Brothers posted outstanding results in 2000.The Firm reported net revenues of $7.7 billion andnet income of $1.8 billion, increases of 44 percent and57 percent, respectively, over last year’s results. For thepast five years, the Firm has grown revenues by 22percent per year and increased earnings at a rate of 44percent per year. We reported earnings per share of$6.38 versus $4.08 per share in 1999. We ended theyear with a return on equity of 27.4 percent before

accounting for the special preferred stock dividend. In 2000, we effected a two-for-one stock split — our first ever — and early this year, we raised our common stock dividend to $0.28 per share, a 27 percent increase. These resultsstrongly affirm our position as a preeminent institutional investment bank.

BUILDING OUR CORE FRANCHISE Lehman Brothers has succeeded in creating adiversified, highly profitable investment bank through the growth of its highermargin businesses. In 2000, we continued to improve our revenue mix:Investment Banking fees accounted for 28 percent of our total revenues; Equitiesprovided 34 percent; Fixed Income produced 27 percent; and Client Servicesprovided the remaining 11 percent. From a product perspective, LehmanBrothers’ revenue base has clearly never been more diversified; but the Firm hasalso focused its resources on geographic diversification, responding to thehigher growth potential in a number of markets outside the U.S. Our non-U.S.operations generated 42 percent of total revenues in 2000, with Europe accounting for 31 percent. Our scale and diversification make us a provider ofchoice among our clients, and they help to generate a more consistent base ofrevenues to weather difficult market conditions.

Lehman Brothers is strategically expanding all of its major businesses.Regionally, the Firm is concentrating its investments in Europe to capture the

Dear Stockholders and Clients

Richard S. Fuld, Jr.Chairman and Chief Executive Officer

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dynamic evolution of that region’s capital markets. The Firm’s strategic investments continued in 2000; as the year progressed, they were increased, as wecapitalized on unique opportunities created by dislocations within the industry.

In 2000, we made significant strides in building our Investment Banking Divisionthrough a well-executed expansion plan. We added more than 500 bankers,growing our ranks to 2,100 professionals, and broadly expanding our client coverage in targeted industry sectors and in key products such as mergers andacquisitions and equity financing. Importantly, we also strengthened our localpresence in Europe, as we made significant additions in the U.K., Germany,France, the Benelux countries, Spain, Switzerland and Sweden. We have consistently increased our share of investment banking business when and wherewe establish client coverage; consequently, these investments should contributeto continued revenue and market share momentum. Our results to date reaffirmour strategy: over the past five years, we have succeeded in growing ourInvestment Banking revenues by 27 percent per year, and in 2000, we reportedrevenues of $2.2 billion, a 31 percent increase over the prior year.

We have also substantially expanded our Equities Division, focusing on all aspects of this business — building our capabilities in sales and trading, deriva-tives and financing, while ensuring full integration among these units. Over thepast three years, we have doubled the size of Equity Research and dramatically increased the number of companies we evaluate. We have investedin the quality and scale of our sales force and have achieved a correspondingincrease in the volume of business we transact with equity investors around theworld. We have also expanded our equity derivatives capabilities and now rankas one of the world’s largest dealers. This past year, we made significant strides in enlarging our Equity Finance and Prime Brokerage capabilities throughenhanced technology and the addition of seasoned professionals. All told, wehave made dramatic progress: since 1996, we have grown our Equity revenues byan extraordinary 59 percent per year; our revenues in 2000 totaled $2.6 billion,an 84 percent increase versus 1999.

In 2000, we continued to reinforce the diversification and dominant market position we hold in Fixed Income. We expanded our high grade and high yieldcapacity in Europe and bolstered our expertise in structured credit, derivativesand securitizations. Our continued investments in building this division helpedus to increase our Fixed Income revenues in 2000 to $2.1 billion, a 24 percentincrease versus the prior year, in an exceedingly difficult market.

We also broadened the scope of our Client Services Division in 2000. Througha combination of organic growth and acquisition, we increased our total numberof high net worth financial consultants to 450. With a productivity level that isamong the highest in the industry, Private Client Services has been a growingcontributor to Firmwide revenues. We have also grown our alternative asset

Net Revenuesin millions of U.S. dollars

00999897

$7,707

$5,340

$4,113$3,873

Net Incomein millions of U.S. dollars

00999897

$1,775

$1,132

$736

$647

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management business by expanding our Private Equity capabilities. Over thecourse of 2000, we successfully completed the investing process for our VentureCapital fund, raised an $800 million global communications fund, and closed on$590 million in commitments for a global real estate fund. We ended the year withover $4.5 billion in Private Equity assets under management. Our Client ServicesDivision is important to the Firm in other ways, including the sourcing of asignificant number of opportunities for our Investment Banking franchise.

From a geographic perspective, Lehman Brothers has focused on Europe, wherethe forces of deregulation, globalization, pension and taxation reform, and a single currency have established the foundation for significant growth. In Europe,we have built a strong track record: our revenues have grown at an annual rate of43 percent per year since 1997, and revenues for 2000 rose 45 percent over theprior year. We have established a large platform throughout Europe that we con-tinue to expand. Since 1997, we have almost doubled our European headcountfrom 1,500 to over 2,900, with an addition of 900 professionals this year alone.

GROWING OUR COMPETITIVE ADVANTAGE Clearly, 2000 was a year of significantachievement for Lehman Brothers. We aggressively pursued strategic investmentsto broaden the scope of our franchise, ultimately adding over 2,400 people tobring our total number of employees to 11,326 at year end. This expansion leavesus well-positioned for the many opportunities we see worldwide. We accom-plished this growth while reporting record financial results. This achievementstems from a number of core competencies that are part of Lehman Brothers’culture.

Expense management is one of those core competencies, and we have establishedourselves as one of the most cost efficient investment banks. We focus on expenses as actively as we focus on increasing our revenue base, maintaining asignificant component of variable expenses in order to weather difficult marketenvironments. This proficiency has allowed Lehman Brothers to increase itsearnings at a rate that far exceeds its overall revenue growth.

We have also made significant enhancements to our risk management processesand our liquidity and funding framework, ensuring that we are best in class inthese extremely important management disciplines. Our conservative approach tothese activities, coupled with our $44 billion capital base, provide us with the solidfinancial structure to grow our business while sustaining competitive performancein market downturns. This strength was recognized by Moody’s Investors Service,when they upgraded our debt rating to single A this past November.

We also regard our technology infrastructure as a major source of competitiveadvantage — it supports our growth, provides scale, increases productivity andgives us the capability to deliver valuable content to our clients. Our enhancedtrading and risk management systems support our growing volume of business.

Return on Equity*percent

00999897

27.4%

21.8%

16.3%17.0%

* Before redeemable preferred dividend.

“Our scale and diversifi-

cation make us a provider

of choice among our

clients, and they help to

generate a more consistent

base of revenues to

weather difficult market

conditions.”

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In terms of electronic trading, we have positioned ourselves to capitalize on theopportunities presented by connectivity, participating in numerous consortiaand alternative trading systems in major product categories and extending thisliquidity to clients. Our launch of LEHMANlive provides a powerful platform todeliver product, research, and other content to our clients. In 2000, we pioneeredthe e-syndicate and have participated in numerous electronic bond offerings. Our objectives continue to be the facilitation of superior execution,speed, transparency and efficiency for our clients.

A CULTURE OF COMMITMENT At Lehman Brothers, we believe that our culturecreates the ultimate cornerstone for our competitive advantage. Our cultureis one of trust and commitment, and we extend that commitment to ourclients, employees and shareholders.

Our clients are the heart of our franchise — they define our purpose and, ultimately, the strength of our Firm. We regard our client relationships as partnerships, where the excellence of our ideas, advice, products, service andexecution determine the quality and longevity of these relationships. As a partner, we look to help our clients achieve their vision, sharing in their successthrough our efforts.

Our employees provide the intellectual capital that defines Lehman Brothers. Asa Firm, we are committed to developing this talented group of people to reachtheir maximum potential. Our employees share in our success through their stockownership, which accounts for 33 percent of our outstanding shares and equiva-lents. This provides a powerful incentive to ensure an atmosphere of excellence,ownership, integrity and commitment to our One Firm principle of teamwork.

Our stockholders share in our success, as the Firm’s financial performance ultimately drives our value as an enterprise. Our performance this year hasimproved our market capitalization to over $16 billion, a 60 percent increase versusyear-end 1999 and a 45 percent annual rate of return for our shareholders since1996. Our performance in 2000 validates our strategy and our commitment tothe proposition of creating shareholder value. Given the many opportunitieswe see around the world, we believe this value creation has just begun. We look forward to long and successful partnerships with our clients andshareholders as we move forward.

Richard S. Fuld, Jr.Chairman and Chief Executive OfficerFebruary 14, 2001

High/Low Price Range ofCommon Stock*

in U.S. dollars

00999897 00999897

$31.06

$80.00

$20.44

$41.94

$12.38

$42.50

$14.50

$28.06

* Adjusted for 2-for-1 stock split in fiscal 2000.

• •

••

“At Lehman Brothers, we

believe that our culture

creates the ultimate

cornerstone for our com-

petitive advantage. Our

culture is one of trust

and commitment, and we

extend that commitment

to our clients, employees

and shareholders.”

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Creating Opportunity

At Lehman Brothers, we build our clients’

vision, helping them extend both their reach

and their grasp. Naturally, we actively collaborate

in formulating their business goals. But we also

work to turn those aspirations into tangible results.

We identify opportunities for clients, but more

importantly, we create opportunities by rebuilding

and realigning our capabilities to correspond with

our clients’ needs and a changing marketplace.

Within the last year, we substantially expanded

the Firm, made highly productive investments in

research and technology, and fostered numerous

alliances to heighten our ability to create such

new and rewarding opportunities for our clients.

Growth in Worldwide Headcount

009998

11,326

8,893 8,873

Ranked Research Analysts

00990099

24

31

19

40

Equities Fixed Income

Source: Institutional Investor U.S. poll data

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Expanding the FranchiseBuilding vision and creating opportunity demand the best tools available, wherever the job needs doing. Consequently,Lehman Brothers continued its planned expansion in 2000. Overall staff increased by 27 percent, to more than 11,300, withespecially significant investments in equity research, equity sales and trading, investment banking, and technology. Theincoming class of analysts and associates was the largest in Firmwide history at more than 600.

Beneath the sheer numbers lies an enviable resource of talent. Our standing and success attract the best quality professionals, whom we are also retaining at an extremely high rate. Industry consolidation has further deepened the talent pool. In Investment Banking, the Firm has added significant teams in technology, heathcare, media and telecom, financial institutions, chemicals, power, industrials and consumer products, among others. In research, the expanded depthand capabilities of our sector teams is one explanation for the dramatic gains we achieved in industry rankings. In our Equitybusiness, we added capacity in the cash, derivatives and financing units to effectively address our increased volume of busi-ness and our growing client roster. In Fixed Income, we bolstered our securitization and structured credit areas, whileexpanding our high grade and high yield capabilities in Europe. We also acquired approximately 92 retail brokers from SGCowen, to augment our high net worth sales force in Private Client Services. In short, our capacity to deploy uncommonly

gifted professionals against the needs ofour clients is growing as never before.

We continue to extend our presenceinto local markets to enhance our clientcoverage. Last year, we established 11new offices and are now located in 24countries. Our expansion strategy hasmost recently targeted Europe, wherethe fundamentals for rapid growth andincreased utilization of institutionalinvestment banking products and serv-ices are particularly compelling. Bordersand barriers to doing business continueto come down, while the single currencypromotes a pan-European view and astable platform for growth and reform.Accordingly, in 2000, we added morethan 900 people to bring our total in Europe to over 2,900 professionals. We opened new offices in Rome,Stockholm, Amsterdam, and Munich,while tripling the size of our bankingstaff in Frankfurt. We have created apowerful presence in Europe as we continue to respond to the needs andgoals of our global client base.

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ResearchDuring a year of severe market pressures, many investment banks scaled back their research efforts. Lehman Brothers remainscommitted to research excellence as a central hallmark of our client franchise. This commitment is apparent in the highlyrespected “All America Research Team” selections by Institutional Investor magazine.

In Equity Research, we have significantly expanded our capabilities on a global basis to better serve our corporate andinstitutional clients. Demonstrating this success was the outstanding showing in last year’s Institutional Investor survey, wherethe Firm increased its number of ranked analysts in the U.S. by 63 percent to 31 — the largest increase of any competitor.In Europe, we doubled our ranked analysts from five to 11. Globally, the group has expanded to approximately 600 profes-sionals — virtually a doubling over a three year period. Equity Research now covers 75 industries and 1600 companies,including over 90 percent of the S&P 500. Aside from quality fundamental research and stock-picking, the group has devel-oped a strong reputation, confident that their responsibility to clients demands candor and objectivity.

Lehman Brothers overwhelmingly dominated the Fixed Income Research rankings with 40 positions overall, demon-strating strength across the board — from high grade corporates to distressed securities to relative value strategies. In additionto its highly regarded qualitative, quantitative, economic and strategic analysis, Fixed Income Research produces the world’sleading bond market indices, providing comprehensive performance and risk measurements for all major bond markets.More than 90 percent of major institutional investors in the U.S. employ the Lehman Family of Indices, which are now beingextensively used in Europe and are newly introduced in Asia. Index and portfolio tools once used exclusively by traders forrisk management and analytics are now available to clients as the Firm continues to provide powerful website content.

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Technology and E-CommerceLehman Brothers manages technology from the viewpoint of improving the levelof service and efficiency for the Firm, as well as for our clients. We look toachieve rapid and reliable implementation of client solutions, quality con-tent, superior front-end applications and execution immediacy.

During 2000, we launched LEHMANlive, our new client site. This year we expect LEHMANlive to service some 10,000 clients with Lehman Brothers’ award-winning research, advanced analytical tools, market monitors, webcasts,

account information, indices, clear-ing and execution capabilities. Overthe course of 2001, we will be addingelectronic trading in a wide array ofproducts, both equity and debt.

In Fixed Income, the strong movement toward electronic tradinghas prompted the formation ofnumerous dealer consortia in whichwe participate. The substantialsavings in execution costs made possible by electronic trading is anadvantage institutional clients havebeen quick to notice. We have

developed proprietary analytics such as POINT, a valuable tool for clients to ana-lyze and dissect their portfolios. We have also managed several e-bond offeringsover the Internet, and the transparency of the process is particularly attractive toissuers. In Equities, our expertise is available through Lehman Links among othersources, an electronic connectivity service that offers clients fast, more conven-ient, and automated access to our trading desks worldwide, to major equitiesexchanges, ECNs, and other liquidity sources.

Technology is, of course, not limited to e-commerce. The Firm’s equity trading volume doubled in 2000 over the previous year; systems upgrades andcapacity increases have been vital to managing this increased flow. LehmanBrothers continues to implement technology solutions to address the chal-lenges of improved information-gathering, e-trading, settlement and clearance,while striving for enhanced productivity and speed of execution.

Global AlliancesIn a testimony to Lehman Brothers’capabilities, many firms have invitedus to jointly serve their clients. Hereare just some of those alliances thathave broadened our global platform.

Global DistributionLehman Brothers has extended its dis-tribution capabilities to the retail andonline investor by providing securitiesproducts and research to a number of institutions. In the U.S., we havepartnered with Fidelity Investments,providing access to their 11.4 millionretail customers. In Germany, wework with Consors, and in Italy wehave allied with FINECO — expand-ing both companies’ online brokerageproduct offerings. We have also joinedwith ANZ Bank to provide theirinstitutional customers in Australiaand New Zealand with capital markets products and services.

Investment Banking & Private EquityIn Investment Banking, we have part-nered with Bank of Tokyo-Mitsubishito jointly pursue advisory opportuni-ties among their client base. In thefield of municipal finance, we haveformed a partnership with CainBrothers & Co., a specialist in thehealthcare field. In Private Equity, we have joined with Booz-Allen &Hamilton in an alliance to provideventure financing and strategic ser-vices for early-stage companies.

“Europe represents a unique opportunity for Lehman Brothers: the markets there have grown quickly, but theyhave the scope to double in size. Seizing these opportunities requires creativity, knowledge and understanding,and we see research at the core of this. Consequently, we continue to add depth and breadth to our pan-European research coverage, where we emphasize quality and focus in this highly-branded product.”

Jeremy M. IsaacsChief Executive Officer, Lehman Brothers Europe & Asia

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Building Value

Lehman Brothers continues to broaden the

spectrum of value it provides to clients: from

creating opportunities, expanding or restructuring

a business, adjusting to difficult changes that

a client may experience, through the complete

range of financing options, to effective, rapid and

reliable execution and consistent follow-up.

We foster a culture that digs deeper and works

harder in pursuing our clients’ business goals.

As we partner with our clients, we make their

aspirations our own.

In the following pages, we detail a number of

transactions that demonstrate our commitment to

building value for our clients. We are especially

proud of our long-term relationships with clients,

who look to us repeatedly to turn their visions into

realities and rely on our ongoing commitment

to their interests.

Completed TransactionsCalendar Year 2000

Source: Thomson Financial Securities Data Corp.

$340b

$155b

$14b

Debt Underwriting

CompletedM&A

Equity Underwriting

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Asian Restructuring / FinancingAsian economic recovery continued to gather momentum last year, and Lehman Brothers played an important role withlong-standing clients.

The Republic of the Philippines sought to consolidate debt at the sovereign level, reduce the principal amount ofits debt, and enhance liquidity with a large benchmark issue. Lehman Brothers devised a series of simultaneous transactions,including a $1.6 billion global bond offering for the Republic; an exchange of global bonds for $300 million of government-guaranteed National Power Corporation (NPC) debt; the use of $34.3 million of the offering proceeds to purchase $41.4 million of NPC bonds; and the on-lending by the Republic of $500 million in proceeds to NPC via thepurchase of newly-issued NPC bonds. This was the largest Asian sovereign offering in 2000, and the first-ever third partybond tender/exchange by any sovereign borrower.

The Firm has also acted as advisor to the Indonesian Bank Restructuring Agency since the summer of 1998, devel-oping and executing programs designed to rehabilitate the banking sector and to help fund the $50 billion cost of bank restructuring. Last year, we advised IBRA on the sale of its 40 percent stake in PT Astra International Tbk, one of the country’s largest conglomerates. The $500 million transaction was the largest M&A deal ever and the first major asset salein Indonesia. We also advised IBRA on the restructuring of over $10 billion in corporate debt and on the initial publicoffering of Bank Central Asia, the first bank equity sale in Indonesia since the Asian economic crisis.

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Comverse Technology, Inc. / Ulticom Inc.Comverse Technology, Inc. is the world’s leading provider of communications software and systems that enable wireless andwireline network operators to offer value-added enhanced services to their customers. Comverse has significant operationsin Israel, where Lehman Brothers was the first global investment bank to open an office. Lehman Brothers has been assisting the company in building its enterprise since 1993 by utilizing our dominant franchise in both Israel and the technology sector worldwide.

In 1993, Lehman Brothers lead-managed the first major financings for Comverse, with a $59 million common stockoffering and a $60 million convertible debt offering. Since then, the Firm has sole-managed three additional convertibleofferings for Comverse, including one for $600 million in 2000, and advised Comverse on its $461 million acquisition ofExalink Ltd. Also in 2000, Lehman Brothers advised the client on how best to realize additional value from its subsidiary,Ulticom Inc., and then led that $63.5 million IPO, one of the top 10 best performing IPOs of 2000, during an extremelydifficult stock market. Six months later, we led a $213 million common stock offering for Ulticom.

In 1993, Comverse was valued at $297 million. Today, with Lehman Brothers as its primary investment bank, that valueis in excess of $20 billion.

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BellSouth Corporation /Cingular WirelessCommunications and Media is anindustry specialization where LehmanBrothers’ professionals have achievedrecognized leadership for many years.For one of our clients, BellSouthCorporation, Lehman Brothers hascompleted five advisory and financingtransactions since 1998, includingadvising on the sale of its wirelesstowers and the issuance of a total of$2.5 billion in debt securities. In2000, we were joint-lead manager fora $2 billion offer ing of BellSouthterm debt. As one of the leadingexperts on corporate restructurings,the Firm also advised the company onthe creation of its Latin Americantracking stock.

Also in 2000, BellSouth wantedto review its strategic alternatives forits wireless communications businessand turned to Lehman Brothers foradvice. The result was the creation ofCingular Wireless in October, a jointventure that combined BellSouth’sdomestic wireless voice and data operations with those of SBCCommunications Inc. CingularWireless has been a major force in thewireless communications industryfrom its inception, and is today thesecond largest wireless company inthe United States.

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Global Natural ResourcesIn the rapidly consolidating oil and gas sector, Lehman Brothers’ understandingof industry forces and command of a broad range of financial issues was criticalfor two clients.

For Lehman Brothers, the announcement of Chevron’s $43 billion mergerwith Texaco was the culmination of several years of relationship building. In early1999, when Chevron began negotiations with Texaco, they turned to LehmanBrothers — having worked across the negotiating table from us in a number oftransactions. While those early negotiations did not lead to a transaction, in late1999, we advised Chevron on two significant fixed income financings. And in2000, we advised the company on the formation of a landmark $6 billion petro-chemicals joint venture with Phillips Petroleum. In 2000, Chevron and Texacobegan a fresh round of negotiations; Lehman Brothers advised Chevron on the full range of structural, financial and accounting issues surrounding the transaction with a merger agreement announced in October.

Lehman Brothers also maintains an extensive long-standing relationship withKerr-McGee, an Oklahoma-based energy company. Hearing that Repsol-YPF,the Spanish energy firm, was considering a divestiture of its North Sea proper-ties, our bankers in the U.S. and Madrid arranged discussions between the twocompanies. Once the $550 million acquisition was completed, Lehman Brothersarranged the financing — a concurrent offering of 7.5 million common sharesand $600 million in convertible subordinated debentures. Kerr-McGee raised $1billion in proceeds in the largest exploration and production financing of 2000.

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Alteon WebSystems, Inc.Lehman Brothers’ recognized standing in the technology sector prompted AlteonWebSystems to appoint the Firm as its sole bookrunning lead manager in 1999. Alteon is a pioneer in the design of “content switches” — intelligent Webswitches used to manage and route Internet traffic — and controls approximately40 percent of that market.

Lehman Brothers explored with Alteon the company’s strategic vision,defining its goals and the means by which these could be turned into reality. Thefirst step of Alteon’s growth plan was Alteon’s $87 million initial public offeringin late 1999, in which the Firm served as sole bookrunning lead manager. Fourmonths later in early 2000, Lehman Brothers again served as sole bookrunninglead manager for a $569 million follow-on equity offering, providing the company with the capital to expand its business.

In the course of 2000, our strategic explorations with Alteon began to focuson how the company might benefit most from a long-term strategic partnershipwith a large telecommunications equipment company. This past October, weserved as Alteon’s sole financial advisor in its acquisition by Nortel Networks for $7.8 billion, one of the largest M&A transactions among communications equipment makers ever.

KirchGroupUntil 1998, KirchGroup, Germany’s secondlargest media company, was privately ownedby Dr. Leo Kirch and consisted of numerousmedia businesses. KirchGroup needed a morerational and effective structure to give thecompany a solid foundation for growth, thepenetration of international media markets, and the potential to raise outside capital. The company chose Lehman Brothers to advise itbased on our media expertise and our ability to resolve complex structuring issues.

Lehman Brothers identified three reorganizational objectives: (i) streamlining the group by realigning the corporatestructure along principal business lines to create “pure-play” formations; (ii) raising capital through the entry of strategicprivate equity investors while enhancing the Group’s overall valuation; and, (iii) preparing the company for a future IPO.Lehman’s assistance in restructuring the company in early 1999 resulted in three separate holding companies: KirchMedia(programming rights and commercial television), KirchPayTV, and KirchBeteiligung (other media assets). Later that year,we raised DM1.6 billion for KirchMedia from a core group of strategic shareholders, including our own Merchant Bankinggroup, while advising on a subsidiary's DM2.0 billion TV joint venture with Mediaset.

In 2000, Lehman Brothers advised the group on a number of transactions, including a DM1.2 billion investment inKirchPayTV by core shareholders, including Lehman Brothers’ Merchant Banking; a $375 million block trade of BSkyBshares for KirchPayTV; and, KirchMedia’s acquisition of shares in ProSieben Media and SAT.1 and their subsequent mergerto create Germany’s leading family of broadcasters.

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Qwest Communications International Inc.As a result of the Firm’s strength inthe communications industry andlong-term relationship with U SWEST, Lehman Brothers was retainedby the company in 1999 to evaluatetwo competing merger proposals.Viewing the combination with broadband communications providerQwest as a tremendous strategic transaction, we served as advisor to U S WEST on that $56 billion deal,the largest merger transaction in theFirm’s history. The combination created a leading growth company inthe communications sector, witha state-of-the-art fiber optic networkfor Internet-based communicationsaround the world and core local andwireless operations in 14 states.

Shortly after the merger, the“new” Qwest turned its sights on thebond market in order to re-finance its short-term debt. Recognizing thevalue that Lehman had created infacilitating the merger and our leadingrole in underwriting telecommunica-tions debt, Qwest retained LehmanBrothers as joint bookrunner. In itsinaugural post-merger financing,Qwest raised $3 billion – up from theoriginal target of $2 billion. Thisoffering, cited as “Runner-Up” for144A Bond Deal of the Year byCorporate Finance, was a strong state-ment about the “new” Qwest, and itunderscored our Firm’s strength inproviding new credits with efficientaccess to the capital markets.

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17

Convertible SecuritiesLehman Brothers excels in underwriting conventional and highly structuredconvertible securities. These securities offer issuers vast corporate finance flexi-bility and are an increasingly important part of the capital markets. We werebookrunner on more than $7.8 billion of convertibles in calendar year 2000.

The Firm continued its tradition of creative financing by introducing a premium puttable convertible structure into the U.S. market with a $550 milliontransaction for Teva Pharmaceutical Finance LLC. We also underwrote oneof the largest-ever euro-denominated exchangeables, a €2.5 billion issue forTecnost, allowing this Olivetti subsidiary to monetize its stake in Telecom Italiawhile efficiently financing its corporate needs. For the fourth time, we werebookrunner for a convertible offering by communications equipment providerComverse Technology, Inc. in a $600 million sole-managed overnight trans-action, maximizing the client’s proceeds while minimizing its stock price risk.

Lehman also sole-managed a $300 million overnight convertible offering forL-3 Communications Holdings, taking advantage of favorable conditions toeliminate market risk. For Vitesse Semiconductor Corporation, we success-fully priced a $720 million convertible with a two-day accelerated “book-build”marketing period, despite volatile market conditions. This was the largest convertible issuance by a U.S. semiconductor company at the time. The $357million convertible we joint lead-managed for International Power was the lowest yielding sub-investment grade issue in Europe in 2000, in the client’sinaugural financing after its demerger from National Power plc.

Capital SecuritiesLehman Brothers is an undisputed leader in devising bank capital solutions: we are able to structure bank capital transactions across a wide variety of regulatory jurisdictions and tax regimes in a range of currencies to meet the specificstrategic needs of our clients. In 2000, we managed 42 of these transactions, raising over $19 billion for our clients. Notableamong these transactions is the U.S. $1 billion offering we arranged for the Abbey National plc, which was thefirst Yankee hybrid Tier 1 preferred issue by a U.K. bank, as well as the first e-preferred, with web-based marketing, distribution, and execution.

We acted as joint bookrunner in a $2.0 billion (equivalent) multi-tranche, multi-currency subordinated issue for AXA,one of the world’s largest insurers, helping that company to strengthen its capital base and refinance the recent acquisitionof certain minority interests in AXA Financial. This transaction was the largest-ever subordinated issue from the insurancesector and AXA’s inaugural issue in the U.S. market.

We also served as sole manager on a $500 million flexible Money Market Cumulative Preferred offering for ZurichCapital Markets. Later in the year, we followed with an additional $500 million offering of 1, 2 and 3 year flexible MoneyMarket Preferred, after our successful performance in the inaugural issue.

In addition, through our leadership in the traditional preferred stock market, we were able to successfully execute a tax-efficient preferred stock offering for ABN Amro, resulting in the largest such transaction in the past several years at $860 million.

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18

Structured FinanceAs a dominant underwriter of asset-backed securities, Lehman Brothers applies securitization technology across asset types.The Firm is a market leader in all structured finance categories — asset-backed and mortgaged-backed securities, collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), synthetics and asset-backed commercialpaper. Lehman Brothers also is a leader in developing cutting edge technologies for the asset-backed market.

The cash flow or arbitrage “CDO” has been successful among clients seeking to increase their assets under manage-ment. Thanks to our leadership in the CDO market, we have been able to work with some of the most sophisticated investment managers and achieve their objectives through a variety of CDO structures. We managed a landmark $350 million transaction for Metropolitan Life Insurance Company, applying their expertise to manage a diversified portfolio of high yield bonds and syndicated bank loans. We also arranged $500 million CDOs for Teachers Insuranceand Annuity Association and for Westdeutsche Landesbank Gironzentrale, N.Y. branch, both backed by portfoliosof asset-backed securities.

Lehman Brothers has also been a leader in the synthetics market — instruments that transfer the risk from a pool ofassets to allow for the redeployment of firmwide capital. In 2000, we organized a €4.3 billion synthetic CLO for CygnusFinance (KBC Bank) of Belgium, referenced to a portfolio of European and U.S. commercial and industrial loans, in thelargest CLO in European history.

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SEAT Pagine GialleAfter several years of working closely with SEAT, including advising the Italian Treasury on the company’s privatization,Lehman Brothers assisted the company in its primary objective: to evolve from being the leading publisher of white andyellow pages in Italy into a company combining this business with a prominent online presence. The key was to exploit theonline opportunities generated by SEAT’s client base of 3 million businesses, with access to end-users and consumersthrough the yellow and white pages.

Progress toward that ambitious goal began in March 2000 with Lehman advising SEAT on its €30 billion acquisitionof Telecom Italia’s Internet service provider, TIN.IT, in the largest Internet M&A transaction in Europe.

Lehman Brothers also advised the company on two other transactions which advanced its pan-European acquisitionstrategy: SEAT’s €760 million acquisition of TDL Infomedia, the second largest publisher of directories in the U.K., and its$150 million acquisition of a 40.7 percent stake in Mondus, the first global web-based business-to-business marketplace forthe procurement needs of small and mid-sized companies.

Also in 2000, we were joint bookrunner for the inaugural €1.0 billion Eurobond offering for the company, and wehave advised SEAT in the €1.1 billion voluntary conversion of savings shares into ordinary shares, which simplifies the com-pany’s capital structure. This, combined with the Eurobond offering, provides SEAT with significant cash resources andincreased flexibility for growth.

Lehman Brothers has committed its efforts to assist SEAT Pagine Gialle in becoming the leading Italian integrated mul-timedia player, with broadly expanded pan-European business-to-consumer and business-to-business platforms.

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BiotechnologyBenefiting from cutting-edge equity research and recognized biotechnology expertise, Lehman Brothers has assisted someexciting firms in raising their profiles and pursuing their goals.

Oxford GlycoSciences Plc needed capital to exploit its proteomics platform for internal development. With ourdetailed knowledge of the biotech markets in Europe and in the U.S., Lehman Brothers lead-managed Oxford’s three equity offerings in 2000, raising £315 million and significantly expanding its global shareholder base. Our listing of OGSIon Nasdaq provides the company additional flexibility for international growth.

In December 1999, Lehman shook off a weak biotech capital market to lead-manage a record-breaking IPO for TularikInc., which creates drugs that regulate genes. The success of this $112 million IPO opened the U.S. biotech financing window and, three months later, we led Tularik’s $101 million follow-on equity offering.

Our relationship with CuraGen Corporation began with their IPO in 1998. In 2000, we lead-managed a $150 millionconvertible senior debt offering, advised on a private placement for its newly-formed genomic technologies subsidiary, andco-led a $197 million common stock offering — all to allow CuraGen to maximize the value of its genomics business.

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21

Baltimore TechnologiesLehman Brothers’ dedication to the One Firm principal has countless practicalexamples. For instance, when a Private Client Services representative ascertainsthat an individual whose assets they are helping to manage also has needs in theircapacity as a business executive, he introduces the appropriate teams of banking,research, sales and trading professionals.

Lehman Brothers’ relationship with Baltimore Technologies, a Dublin-basedglobal leader in e-security solutions, was initiated following an introduction byour Private Client Services area. Since that time, we have been actively engagedin strategic value creation on behalf of the company. In 1999, Lehman Brothersjointly lead-managed a $188 million common stock offering and concurrent listing on Nasdaq for the company. Thereafter, and during the course of 2000, we lead-managed several block trades on behalf of Baltimore’s sharehold-ers for an aggregate amount of $171 million. Last year, we also served as advisorto Baltimore when it announced its $990 million acquisition of ContentTechnologies, the worldwide market leader in content security solutions. Theacquisition added complementary technology and broadened Baltimore’s product portfolios. The transaction, which was executed on the London StockExchange by our teams in New York and London, was accompanied by a subsequent $253 million equity offering, where we served as joint-lead manager. Baltimore Technologies is only one of many clients that has benefitedfrom our ability to deliver the full resources of a global investment bank.

PEMSTAR Inc.Lehman Brothers’ relationship withPEMSTAR Inc. demonstrates howwe combine capital investment andfinancial expertise to achieve a client’svision. In 1994, PEMSTAR wasfounded with the objective of build-ing a world-class, global provider ofelectronics manufacturing services(EMS). PEMSTAR recognized thatstrong institutional support wasrequired to expand both organicallyand through acquisition. In 1998, our Venture Capital Group investedapproximately $10 million in PEM-STAR, fueling the company’s expan-sion in Mexico and China. In 1999,we provided both strategic and struc-turing advice with respect to bankfinancing, allowing the company toproceed with acquisitions of signifi-cant manufacturing capabilities inEurope and Silicon Valley. OurVenture Capital Group also investedan additional $18 million, providingthe long-term capital necessary forthe company to complete the transac-tions. Taking full advantage of itsglobal capabilities, PEMSTAR againpartnered with Lehman Brothers,drawing on our equity research andcapital markets expertise, to lead-manage a successful $100 million IPOin August 2000. Utilizing the full scopeof our resources, PEMSTAR has cre-ated a solid foundation to emerge as aglobal EMS industry leader.

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Delivering Performance

At Lehman Brothers, we apply creativity and

foresight when we think about growing our own

business and about strategies to maximize our

opportunities in an ever-changing, ever-expanding

industry. As a Firm, we have demonstrated a

constancy of vision, a consistency of purpose,

and a clear commitment to our clients, our

employees and our shareholders. Our results are

the ultimate testament to our success as a

premier global institutional investment bank.

Ours is a business of client relationships and

ideas: we must continue to deliver superior

performance on behalf of our clients to grow

and to thrive as a franchise. Ultimately, it is

our ability to build our clients’ vision that defines

our success.

Measures of Profitabilitypercent

00999897

33.5%

30.5%

25.6%24.2%

Pretax OperatingMargin

Return on Equity

27.4%

21.8%

16.3%17.0%

Revenue Growthin Key Businessesin millions of U.S. dollars

InvestmentBanking

CapitalMarkets

ClientServices

009900990099

$839

$4,689

$3,093

$1,664

$2,179

$583

pages 1-25 2/22/01 12:19 AM Page 22

Page 25: Where Vision Gets Built

“Lehman Brothers has continued to build its equity and investment banking franchise and now generates profit margins that are comparable with the industry leaders. Lehman’s expanding European operations alsocontribute a significant and growing share of the Firm’s overall profitability. This has improved the geographicdiversification of Lehman’s earnings, and Moody’s thinks the Firm should be able to remain profitable over a wide range of market conditions.”

Moody’s Investors Service(On its upgrade of Lehman Brothers’ credit ratings, November 3, 2000)

Delivering ProfitabilityLehman Brothers’ financial performance was at the top of the range for its industry in 2000. Given that the investmentbanking industry has recorded profitability growth well above the market averages, this was a strong performance indeed forthe Firm as a whole.

In volatile and often treacherous markets, Lehman Brothers’ revenues of $7.7 billion grew by 44 percent in 2000, whilethe Firm’s net income hit a record of $1.78 billion, an increase of 57 percent for the year. We accomplished this throughthe diligent execution of our strategic plan: building a diversified set of high margin, global businesses, including the expansion of our Investment Banking franchise, our global Equities business, our Private Client unit, Private Equity andour businesses broadly in Europe. In the meantime, we have balanced our strategic investments with the objective of meet-ing certain financial targets. Consequently, our careful control over expense levels and our prudent management of risk havehelped to produce exceptional bottom-line results. Over the past five years, this disciplined approach has allowed the Firmto generate net income that has grown at a compounded rate of 44 percent per year.

For 2000, Lehman Brothers realized a pretax operating margin of 33.5 percent and a return on equity of 27.4 percent(before a special preferred dividend), representing significant increases over the prior year’s results and an extraordinary levelof performance. These measures are the ultimate determinants of value for our shareholders. We remain committed toenhancing the performance of our franchise to realize the full value potential for them.

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Delivering GrowthLehman Brothers achieved recordrevenues and significant growth ineach of its major businesses and everyregion of the world in 2000. By anymeasure — revenues, earnings, head-count, transactions closed, tradingvolume, clients covered — the Firmcontinued on its upward trajectory ofgrowth.

In 2000, our Investment Bankingrevenues jumped 31 percent to $2.2billion, as the value of our mergerand acquisition completions rose by88 percent and our fees from equityoffer ings increased by 79 percent.We supported this expansion andpositioned ourselves for futuregrowth by raising our investmentbanking ranks 25 percent to 2,050during the year. Our revenues inCapital Markets rose by 52 percent in2000, bolstered by an 84 percentincrease in Equities, as we continuedto grow and integrate our sales, trading, research and derivativesexpertise. In terms of Fixed Income,despite weaker market conditions,the Firm was able to increase revenues by 24 percent. Our Client

Services division grew 44 percent in 2000, as we increased our high net worth sales force and grew transaction volumeswith clients.

Lehman Brothers continued to build its franchise in Europe and Asia, keeping pace with the rapid growth in theseregions. In 2000, our revenues in Europe increased by 45 percent and our Asian revenues rose by 58 percent. The Firm’sactivities outside the U.S. accounted for 42 percent of our total revenues last year, demonstrating that we remain exceedingly well-positioned to serve our global client base with the full array of capital markets solutions.

“Lehman Brothers has advised Williams over the years on many aspects of our corporate strategy. Most recently, that advice has centered on the development and the proposed separation of Williams Communications. They haveprovided industry insight and execution expertise in both the energy and communications sectors and have beeninstrumental in helping our management construct solutions to meet our business objectives.”

Keith E. BaileyChairman, President and Chief Executive OfficerThe Williams Companies, Inc.

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25

Delivering the FranchiseOur business is one of innovation and ideas, where our clients demand comprehensive advice, tailored solutions and flawless execution. We pride ourselves on our ongoing dialogue with our clients, providing them with the intelligence andthe tools they need for their next stage of evolution.

For our banking clients, we organize extensive team coverage that is meant to address all of the client’s issues: this beginswith our industry, product and research specialists; it often includes experts in tax issues, derivatives, securitization and structured credit, among other disciplines. This level of focus and expertise has allowed the Firm to garner a substantial portion of repeat business from satisfied clients. In 2000, we participated in investment banking transactions for 1,072 clients,of which 601 had engaged the Firm for other transactions in the prior two years.

In our Equity business, we leverage our product expertise, our geographic reach and fundamental and technical researchto deliver the full range of cash products, financing and derivatives to our clients. We work across product groups to provide our clients with efficient and optimal solutions; and, we organize our product specialists by industry sector to provide broader expertise to our clients. In Fixed Income, we utilize our extensive product capabilities, our quality research,our skills in derivatives, securitization and structured credit to source, create or finance tailored products for our clients.Often, we work with our clients on both sides of their balance sheet to create value. Our commitment to state-of-the-arttechnology platforms also enhances the efficiency and content we provide to our clients.

“I would characterize our relationship with Lehman Brothers as a total relationship — they touch on every aspect of our business and we touch on theirs, respectively. We use all of their products and services,from investment banking to fixed income and equities, and they are also a great client of ours, widelyusing our funds and money management services.”

James F. GetzPresident, Federated Securities Corp.

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26

Clients do not lightly grant the opportunity to build their vision: they requirecreativity, sound advice, extensive understanding of their industry and their special needs, access to the full array of capital markets-based solutions, and reliable execution. If an investment bank falls short of client expectations, thechances of repeat business are scant. We are proud that, in the year 2000, over 56percent of Lehman Brothers’ investment banking transactions were performedfor existing clients; recurring assignments and long-term client relationships area cornerstone of our Firm. During the past year, we also continued to build newclient relationships, and these new partnerships contributed to our growing baseof business worldwide. The Firm’s fees from advisory and financing activitiesincreased 31 percent in 2000, to total $2.2 billion. We have emerged as a preeminent provider of investment banking services globally, and we have doneso by earning the trust and respect of our clients over many years.

Lehman Brothers’ global industry groups — Chemicals, Communications &Media, Consumer/Retailing, Financial Institutions, Financial Sponsors,Healthcare, Industrial, Natural Resources, Power, Real Estate and Technology— deliver senior bankers with superior industry knowledge and the resources tomeet all of their clients’ objectives. Specialized product groups in Mergers andAcquisitions, Equity Capital Markets, Debt Capital Markets, Leveraged Financeand Private Placements are partnered with global relationship managers to provide comprehensive solutions for clients. The Firm’s specialists in new product development, tax, and derivatives also offer the expertise to tailor specific structures for clients.

During the past year, Lehman Brothers dedicated significant resources to expand-ing Investment Banking, and this expansion was complimented by significantgrowth in the Firm’s research presence in both the United States and Europe.We enlarged virtually all of our global industry groups over the course of 2000,and we emerged notably strengthened. All told, we added close to 500 profes-sionals to Investment Banking in 2000, ending the year with well over 2,050bankers, including 174 managing directors. Much of this expansion took placein Europe, where, in addition to augmenting our industry and product groups,we added significant local presences in the U.K., Germany, France, Italy, Spain,the Benelux countries, Switzerland and Sweden.

MERGERS AND ACQUISITIONS / STRATEGIC ADVISORY Lehman Brothers advised ona total of 223 completed mergers and acquisitions in 2000, totaling $340 billionand generating fees of $777 million. Fifty-three of these transactions were valuedin excess of a billion dollars, including a total of 22 such transactions in Europe.

Lehman Brothers advised on some of the largest transactions completed in 2000.Of special note were the formation of a joint venture of the wireless operationsof BellSouth Corporation and SBC Communications to create CingularWireless; MediaOne Group Inc.’s acquisition by AT&T Corp. for $51.9

Investment Banking

Composition of Investment Banking Feesin millions of U.S. dollars

00999897

504

511

309

342

328

456

585581

380

704

$2,179

$1,401

$1,050

$1,664

817

777

Merger & Acquisition Advisory FeesEquity Underwriting Fees

Debt Underwriting Fees

Dollar Value of Completed Worldwide Mergers and Acquisitions

in billions of U.S. dollars

00999897

$340

$189

$277

$69

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27

billion; R.J. Reynolds Tobacco Holdings Inc.’s $15.2 billion acquisition ofNabisco Group Holdings; Seagate Technology’s $19.7 billion acquisition byVERITAS Software and a buyout group led by Silver Lake Partners. In Europe,Lehman Brothers served as lead advisor to Teleglobe Inc. in its $6.5 billion acquisition by BCE Inc.; to VIAG AG in its $16.3 billion acquisition by VEBAAG., and to Abbey National plc on its agreement to acquire Scottish Provident for $2.5 billion.

We advised a number of clients on multiple transactions: Chevron Corporationon its $43.3 billion pending acquisition of Texaco, after advising the client on the formation of a $6.1 billion chemical business joint venture with PhillipsPetroleum earlier in the year; QUALCOMM Incorporated on the $1.0 billionsale of its cellular handset manufacturing business to Kyocera Corp. and its $1.1billion acquisition of SnapTrack Inc.; SEAT Pagine Gialle on its €30.4 billionmerger with TIN.IT, its $712 million acquisition of TDL Infomedia Ltd., andtwo other transactions totaling $194 million; and KirchGroup on four separate transactions totaling $4.1 billion.

In Asia, the Firm advised our alliance partner, the Bank of Tokyo-Mitsubishi, onits integration with the Mitsubishi Trust and Banking Corporation and NipponTrust Bank to form Mitsubishi Tokyo Financial Group in a ¥1.2 trillion transac-tion. We also advised Newbridge in its $417 million acquisition of Korea FirstBank and AsiaNetCorp. in its $1.3 billion acquisition by Littauer Technologies.Our work with the Indonesian Bank Restructuring Agency (IBRA) resulted inthe sale of a $500 million stake it held in PT Astra International Tbk, voted“Indonesian Deal of the Year” by AsiaMoney magazine; and we continue toadvise IBRA on their $11 billion debt restructuring and loan sale program.

EQUITY FINANCING Turbulence and extreme volatility characterized the global equity markets last year. Even so, Lehman Brothers engaged in a record level ofequity issuance on behalf of our clients: we managed a total of 191 transactionsworth $88 billion. We were lead manager on 89 separate offerings totaling $14.4billion, an 11 percent increase over our 1999 volumes. Of this total, the Firmserved as lead manager for 32 IPOs, raising a total of $3.0 billion in transactionssuch as the $550 million offering for Dobson Communications, a $617 millionoffering for Tele1 Europe — the largest IPO ever from a Nordic country — anda $178 million IPO for Hongkong.com. Over the course of 2000, we receivedrepeat equity mandates from 22 clients — another tribute to the strength of ourservice and execution on behalf of clients. Among the most notable were a $411 million series of three transactions for Oxford GlycoSciences Plc, threetransactions totaling $290 million for Baltimore Technologies, and two separateofferings for SBA Communications that raised a total of $527 million.

Lehman Brothers continued to demonstrate its global capabilities in 2000, leading large transactions across all product lines throughout the world. In one of

“In 2000, the Investment

Banking Division signifi-

cantly increased the size

and scope of Lehman

Brothers’ franchise

globally. We also made

tremendous progress in

building broader and

deeper relationships with

many of our key clients

by partnering with them

in the development

and execution of their

strategic vision. The

bringing together of a

multi-disciplined team

of bankers from across

the Firm globally, along-

side our research and

capital markets expertise,

is the essence of that

partnership.”

Bradley H. JackHead of Investment Banking

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28

the largest-ever euro-denominated exchangeables, we led Teconost’s €2.5 billiontransaction. We also led offerings for Alteon WebSystems, in a $569 millionunderwriting; and our $150 million offering of zero yield puttable securities forCMC Magnetics marked the first Asian equity-linked transaction outside Japan.

DEBT FINANCING Despite extremely difficult conditions in the Fixed Incomemarkets in 2000, Lehman Brothers retained its premier position, lead-managing$155.0 billion in global debt offerings. During the course of the year, we servedas lead manager for a number of landmark transactions around the world: wewere joint bookrunner on two offerings raising £1.25 billion and U.S. $1.0 bil-lion for Abbey National plc; we were sole bookrunner for Vodafone’s floatingrate note issue of $3.75 billion; and we raised a total of $2.0 billion for AXA ina 3-tranche dollar, euro and sterling-denominated transaction. In Asia, we werelead manager on the $1.6 billion series of bond offerings for the Republic ofPhilippines. In the U.S., we raised over $6.0 billion for General Electric CapitalCorp. in a series of 12 transactions. We also served as lead manager for QwestCapital Funding in their $3.0 billion inaugural financing after the merger withU S WEST Inc., a runner up for Corporate Finance’s “144 A Deal of the Year.”

The year 2000 was particularly difficult in the leveraged finance markets.Nevertheless, Lehman Brothers completed a number of notable transactions,including a $1.0 billion lead-managed transaction for Williams CommunicationsGroup and a $450 million transaction for Telecorp PCS, Inc. The Firm continued to engage in comprehensive financing solutions for clients, includingadvisory and financing transactions for Penn National Gaming and Time WarnerTelecom. In the syndicated loan market, where we organize and syndicate loanfacilities for both high grade and high yield borrowers, we arranged a $3.0 bil-lion credit facility for Cingular Wireless and a $615 senior secured credit facilityfor Vought Aircraft.

Lehman Brothers’ tradition of innovation in the fixed income markets continuedin 2000. Early in the year, Lehman Brothers arranged the first-ever corporate e-bond offering and raised $1.2 billion for Ford Motor Credit Company. We alsocontinued to apply our skills in securitization and structured finance to benefitour clients, arranging a $2.0 billion collateralized loan obligation for Fleet and a€4.3 billion collateralized loan obligation for Cygnus Finance (KBC Bank ofBelgium).

“QUALCOMM has worked

closely with Lehman

Brothers for the past ten

years as QUALCOMM,

through its leadership in

advanced CDMA technol-

ogy, has been building the

wireless world and leading

the way for advanced 3G

wireless networks that are

now in the process of

being developed. Lehman,

as lead advisor to

QUALCOMM throughout

this period, has provided

senior strategic judgment

and advice along with

aggressive capital raising

for QUALCOMM every

step of the way. Lehman

has raised over $2.5

billion of equity related

securities for QUALCOMM

and has provided strategic

advice in a series of

acquisitions, divestitures

and spin-offs.”

Richard SulpizioPresident and Chief Operating Officer QUALCOMM Incorporated

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Lehman Brothers has built a dominant Capital Markets franchise of global stand-ing and scale over many years, investing heavily in technology and outstandingprofessionals, constantly refining the structure and its working details. One pointof constant attention: the integration of traders, investment bankers, sales professionals and research specialists, since the effective functioning of thewhole requires the equally effective functioning of all the parts. To enhance thehigh degree of integration needed in serving the sophisticated global investor,Lehman Brothers made an important organizational change in 2000, joining itsEquities and Fixed Income Divisions under the umbrella of Capital Markets. Thisstructure allows for superior alignment with investors, enhanced opportunities inresearch and in our Prime Broker operations, as well as improved risk manage-ment and capital allocation processes.

Preeminent capital markets businesses require a large technology component.Lehman Brothers has developed trading and risk management systems that effective-ly support the Firm’s growing volume of business, while improving productivity andease of execution. In terms of electronic trading, the Firm has positioned itself as anowner or member of numerous consortia and alternative trading systems in everymajor product market, extending liquidity flows to our clients through various con-nectivity initiatives. Additionally, the launch of LEHMANlive provides a proprietaryplatform to deliver product, research, portfolio tools and other powerful content toour institutional clients. All of these efforts have a single target — superior execu-tion for our clients, performed with transparency and cost efficiency.

EQUITIES Lehman Brothers’ net revenues from Equities grew to $2.6 billion in2000, an 84 percent increase over the prior year’s results. Significant growth in the Firm’s global cash, derivatives and financing businesses contributed to thisincrease. These impressive results were achieved while we expanded the divi-sion significantly, growing to 1,740 professionals, a 44 percent increase over 1999.

Lehman Brothers has established itself as a leading global underwriter of equitysecurities. In calendar year 2000, the Firm lead-managed a total of $14.4 billion inequity and related issuance, including 32 initial public offerings which raised $3.0billion for clients. Lehman Brothers served as lead manager on a number ofnotable initial public offerings, including a $106 million lead-managed offering forPEMSTAR and a $64 million initial public offering for Ulticom, one of the 10best-performing IPOs of 2000. Lehman Brothers was one of the largest under-writers of offerings in the healthcare field, highlighting the Firm’s capabilities inbiotechnology with such transactions as a $550 million convertible offering forTeva Pharmaceuticals, a $53 million initial public offering for SangamoBiosciences, and a $116 million IPO for Rosetta Inpharmatics.

In 2000, Lehman Brothers lead-managed numerous secondary offerings forclients, including Dynegy’s $514 million offering, Kerr-McGee’s $975 millionconcurrent common and convertible transactions and a $412 million convertible

Volume of Lead-Managed Equity and Equity-Related Underwriting

in billions of U.S. dollars

00999897

$14

$13

$9$9

Volume of Lead-Managed WorldwideFixed Income Underwriting

in billions of U.S. dollars

00999897

$155

$192$192

$150

Capital Markets

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30

offering for Dominion Resources. Other notable secondary transactions wherewe served as lead manager included a $450 million transaction for Time WarnerTelecom and $837 million in common and convertible offerings for VersatelTelecom International.

Lehman Brothers demonstrated its superior marketing ability in 2000 through itsexecution on accelerated book building, including a $564 million transaction forAmerican Tower and a $516 million trade for Bank Hapoalim. The Firm alsooffered its clients quality execution and exceptional service in difficult markets,completing a $720 million transaction on an accelerated basis for Vitesse Semi-conductor and raising a total of $1.5 billion in six separate offerings for clients suchas L-3 Communications Holdings Inc., Comverse Technology and Cross TimbersOil Company in one week in November, 2000.

In terms of market-making activities, Lehman Brothers remains one of the leading investment banks for U.S. and pan-European listed trading volume, andthe Firm maintains a major presence in over-the-counter stocks, all majorEuropean and Asian large capitalization stocks, warrants, convertible debenturesand preferred issues. We currently make markets in over 2000 listed stocks and500 Nasdaq stocks worldwide. In order to improve client information and execution, we have increasingly structured our trading units by industry sector;this process is well-developed in our U.S. operations and is now being applied in Europe.

Lehman Brothers has developed comprehensive equity derivatives capabilities thatallow the Firm to apply sophisticated financial engineering techniques in servingthe needs of clients. In 2000, Lehman Brothers again witnessed significant growthin its two major equity derivatives product areas — its volatility business, encom-passing options-related products, and its portfolio trading business, specializing inagency/risk baskets, index rebalancing and other structured products — reflectingthe Firm’s growing client base and the expansion of derivatives sales and research.The condition of the markets in 2000 unquestionably enlarged the global appetitefor options-based volatility trading products and for the structured products weoffer through our portfolio trading business. We have created a series of joint ventures between derivatives and each of our Equity businesses to better meet ourclients’ demands, combining program trading flows, options flows and Nasdaqand listed flows to maximize liquidity and trading efficiency.

Lehman Brother’s Equity Finance and Prime Brokerage business engages in twoprimary functions: providing liquidity to the Firm’s customers and supplyingsecured financing for the Firm. Prime Brokerage provides margin financing andsecurities lending services to alternative investment managers on a collateralizedbasis across a wide variety of investment strategies. Additional services are provided to help these investors manage their daily business activities, includingtrade clearance and settlement and the delivery of information products and

“In a year of industry

consolidation and high

market volatility, Lehman

Brothers’ Equity Division

had another record year

in terms of revenues and

investment in our global

footprint. In Equity

Research, we achieved

enormous recognition in

public and private surveys

for our breakout progress,

while Europe continued

to be an enormous focus.

Best ideas and best

execution remain at a

premium, and this is

something our clients will

always receive from us.

Our priorities are simple:

superior service to our

clients and excellent returns

for our shareholders.”

Roger B. NagioffRobert S. ShafirCo-Heads of Equities

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analytics over LEHMANlive. In 2000, we expanded our overall coverage of thehedge fund market, where we see significant opportunities to cross-sell a varietyof our capital markets products, while delivering a comprehensive package offinancing, securities lending and structured products to finance a client’s portfolioin the most optimal, cost-effective manner. In 2000, Prime Brokerage introduceda series of new value-added products, including our Capital IntroductionsProgram, enhanced financing products, such as Lehman Brothers’ Prime PLUSsm

and our new PrimeWEB hedge fund portal.

FIXED INCOME Excellence in research, execution, and distribution comprise thefoundations of Lehman Brothers’ powerful Fixed Income franchise. Althougha rising interest rate environment, widening credit spreads and deteriorating creditquality made for a challenging year in 2000, our Fixed Income Division recordedtotal revenues of $2.1 billion, up 24 percent over the prior year, reflecting the broaddiversification within this division.

In calendar year 2000, the Firm completed over $155 billion in lead-managed debttransactions for its global clients. Notable assignments included a $2.0 billionoffering for BellSouth Capital Funding, two $1.3 billion global note transactionsfor The CIT Group, a $1.0 billion offering for Liberty Media Group and twolead-managed offerings totaling $825 million for Enron Corp. In Europe, theFirm lead-managed a €300 million offering for AB Electrolux, a €1.1 billion offer-ing for UniCredito Italiano, a €1.0 billion debut Eurobond for SEAT PagineGialle, and a €600 million floating rate note issue for the Republic of Turkey.Lehman Brothers emerged as a leader in the placement of capital securities forglobal banks, completing 42 transactions totaling $19 billion for clients such asLloyds TSB, DG Bank and AXA.

Market conditions and economic circumstances were especially challenging inhigh yield securities over the course of 2000. Even so, Lehman Brothers lead-managed a total of $2.4 billion in high yield securities, and the Firm’s default ratesremained among the lowest of any underwriter. Highlights included a $1.0 billion two-tranche offering for Williams Communications Group, a $600 millionoffering for Globix Corp., and a $200 million offering for Grant Prideco. In thenon-dollar high yield market, the Firm executed lead-managed transactions forVersatel and for Clondalkin. In the syndicated loan market, Lehman Brothers con-tinued to expand its client base of high grade and high yield borrowers, arranginga $3.0 billion facility for Cingular Wireless, a $700 million facility for AES EDC,and a $340 million facility for Buffets, Inc.

Our leadership in mortgage-backed and asset-backed securities is demonstratedthrough our research strength and our consistent standing as a top underwriter. Incalendar year 2000, we served as lead-manager for over $27.0 billion of mortgage-backed issuance and $30.0 billion of asset-backed placements. We executed thelargest residential mortgage transaction ever, a $7.0 billion securitization for

“We have an important

relationship with Lehman

Brothers. In Equities,

they are one of our largest

suppliers, and they also

provide us with significant

value through quality

research, sales and

trading services.”

Bruce W. CalvertChief Executive OfficerAlliance Capital Management

“I think execution has

played a big role in

Lehman Brothers’ success

in Equities. They have a

very focused sales effort.

More importantly, they

have product to call with,

and they have something

of value to say about it.

Across the board they

seem to be clicking.”

Bill RiegelEquity Portfolio ManagerTIAA-CREF

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32

Washington Mutual. Through Lehman Brothers Bank, FSB, the Firm is expand-ing its funding sources and creating new mortgage origination pipelines forsecuritization, including a joint venture with Sotheby’s International Realty, Inc.and a partnership with Freddie Mac, EDS and Microsoft. In Korea, we formed ajoint venture with Korea Asset Management Corporation to invest in loan port-folios and accelerate the restructuring process in that country. In the asset-backedbusiness in 2000, we successfully completed Embarcadero Aircraft’s $793 millionsecuritization and lead-managed auto loan securitizations totaling $5.1 billion forFord Motor Credit. We established ASAP Funding Ltd., a $1.5 billion conduit tofinance an investment portfolio through the issuance of secured liquidity notes,and placed a $1.3 billion transaction to finance Avis Rent-A-Car System’s car fleet.Lehman Brothers also acquired a stake in properties owned by Telecom Italia inconjunction with Beni Stabili S.p.A. and announced that we were assistingBurford Holdings plc in its £920 million management buyout.

Complimenting our expertise in securitization, high yield debt and syndicatedlending, structured credit trading occupies an increasingly important role for both institutional investors and dealers, through its ability to control credit risk, manage regulatory capital, and enhance investment returns. We have developedindustry-leading capabilities in credit derivatives, structured products and collater-alized loan and debt obligations. In 2000, we were sole arranger for a $1.5 billiontwo-tranche transaction for Zurich Capital Markets issued by our proprietarystructured trust program — the largest of its kind. We also lead-managed a $750million synthetic collateralized bond obligation for Rabobank International, thefirst synthetic resecuritization of CDOs.

In Municipal and Public Finance, Lehman Brothers has fully integrated its invest-ment banking, sales, trading and derivative functions, and introduced asset-backedand reinsurance expertise, to generate comprehensive client solutions. For the pastfive years, the Firm has consistently ranked as one of the top dealers in municipalderivatives, consistent with this focus. In 2000, Lehman Brothers lead-managed$17.7 billion in offerings, including an $800 million financing for the MetropolitanTransportation Authority of New York. We are the ranking institution in higher education finance, and in 2000, we executed more than $1.5 billion in senior managed financings for clients such as Harvard University. The Firm alsoranks as one of the top housing groups, where we make frequent use of deriva-tives to provide savings to clients such as California, New York and Alaska. In2000, we acquired an interest in Cain Brothers to enhance our heathcare practice.

Lehman Brothers remains a preeminent global market-maker in numerous fixedincome products, including U.S., European and Asian government and agencysecurities, money market products, corporate high grade, high yield and emerg-ing markets securities, mortgage-and asset-backed securities, preferred stock,municipal securities, bank loans, foreign exchange, financing and derivatives products. The Firm has effectively integrated derivatives specialists into all areas of

“In 2000, when volatility

was commonplace,

Lehman Brothers’ Fixed

Income franchise

continued to propel for-

ward. Our core strategy

of providing superior

advice with robust content

— research — to a core

client constituency, was

again validated. Both

dealer consolidation and

a general aversion to risk

by market participants

pushed to the forefront

those service providers,

such as Lehman Brothers,

who are capable of pro-

viding intellectual capital.

Our research credentials

were again recognized

by Institutional Investor

magazine. In addition,

the growing use of our

bond indices continued

unabated.”

Theodore P. JanulisHerbert H. McDade, IIICo-Heads of Fixed Income

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Fixed Income in response to the continued convergence of the cash and derivatives markets worldwide. Lehman Brothers ranks as one of the top providers of interest rate derivatives: this market has grown rapidly, and LehmanBrothers’ volume has increased at a higher rate. The Firm has developed a SpecialClient Services unit for its active derivatives clients to provide risk and scenarioanalysis as well as middle and back office functions.

GLOBAL DISTRIBUTION AND RESEARCH Even in the challenging market conditionsof 2000, Lehman Brothers invested to reinforce its status as a premier client franchise: worldwide, our sales force grew to 822 and our research staff increasedto over 900.

Equity Sales is devoted to understanding the investment objectives of its institu-tional investor client base and delivering market-leading execution and liquiditythroughout the equity product spectrum. Their success is increasingly defined bytheir ability to cut across geographies and offer the full array of cash, financing,derivatives and research products to provide maximum value for their clients.

Similarly, Fixed Income Sales specialists concentrate on partnering with theirclients, not only knowing their investment parameters, but also providing qualityresearch, resources and the willingness to work across the Firm to develop customized solutions. Globally, fixed income performance is increasingly benchmarked, and the Lehman Brothers’ Bond Indices are the most reliable andwidely-used tools in the fixed income market. Recently, we have established advisory councils to refine the global indices; these panels include some of themost high-profile investors in the bond market.

Our sales effort has been augmented by our strategic alliance with FidelityInvestments, who provides our products and research to their retail brokerage andon-line customers. In 2000, Lehman Brothers joined with Fidelity in the $1.0 billion directed share program for AT&T’s spin-off of its wireless business. WithFidelity, we now have the capabilities to manage both directed share and employeestock option programs. In 2000, we forged similar alliances with Consors inGermany and Fineco in Italy; we also formed an alliance with ANZ InvestmentBank to provide capital markets’ access to their institutional clients.

Research extends into every corner of our business, supplying invaluable analysis,information, and advice for our clients. Equity Research now incorporates over450 professionals worldwide, while our Fixed Income Research group numbers342 professionals. In addition to broad-based fundamental, quantitative, strategic,and tactical research, these groups have developed specialized products such as “10 Uncommon Values,” “10 Uncommon Euro Values” and the Lehman BondIndices to provide investing clients with unique valued-added products.

“We have a solid relation-

ship with Lehman

Brothers across all fixed

income products. At our

firm, we acknowledge

that portfolio managers,

research and trading must

work together as a team,

and Lehman is set up the

same way. As a result,

they are great communi-

cators: between our two

firms, research talks, the

traders talk, the analysts

talk, and the relationship

extends right up to senior

management. Last year,

they structured our first

high grade collateralized

debt obligation, easing

the process by acting as

a single team from the

structuring and trading

sides of their business.

They get the balance right.”

Brad TankDirector of Fixed IncomeOffice of the CEOStrong Capital Management

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34

Lehman Brothers’ Client Services Division incorporates both our Private ClientServices group, a retail-based organization involved in managing assets forwealthy individuals, and our Private Equity Division, which offers alternativeasset management through a series of private equity funds.

PRIVATE CLIENT SERVICES Private client banking is customarily a matter ofinvestment advice. Lehman Brothers has a different vision: adding value for ourclient base of high net-worth individuals, families, corporations and mid-sizedinstitutional investors through innovative financial solutions, global access to cap-ital, research excellence, global product depth and personal service and advice.Unique in this business, we provide our clients with direct access to the samecapabilities, knowledge and resources that are used by our largest institutionalclients.

We do provide investment advice, of course, along with fast and reliable execu-tion and the sophisticated analysis of Lehman Brothers’ proprietary research. Asa leading investment bank and member of every major stock exchange in theworld, we offer access to an exceptionally broad range of securities. Additionally,we provide our clients with investment alternatives such as private equity invest-ments and structured products to manage risk, diversify or leverage currentinvestments or enhance returns. Our ability to monetize client investments canprovide an attractive alternative to an outright sale. Our 450 Private Client professionals are alert to investing opportunities as well as to their clients’ specialneeds. But people who have accumulated substantial assets have frequently doneso in their capacity as business owners or executives. They are, more often thannot, already sophisticated investors. Their responsibilities require a higher level of investment banking services, and we are expert in introducing them to theappropriate capital commitment specialists and other global banking resources ofour institution: from M&A to derivatives, from debt transactions to foreignexchange, from IPOs to private equity capital.

In 2000, Private Client Services recorded average commissions of $2.1 millionper investment representative, a level that is among the highest in the industry.The group’s net revenues for the year were $795 million, a 39 percent increaseover 1999. We remain committed to expanding our Private Client activities: in2000, we recruited our largest-ever class of entry-level associates; we continuedto attract seasoned professionals; and we also added 92 investment representativesthrough the acquisition of the retail brokerage operations of SG Cowen.

PRIVATE EQUITY When Lehman Brothers entered the Private Equity business in1984, it was one of the first investment banks to do so. Currently, the Firm man-ages a number of private equity funds with committed capital in excess of $4.5billion. Investment performance over the last 16 years has been exceptional, withnet returns to investors significantly exceeding relevant performance benchmarks.These results are attributable not only to our private equity professionals, whom

Client Services

“Private Client Services is

a natural complement to

our institutional business,

since these clients require

the highest standard of

service. As a Lehman

Brothers’ client, they get

direct access to all parts

of the Firm, as well as a

trusted advisor that stands

ready to assist in the

management of both their

assets and liabilities.

That is why, over the last

two years, we have raised

or invested over $10 billion

for our private clients, in

transactions ranging from

IPOs to acquisitions to

sourcing private equity.”

Stephen M. LessingSenior ClientRelationship Manager &Head of Private Client Group

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we increased to 92 from 39 last year, and our global presence, which gives usaccess to worldwide proprietary deal flow, but also to a disciplined selection andinvestment review process, which places special emphasis upon managementstrength, business fundamentals, market opportunities and clearly-defined exitstrategies. Our objectives in Private Equity are threefold: first, to provide a widerange of attractive alternative investment products to clients; second, to realizesignificant capital appreciation on these investments; and, third, to launch adiversified series of funds, thereby providing a more significant and stable sourceof Private Equity earnings to the Firm.

Private Equity currently operates in four asset classes:

• Merchant Banking partners with established, well-managed operating com-panies in the U.S. and Europe to achieve an objective of long-term capitalappreciation. Currently, $1.3 billion of its $2.0 billion institutional fund isinvested in five portfolio companies. We expect that the U.S. will continueto provide attractive investment opportunities, and that Europe, where the Firm has deep roots and a strong local presence, will emerge as a largeopportunity in 2001 and the foreseeable future

• Venture Capital provides growth-oriented equity investments in privately-held companies. Specifically, we focus on investing in companies capable ofturning innovative technology and management solutions into successfulbusinesses. The Venture Capital Fund currently has $302 million under management; it has invested in 46 portfolio companies across a significantrange of industries. Venture Capital opened a London office last year, whichmanages investments in both Europe and Israel, and we intend to launch ahealthcare venture capital initiative in 2001. To leverage further our extensiveexpertise and client relationships with developing portfolio companies, weannounced a new venture, Innovate@Lehman Brothers/Booz-Allen, in late2000. This global alliance provides start-up and spin-out ventures with funding as well as a wide range of strategic, technical, executive and financialservices that are typically unavailable to early-stage companies.

• The Communications Fund is the first industry-specific fund sponsored by Lehman Brothers. With capital commitments of $800 million, theCommunications Fund invests in early-stage communications serviceproviders, predominantly in the U.S. and Europe. There are presently fivecompanies in this portfolio. Lehman Brothers frequently acts as a lead investorin these companies and takes an active role in managing their growth.

• Our newest fund, Lehman Brothers Real Estate Partners, L.P. closed oncommitments of $590 million during 2000. Its objective is to invest in a variety of properties, real estate companies, service businesses ancillary tothe real estate industry, mortgage interests, and equity and debt instrumentsin North America and Europe.

“Our Private Equity Division

continues to build on

Lehman Brothers’ success

in identifying and invest-

ing in extraordinary oppor-

tunities for the Firm, our

employees and outside

investors. We are focused

on increasing our assets

under management by

introducing new funds

in areas where Lehman

Brothers’ expertise and

market position gives us a

competitive edge. During

2000, we significantly

expanded our business

with the addition of a

Communications fund

and a Real Estate fund

to our established

Merchant Banking and

Venture Capital funds.

We now have a terrific

platform in place to grow

significantly our funds

under management.”

Michael J. OdrichHead of Private Equity

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TABLE OF CONTENTS

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Summary—Fiscal 2000 37Business Environment 37Results of Operations 39

Geographic Diversification 42Non-Interest Expenses 43Income Taxes 43

Liquidity, Funding and Capital Resources 43Managing Liquidity, Funding and Capital Resources 45Total Capital 45Back-Up Credit Facilities 46Balance Sheet 46Financial Leverage 46Credit Ratings 47High Yield Securities 47Private Equity 47

Off-Balance Sheet Financial Instruments and Derivatives 47Overview 47Lehman Brothers’ Use of Derivative Instruments 48

Risk Management 49Credit Risk 49Market Risk 49Value-at-Risk 50

New Accounting Developments 5 1Effects of Inflation 52Report of Independent Auditors 53Consolidated Financial Statements 54Notes to Consolidated Financial Statements 6 1Selected Financial Data 88

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MD&A

FINANCIAL SUMMARY— FISCAL 2000

For 2000, Lehman Brothers Holdings Inc. (“Holdings”) and subsidiaries(collectively, the “Company” or “Lehman Brothers”) reported its 6thconsecutive year of record financial performance.

Net income of $1,775 million increased 57% over 1999 while earnings pershare of $6.38 grew approximately 56% over last year. These results reflectthe continued successful execution of the Company’s strategy to grow itshigh margin investment banking and equities businesses; increase its pres-ence in certain businesses in Europe; and, at the same time, maintain astrict discipline with regard to its expenses and risk management. Net rev-

enues increased to a record $7,707 million from $5,340 million in 1999 as the Company achieved record revenues in each majorbusiness segment and region in which it operates. The Company’s emphasis on high margin businesses and disciplined approachto expense management supported an increase in the Company’s pretax operating margin to 33.5% in 2000 from 30.5% in1999. Revenues in each of the Company’s three segments grew by over 30% compared to last year and return on equityincreased to 27.4% from 21.8% a year ago. As a result of the Company’s continued emphasis on expense discipline, non-per-sonnel expenses increased only 19%, compared with an overall increase of 44% in net revenues. The Company’s compensa-tion and benefits ratio increased slightly to 51.0% of net revenues from 50.7% in 1999 as the Company continued to increaseheadcount, making significant additions in areas where the Company is focusing its growth.

The Company reported net income of $1,132 million and earnings per share of $4.08 for 1999. Net revenues increased 30%from 1998 to $5.3 billion. The Company’s pretax operating margin was 30.5% for 1999 and 25.6% for 1998. The compensa-tion and benefits ratio was 50.7% of net revenues and non-personnel expenses as a percentage of revenues was 18.8% comparedto 23.7% in 1998. These results reflected the continued implementation of the strategy to grow high margin businesses whilemanaging expenses carefully. For 1998, the Company reported net income of $736 million and earnings per share of $2.60.

BUSINESS ENVIRONMENT

The principal business activities of the Company are investment banking and securities trading and sales, which by their natureare subject to volatility, primarily due to changes in interest and foreign exchange rates and security valuations, global economicand political trends and industry competition. As a result, revenues and earnings may vary significantly from quarter to quarterand from year to year.

The favorable market and economic conditions experienced during 1999 continued into the first half of 2000, boosted by awealth effect stemming from previous gains in the stock market and strong consumer spending. In response to strong growthand rising inflation fears, the Federal Reserve raised the Federal Funds rate by a total of 100 basis points to 6.50% over the firsthalf of 2000, with the last increase occurring on May 16, 2000. In the second half of the year, marketplace uncertainties com-bined with slower consumer spending, higher borrowing costs and recessionary fears resulted in weaker market conditions,prompting the Federal Reserve to adopt an easing bias by year-end.

Some of the statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, including those relating to the Company’s strategy and other state-ments 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 sim-ilar 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 theCompany’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 topredict, which may include market, credit or counterparty, liquidity, legal and operational risks. Market risks include changes in interest and foreign exchange rates and securities valuations, globaleconomic and political trends and industry competition. The Company’s actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in anysuch forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

• Net revenue growth of 44%

• Net income increased 57%

• Pretax margin of 33.5%

• ROE of 27.4%(1)

(1) Before redeemable preferred dividend

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As a result of this changing economic climate, the U.S. equity markets were very volatile during the year, posting lower returnswhen compared to the previous several years. By the middle of January 2000, in anticipation of further Federal Reserve Boardrate hikes, the Dow Jones Industrial Average (“DJIA”) started to decline, falling briefly below the 10,000 level before recov-ering through the end of August. Following the Federal Reserve Board’s fifty basis point tightening in May, equity analystsstarted to lower their forecasts for the late 2000 and early 2001 quarters, a pattern that would continue through the end of thefiscal year. In October, the DJIA again slipped below the 10,000 level before recovering to 10,415 at November 30, 2000, a 4%decrease from fiscal year-end 1999. The NASDAQ Composite experienced even greater volatility, climbing 40% to an all-timehigh of 5,049 in early March, before slipping almost 50% during the second half of the year. The NASDAQ close of 2,598,represented a 22% decline for the year-ended November 30, 2000, the worst full year performance since its inception in theearly 1970s. The S&P 500 also closed lower, marking the first time in a decade that all three major indexes would finish the year with losses.

Europe was the only major region to register positive returns on equities for the twelve months ended November 30, 2000.However, the 6% return in local currency terms (FTSE World Europe Index) disguised a sharp sectoral divide. The technol-ogy and telecommunications sectors had wide swings, rising 50% in value during the three months ended February 2000,before losing 40% of their value in the next three-quarters. Meanwhile, the rest of the market recorded a much steadier per-formance, although the fourth quarter was weak across all sectors as regional growth expectations began to deteriorate. Trad-ing volumes were very strong in the early months of the year, but dropped off significantly during the second half of the year.

Asian Pacific markets were particularly weak for the year-ended November 30, 2000. The capital-weighted index of all shareslisted on the Tokyo Stock Exchange (“TOPIX index”) lost 17% of its value during the year as the cyclical recovery in Japanbegan losing momentum. Outside of Japan, Asian markets also fell sharply during the year as the FTSE World Pacific Basinindex was down 10% for the year.

Equity new issuances reached record levels during the year with volumes up 23% over the same period last year. Fueling thegrowth in the U.S. equity market was increased IPO volume and continued equity raising in the technology, telecommuni-cation and new media sectors. Fourth quarter origination volumes, however, were off significantly from the first nine monthsof the year as the equity markets began to feel the affects of the market’s downturn.

Overall, the fixed income market environment was sub-optimal in 2000. The U.S. Treasury market was the lone exception,as it benefitted from many factors, including the turbulence in the equity markets, increased U.S. Treasury buybacks, lowervolume of U.S. corporate debt issuance and revised forecasts for higher future U.S. budget surpluses. This led to a strong per-formance in the government bond sector during the second half of 2000. The credit market environment was very difficultfor virtually the entire year. Interest rates were rising, the yield curve was inverted and credit spreads widened significantlytoward the end of the year due to uncertainty over the interest rate environment and increased concerns over corporate creditquality and defaults. This was most prominently seen in the high yield market, where spreads widened to their highest levelssince 1991.

European corporate bond market activity slowed significantly during the second half of the year, primarily as a result of con-tinued concerns around corporate credit quality. Credit spreads widened moderately by year-end, leading to underperfor-mance of corporate bonds compared to government securities. Trading activities also slowed, affected by volatile tradingconditions in high profile sectors such as telecommunications.

Global debt new issuances were dampened by the inversion of the yield curve and the anticipation of future interest rate hikesby the Federal Reserve. However, as it became apparent that the Federal Reserve was no longer aggressively raising interestrates, market fundamentals improved in the second half of the year. Overall, debt new issuances for the year were down approx-imately 15% from 1999. However, the high yield new issue market was down significantly, approximately 50% from 1999, dueto the spread widening in this sector.

Merger and acquisition advisory activities on a global basis reached record levels in 2000, although fourth quarter results weresignificantly slower than the rest of the year as volatility in equity markets affected the pace of announced transactions. Over-all, the volume of completed transactions for the year soared to a record $3.4 trillion in 2000, which included the completionof the highest ever number of deals greater than $1 billion. The increase was influenced by activity involving European

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

companies and cross-border mergers and acquisitions as the forces of consolidation, deregulation and globalization acrossindustry sectors continued to drive strategic combinations.

RESULTS OF OPERATIONS

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

TWELVE MONTHS ENDED NOVEMBER 30, 2000

TWELVE MONTHS ENDED NOVEMBER 30, 1999

TWELVE MONTHS ENDED NOVEMBER 30, 1998

PrincipalTransactions,

Commissions and Investment(in millions) Net Interest Banking Other Total

Investment Banking $1,401 $1,401

Capital Markets $2,175 $(62) 2,113

Client Services 472 40 87 599

Total $2,647 $1,441 $ 25 $4,113

PrincipalTransactions,

Commissions and Investment(in millions) Net Interest Banking Other Total

Investment Banking $1,664 $1,664

Capital Markets $3,071 $22 3,093

Client Services 523 18 42 583

Total $3,594 $1,682 $64 $5,340

34%

62%

28%

27%

11%

Investment Banking

Capital Markets:Equities

Fixed Income

Client Services

Net Revenue Diversity by Division

Investment Banking and Equitiesgenerated 62% of net revenues in 2000compared with 39% in 1997.

PrincipalTransactions,

Commissions and Investment(in millions) Net Interest Banking Other Total

Investment Banking $2,179 $2,179

Capital Markets $4,660 $ 29 4,689

Client Services 697 37 105 839

Total $5,357 $2,216 $134 $7,707

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40

Lehman Brothers provides a full array of capital market products and advisory services worldwide. Through the Company’sbanking, research, trading, structuring and distribution capabilities of equity and fixed income products the Company con-tinues its focus of building its client/customer business model. These “customer flow” activities represent a majority of theCompany’s revenues. In addition to its customer flow activities, the Company also takes proprietary positions, the success ofwhich is dependent upon its ability to anticipate economic and market trends. The Company believes its customer flow orientation mitigates its overall revenue volatility.

The Company, through its subsidiaries, is a market-maker in all major equity and fixed income products in both the domes-tic and international markets. In order to facilitate its trading activities, the Company is a member of all principal securitiesand commodities exchanges in the United States and holds memberships or associate memberships on several principal inter-national securities and commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Milan and Paris stockexchanges. As part of its market-making customer flow activities, the Company maintains inventory positions of varyingamounts across a broad range of financial instruments, which are marked-to-market on a daily basis and, along with anyproprietary trading positions, give rise to principal transactions revenues.

Net revenues from the Company’s market-making, sales and trading activities in the capital markets are recognized as eitherprincipal transactions, commissions or net interest revenues, depending upon the method of execution, financing and/or hedg-ing related to specific inventory positions. The Company evaluates its sales and trading strategies on an overall profitabilitybasis, which combines principal transactions revenues, commissions and net interest.

INVESTMENT BANKING

This segment’s net revenues result from fees earned by the Company for underwriting public and private offerings of fixedincome and equity securities, and advising clients on merger and acquisition activities and other services.

Investment Banking’s net revenues increased 31% in 2000 to $2,179 million from $1,664 million in 1999 and $1,401 million in1998, due principally to an increase in equity underwriting and merger and acquisition advisory activities. This increase in netrevenues reflects the progress the Company has made in its strategy to build its global investment banking franchise.

Equity underwriting revenues increased 79% to $817 milliondriven by increased issuances as well as the Company’simprovement in lead-managed global equity issuances and corresponding improvement in the competitive rankings perThomson Financial Securities Data Corp. (“TFSD”). Mergerand acquisition advisory revenues increased 54% to a record$777 million. These record results were driven by an increasein the Company’s market share for completed mergers andacquisition transactions from 7.6% in 1999 to 9.8% in 2000, per TFSD.

INVESTMENT BANKING NET REVENUES:

(in millions) 2000 1999 1998

Equity Underwriting $ 817 $ 456 $ 309

Debt Underwriting 585 704 581

Merger and Acquisition

Advisory 777 504 511

$2,179 $1,664 $1,401

Investment Banking—Net Revenuesin millions

$1,250

$1,500

$1,750

$2,000

$2,250

009998

CAGR

25%

• Net revenues increased 31% for the year

• Record merger and acquisition advisory fees of $777million, up over 50% from a year ago

• Record equity underwriting revenues of $817 million,up 79% from 1999 on record lead managedunderwriting volume of $14 billion

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Debt underwriting revenues decreased 17% to $585 million as a result of challenging market conditions as rising interest ratesled to decreased underwriting volume across most fixed income products, most notably in the high yield market where spreadswere at their widest levels since 1991. Overall market volumes for global debt underwriting and high yield issuances were down14% and 52%, respectively, according to TFSD.

The increase in net revenues in Investment Banking in 1999 from 1998 reflected the ongoing success in building-out this seg-ment, as evidenced by the Company’s ability to execute several significant multiple product transactions for key clients in equityand investment grade debt underwriting. In addition, the Company also met a key strategic initiative in improving its ranking in lead-managed initial public offerings and European-related transactions during the year.

CAPITAL MARKETS

This segment’s net revenues reflect institutional flow activities and secondary trading and financing activities related to a broadspectrum of equity and fixed income products. These products include a wide range of cash, derivative, secured financing andstructured instruments.

Capital Markets’ net revenues were $4,689 million for 2000, $3,093 million for 1999 and $2,113 million for 1998. The 52%increase in net revenues in 2000 is primarily attributable to a significant increase in customer flow activities as overall transac-tion volumes almost doubled 1999 levels.

Net revenues from the equity component of Capital Marketsincreased 84% to $2,629 million from $1,425 million in 1999.This performance reflects the success of the continued develop-ment of the Company’s equity franchise, a key component ofthe Company’s strategic focus on building high margin busi-nesses. Revenues benefited from strong customer flow activityacross all equity products and regions, in particular equity deriv-

ative and cash products. Also contributing to the increase were higher revenues related to the Company’s Private EquityInvestments.

Net revenues from the fixed income component of Capital Markets increased 24% to $2,060 million from $1,668 million in1999. The Company generated this year-over-year increase in an extremely difficult market environment due to strong activ-ity across most fixed income instruments, especially in higher margin structured products. Certain products, particularly highyield instruments, experienced reduce flow activity due to the widening of spreads resulting from ongoing credit concerns.These concerns led many institutional investors toward more liquid types of fixed income products, such as government andmortgage-backed securities.

CAPITAL MARKETS NET REVENUES:

(in millions) 2000 1999 1998

Equities $2,629 $1,425 $ 717

Fixed Income 2,060 1,668 1,396

$4,689 $3,093 $2,113

Fixed Income—Net Revenuesin millions

$1,250

$1,500

$1,750

$2,000

$2,250

009998

CAGR

21%

Equities—Net Revenuesin millions

$500

$1,000

$1,500

$2,000

$2,500

$3,000

009998

CAGR

91%

• Net revenues up 52% for the year

• Equities revenues increased 84%over 1999 results

• Fixed income revenues up 24%from a year ago

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The increase in net revenues in Capital Markets from 1998 to 1999 was primarily due to significantly increased institutionalcustomer flow activity across most equity and fixed income products as the Company continued to invest in high marginproduct areas.

CLIENT SERVICES

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

Client Services’ net revenues for 2000 were $839 million com-pared to $583 million for 1999 and $599 million for 1998. The44% increase in 2000 was driven by record customer activity asthe Company successfully increased the headcount and pro-ductivity of its investment representatives. In October of 2000,the Company acquired SG Cowen’s high-net-worth group of 92 investment representatives. This, combined with the

Company’s own hiring initiatives, increased the number of investment representatives to 450 as of November 30, 2000. Inaddition, Private Equity management fees increased significantly as the Company’s assets under management increased 51% to$4.5 billion. This growth is part of the Company’s strategic expansion of its high margin businesses.

In 1999, Private Client revenues increased 10% to a record $573 million due to increased productivity of its sales force whichoffset a reduction in realized gains and incentive fees from the liquidation of private equity investments.

GEOGRAPHIC DIVERSIFICATION

In fiscal 2000, the Company continued to strategically expand its international franchise, with a particular focus in Europe.This expansion enabled the Company to benefit from the continued globalization of financial markets driven by the increasein cross-border transactions and client demand for global investment products. International net revenues represented 42% oftotal net revenues in 2000, compared with only 28% in 1997.

During the year, the Company continued to invest significant resources in expanding its European franchise as it expandedheadcount by approximately 40%. Since 1997, European headcount has nearly doubled. This growth is based on the Com-pany’s belief that the European economy will continue the transformation toward a more capital markets driven environment.Overall European revenues increased 45% versus 1999 to approximately $2.4 billion, as the region experienced significantgrowth in all business lines, particularly equity cash and derivative products and the growth of investment banking.

The Company also saw increased revenues in the Asian Pacific region across most equity and fixed income products.

CLIENT SERVICES NET REVENUES:

(in millions) 2000 1999 1998

Private Client $795 $573 $523

Private Equity 44 10 76

$839 $583 $599

Number of InvestmentRepresentatives

100

200

300

400

500

009998

284308

450

Private Equity Assets UnderManagement

in billions

$1.0

$2.0

$3.0

$4.0

$5.0

009998

$2.8$3.0

$4.5

• Net revenues up 44% for the year

• Private equity assets undermanagement grew 51% in 2000

• Private Client’s investmentrepresentatives increased over 40%during the year

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NON-INTEREST EXPENSES

Non-interest expenses in 2000 totaled $5,128 million, up 38% over 1999’s non-interest expenses of $3,709 million. Theincrease in non-interest expenses was more than offset by the 44% increase in net revenues, highlighting the Company’s con-tinued disciplined approach to expense management. This ongoing focus on expenses is a key attribute of the Company’sstrategic objective of increasing pretax operating margins. Nonpersonel expenses as a percentage of net revenues decreasedfrom 18.8% in 1999 to 15.5% in fiscal 2000.

Compensation and benefits expense as a percentage of net revenues increased slightly to 51.0% compared to 50.7% in 1999.The increase reflects the Company’s continued expansion of its investment banking, equities and European franchises as wellas its investment in technology and e-commerce capabilities. Compensation and benefits expense includes the cost of salaries,incentive compensation and employee benefit plans as well as the amortization of deferred stock compensation awards.

INCOME TAXES Lehman Brothers 2000 income tax provision of $748 million represented a 29% effective tax rate. In 1999and 1998, income tax provisions were $457 million and $316 million, respectively, resulting in effective tax rates of 28% in 1999and 30% in 1998. The effective tax rate increased in 2000 due to an overall increase in the level of pretax income, which less-ened the relative impact of certain tax preference items. The increase was partially offset by a decrease in the state and localeffective tax rate. Additional information about the Company’s income taxes can be found in Note 11 to the ConsolidatedFinancial Statements.

LIQUIDITY, FUNDING AND CAPITAL RESOURCES

LIQUIDITY RISK MANAGEMENT Liquidity risk management is of critical importance to the Company, providing a frameworkwhich seeks to ensure that the Company maintains sufficient liquid financial resources to continually fund its balance sheetand meet all of its funding obligations in all market environments. The Company’s liquidity framework has been structuredso that even in a severe liquidity event the balance sheet does not have to be reduced purely for liquidity reasons (although wemay choose to do so for risk reasons). This allows the Company to continue to maintain its customer franchise and debt ratings during a liquidity event.

The Company’s liquidity management philosophy incorporates the following principles:

• Liquidity providers are credit and market sensitive. Consequently, firms must be in a state of constant liquidity readiness.• Firms should not rely on asset sales to generate cash or believe that they can increase unsecured borrowings or funding

efficiencies in a liquidity crisis.• During a liquidity event, certain secured lenders may require higher quality collateral. Firms must therefore not over-

estimate the availability of secured financing, and must fully integrate their secured and unsecured funding strategies.• A firm’s legal entity structure may constrain liquidity. Regulatory requirements can restrict the flow of funds between

regulated and unregulated group entities and this must be accounted for in liquidity planning.

Nonpersonnel ExpenseAs a Percentage of Net Revenues

14%

16%

18%

20%

22%

24%

009998

Non-Interest ExpenseAs a Percentage of Net Revenues

50%

60%

70%

80%

009998

Twelve months ended November 30

(in millions) 2000 1999 1998

Compensation and benefits $3,931 $2,707 $2,086

Nonpersonnel 1,197 1,002 975

Total non-interest expenses $5,128 $3,709 $3,061

Compensation and benefits/Net revenues 51.0% 50.7% 50.7%

Nonpersonnel expenses/Net revenues 15.5% 18.8% 23.7%

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The Company’s Funding Framework incorporates these principles and mitigates liquidity risk wherever possible. This Framework comprises four major components:

1. The Cash Capital Model—which evaluates the amount of long-term liabilities—with remaining maturities of over oneyear—that are required to fund the Company. The model incorporates that the following must be funded with cash capital:

• Secured funding “haircuts,” to reflect the estimated value of cash that would be advanced to the Company by counter-parties during a stress environment.

• Fixed assets and goodwill.• Operational cash at banks and unpledged assets independent of collateral quality; the Company assumes that it will not

be able to operate with lower requirements in a stress environment than the Company currently operates with in anormal environment.

The Company operates with a surplus of cash capital sources over cash capital uses. To ensure that the Company is always operating “within its means,” the businesses operate within strict cash capital limits. This limit culture has been institutionalized and this policy engages the entire Company in managing liquidity.

2. The Reliable Secured Funding Model (“RSFM”)—which forecasts the reliable sources of overnight secured funding available to the Company.

The RSFM represents our assessment of the reliable secured funding capacity, by asset class, that we would anticipate in a liq-uidity event. The Company pays careful attention to validating this capacity through a periodic counterparty by counterparty,product by product review which draws upon the Company’s understanding of the financing franchise and experience.

In cases where a business has inventory at a level above its RSFM, the Company requires the excess to be funded on a termbasis with a maturity in excess of three months. If this is not feasible, the Company will then provide for this in its liquiditycushion—a cash amount with a remaining term in excess of 90 days. The cost of maintaining the liquidity cushion is borneby the business and encourages the development of secured funding capacity in line with balance sheet growth.

The Company has increased RSFM for certain asset classes through the use of favorable legal entity structures, such as LehmanBrothers Bank (Thrift) and Lehman Brothers Bankhaus. These entities operate in a deposit protected environment and aretherefore able to source low cost unsecured funds that are insulated from a companywide or market specific event, whileproviding reliable funding for mortgage products and other loan assets.

3. The Maximum Cumulative Outflow (“MCO”)—which estimates the size of the added liquidity requirement necessaryto fund contingent cash outflows expected from a stress environment.

The MCO model reflects our posture of constant liquidity readiness. On an ongoing basis, the Company projects, for our regulated and unregulated entities, the amount of cash we would have over the next three months, assuming that we immediately experience a very severe liquidity stress environment. The MCO assumptions, which presume a very severeliquidity stress environment, include the following:

• The Company is temporarily unable to replace maturing commercial paper and long-term debt.• Collateral posting requirements increase as counterparties call for additional collateral.• Contingent commitments are drawn as other liquidity-impacted institutions draw on their contractual facilities.• The Company does not have to draw on its committed back-stop facilities.• Secured funding consumes additional cash as haircuts widen to reflect stress levels.

The Company’s MCO standard is to operate in such a manner that even if a severe liquidity event ensues, three monthsforward the Company retains a substantial level of cash in both its regulated and unregulated subsidiaries.

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

4. The Contingency Funding Plan—which represents a detailed action plan to manage a stress liquidity event withinthe Company.

The Company has developed a comprehensive Funding Action Plan to manage liquidity risk and communicate effectivelywith creditors, investors and customers during a funding crisis. The main focus of the plan is to detail how, in practice, wewould manage our liquidity in a real situation, using the three components discussed above.

As a consequence of implementing its Funding Framework, the Company has generally shifted to longer-term funding overthe past several years. As a result, the Company has reduced its reliance on short-term unsecured debt, which representsonly 4% of adjusted total assets and less than 15% of total debt.

MANAGING LIQUIDITY, FUNDING AND CAPITAL RESOURCES The Company’s Finance Committee is responsible for develop-ing, implementing and enforcing the liquidity, funding and capital policies. These policies include recommendations for capi-tal and balance sheet size as well as the allocation of capital and balance sheet to the business units. Through the establishmentand enforcement of capital and funding limits, the Company’s Finance Committee seeks to ensure compliance throughout theorganization so that the Company is not exposed to undue risk.

TOTAL CAPITAL The Company’s Total Capital (defined as long-term debt, preferred securities subject to mandatory redemp-tion and stockholders’ equity) increased 16% to $43.9 billion at November 30, 2000, compared to $37.7 billion at November30, 1999. The increase in Total Capital resulted from a net increase in long-term debt, the retention of earnings, the netimpact of various stock-based employee awards and the issuance of $250 million of Series E Preferred Stock. These werepartially offset by repurchases of common stock (to fund stock-based employee awards) and $88 million of convertible Series BPreferred Stock.

$10

$20

$30

$40

009998

Long-Term Debtin billionsNovember 30

(in millions) 2000 1999 1998

Long-term Debt

Senior Notes $32,106 $27,375 $23,873

Subordinated Indebtedness 3,127 3,316 3,468

35,233 30,691 27,341

Preferred Securities 860 710

Stockholders’ Equity

Preferred Equity 700 688 908

Common Equity 7,081 5,595 4,505

7,781 6,283 5,413

Total Capital $43,874 $37,684 $32,754

Short-Term Debt to Total Debtpercentage

6%

12%

18%

24%

30%

00999897

Short-Term Debt to Adjusted Total Assetspercentage

2%

4%

6%

8%

00999897

Lehman Brothers has lowered its Short-Term Debt to Adjusted Total Assets and its Short-Term Debt to Total Debt ratios over the past four years to lessen the impact of short-term dislocations in unsecured funding markets. Lehman Brothers has considerably lower ratios than its peer group.

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During 2000, the Company issued $14.2 billion in long-term debt, which was $5.7 billion in excess of its maturing debt. Long-term debt increased to $35.2 billion at November 30, 2000 from $30.7 billion at November 30, 1999, with a weighted-average maturity of 3.8 years at November 30, 2000 and 3.7 years at November 30, 1999.

The Company operates in many regulated businesses that require various minimum levels of capital. These businesses are alsosubject to regulatory requirements that may restrict the free flow of funds to affiliates. Regulatory approval is generally requiredfor paying dividends in excess of certain established levels, making affiliated investments and entering into management andservice agreements with affiliated companies. Additional information about the Company’s capital requirements can be foundin Note 9 to the Consolidated Financial Statements.

BACK-UP CREDIT FACILITIES Holdings maintains a Revolving Credit Agreement (the “Credit Agreement”) with a syndicateof banks. Under the terms of the Credit Agreement, the banks have committed to provide up to $2 billion for up to 364 days.Any loans outstanding on the commitment termination date may be extended for up to an additional year at the optionof Holdings. The Credit Agreement contains covenants, which require, among other things that the Company maintainspecified levels of liquidity and tangible net worth.

In July 2000, the Company entered into a $1 billion Committed Securities Repurchase Facility (the “Facility”) for LehmanBrothers International (Europe) (“LBIE”), the Company’s major operating entity in Europe. The Facility provides securedmulti-currency financing for a broad range of collateral types. Under the terms of the Facility, the bank group will agree toprovide funding for up to one year on a secured basis. Any loans outstanding on the commitment termination date may beextended for up to an additional year at the option of LBIE. The Facility contains convenants that require, among other things,that LBIE maintain specified levels of tangible net worth.

There are no borrowings outstanding under either the Credit Agreement or the Facility. The Company may use the CreditAgreement and the Facility for general corporate purposes from time to time. The Company has maintained compliance withthe applicable covenants for both the Credit Agreement and the Facility at all times.

BALANCE SHEET The Company’s total assets increased to $224.7 billion at November 30, 2000 from $192.2 billion at Novem-ber 30, 1999. The Company’s adjusted total assets, defined as total assets less the lower of securities purchased under agree-ments to resell or securities sold under agreements to repurchase, were $143.5 billion at November 30, 2000 compared to$130.0 billion at November 30, 1999. The Company believes adjusted total assets is a more effective measure of evaluating bal-ance sheet usage when comparing companies in the securities industry. The increase in adjusted total assets reflects a higherlevel of securities owned associated with increased customer flow activities across the Capital Markets businesses, principallyin the Company’s equity businesses.

The Company’s balance sheet consists primarily of cash and cash equivalents, securities and other financial instruments owned,and collateralized short-term financing agreements. The liquid nature of these assets provides the Company with flexibility infinancing and managing its business. The majority of these assets are funded on a secured basis through collateralized short-termfinancing agreements.

FINANCIAL LEVERAGE Balance sheet leverage ratios are one measure used to evaluate the capital adequacy of a company.Leverage ratios are commonly calculated using either total assets or adjusted total assets divided by total stockholders’ equityand preferred securities subject to mandatory redemption. The Company believes that the adjusted leverage ratio is a moreeffective measure of financial risk when comparing companies in the securities industry. The Company’s leverage ratios basedon adjusted total assets were 16.6x and 18.6x as of November 30, 2000 and 1999, respectively. Consistent with maintaining asingle A credit rating, the Company targets an adjusted leverage ratio of approximately 20.0x. The Company operated belowthis level at November 30, 2000 principally due to the sub-optimal market environment at year-end. Due to the nature of theCompany’s sales and trading activities, the overall size of the Company’s balance sheet fluctuates from time to time and at spe-cific points in time may be higher than the fiscal year-end or quarter-end amounts.

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CREDIT RATINGS The Company, like other companies in the securities industry, relies on external sources to finance a sig-nificant portion of its day-to-day operations. The Company’s access to and cost of funding is generally dependent upon itsshort- and long-term debt ratings. On November 3, 2000, Moody’s Investors Service upgraded Holdings senior debt fromA3 to A2 and commercial paper from P-2 to P-1. As of November 30, 2000 the short- and long-term debt ratings of Hold-ings and Lehman Brothers Inc. (“LBI”) were as follows:

HIGH YIELD SECURITIES The Company underwrites, trades, invests and makes markets in high yield corporate debt securi-ties. The Company also syndicates, trades and invests in loans to below investment grade-rated companies. For purposes ofthis discussion, high yield debt instruments are defined as securities or loans to companies rated BB+ or lower, or equivalentratings by recognized credit rating agencies, as well as non-rated securities or loans which, in the opinion of management, arenon-investment grade. Non-investment grade securities generally involve greater risks than investment grade securities dueto the issuer’s creditworthiness and the liquidity of the market for such securities. In addition, these issuers have relatively higherlevels of indebtedness, resulting in an increased sensitivity to adverse economic conditions. The Company recognizes theserisks and aims to reduce market and credit risk through the diversification of its products and counterparties. High yield debtinstruments are carried at fair value, and unrealized gains or losses for these securities are recognized in the Company’s Con-solidated Statement of Income. Such instruments at November 30, 2000 and 1999 included long positions with an aggregatemarket value of approximately $3.5 billion and $3.0 billion, respectively, and short positions with an aggregate market valueof approximately $745 million and $290 million, respectively. The Company mitigates its aggregate and single-issuer net expo-sure through the use of derivatives, sole-recourse securitization financing and other financial instruments.

Additional information about the Company’s high yield securities and lending activities, including related commitments, canbe found in Note 14 to the Consolidated Financial Statements.

PRIVATE EQUITY The Company has investments in twenty private equity partnerships, for which the Company acts as gen-eral partner, as well as related direct investments. At November 30, 2000 and 1999, the Company’s investment in these partner-ships totaled $149 million and $134 million, respectively, and direct investments totaled $678 million and $375 million,respectively. The Company’s policy is to carry its investments, including the appreciation of its general partnership interests, atfair value based upon the Company’s assessment of the underlying investments. Additional information about the Company’sprivate equity activities, including related commitments, can be found in Note 14 to the Consolidated Financial Statements.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES

OVERVIEW Derivatives are financial instruments, which include swaps, options, futures, forwards and warrants, whose valueis based upon an underlying asset (e.g., treasury bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR). A derivativecontract may be traded on an exchange or negotiated in the over-the-counter markets. Exchange-traded derivatives are stan-dardized and include futures, warrants and certain option contracts listed on an exchange. Over-the-counter (“OTC”) deriv-ative contracts are individually negotiated between contracting parties and include forwards, swaps and certain options,including caps, collars and floors. The use of derivative financial instruments has expanded significantly over the past decade.One reason for this expansion is that derivatives provide a cost-effective alternative for managing market risk. In this regard,derivative contracts provide a reduced funding alternative for managing market risk since derivatives are based upon notionalamounts, which are generally not exchanged, but rather are used merely as a basis for exchanging cash flows during the dura-tion of the contract. Derivatives are also utilized extensively as highly effective tools that enable users to adjust risk profiles,

Holdings LBI

Short-term Long-term Short-term Long-term**

Fitch IBCA, Inc. F-1 A F-1 A/A–

Moody’s P-1 A2 P-1 A1*/A2

Standard & Poor’s Corp. A-1 A A-1 A+*/A

Thomson BankWatch TBW-1 A TBW-1 A+/A

* Provisional ratings on shelf registration

** Senior/subordinated

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such as interest rate, currency, or other market risks, since OTC derivative instruments can be tailored to meet individual clientneeds. Additionally, derivatives provide users with access to market risk management tools that are often unavailable in tradi-tional cash instruments. Derivatives can also be used to take proprietary trading positions.

Derivatives are subject to various risks similar to non-derivative financial instruments including market, credit and operationalrisk. Market risk is the potential for a financial loss due to changes in the value of derivative financial instruments due to marketchanges, including changes in interest rates, foreign exchange rates and equity and commodity prices. Credit risk results fromthe possibility that a counterparty to a derivative transaction may fail to perform according to the terms of the contract.Therefore, the Company’s exposure to credit risk is represented by its net receivable from derivative counterparties, afterconsideration of collateral. Operational risk is the possibility of financial loss resulting from a deficiency in the Company’ssystems for executing derivative transactions. In addition to these risks, counterparties to derivative financial instruments mayalso be exposed to legal risks related to derivative activities, including the possibility that a transaction may be unenforceableunder applicable law. The risks of derivatives should not be viewed in isolation but rather should be considered on an aggregatebasis along with the Company’s other trading-related activities.

As derivative products have continued to expand in volume, so has market participation and competition. As a result, additionalliquidity has been added into the markets for conventional derivative products, such as interest rate swaps. Competition hasalso contributed to the development of more complex products structured for specific clients. It is this rapid growth andcomplexity of certain derivative products, which has led to the perception, by some, that derivative products are unduly riskyto users and the financial markets. In order to remove the public perception that derivatives may be unduly risky and to ensureongoing liquidity of derivatives in the marketplace, the Company supports the efforts of the regulators in striving for enhancedrisk management disclosures which consider the effects of both derivative products and cash instruments. In addition, theCompany supports the activities of regulators that are designed to ensure that users of derivatives are fully aware of the natureof risks inherent within derivative transactions. As evidence of this support, the Company is an active participant in theDerivative Policy Group and has been actively involved with the various regulatory and accounting authorities in thedevelopment of additional enhanced reporting requirements related to derivatives. The Company strongly believes thatderivatives provide significant value to the financial markets and is committed to providing its clients with innovative productsto meet their financial needs.

LEHMAN BROTHERS’ USE OF DERIVATIVE INSTRUMENTS In the normal course of business, the Company enters intoderivative transactions both in a trading capacity and as an end user. As an end user, the Company utilizes derivative productsto adjust the interest rate nature of its funding sources from fixed to floating interest rates, and to change the index upon whichfloating interest rates are based (e.g., Prime to LIBOR) (collectively, “End User Derivative Activities”). For a further discussionof the Company’s End User Derivative Activities, see Note 12 to the Consolidated Financial Statements.

The Company utilizes derivative products in a trading capacity both as a dealer to satisfy the financial needs of its clients andin each of its trading businesses (collectively, “Trading-Related Derivative Activities”). The Company’s use of derivativeproducts in its trading businesses is combined with cash instruments to fully execute various trading strategies.

The Company conducts its derivative activities through a number of wholly-owned subsidiaries. The Company’s fixed incomederivative products business is conducted through its special purpose subsidiary, Lehman Brothers Special Financing Inc., andseparately capitalized “AAA” rated subsidiaries, Lehman Brothers Financial Products Inc. and Lehman Brothers DerivativeProducts Inc. The Company’s equity derivative product business is conducted through Lehman Brothers Finance S.A. Inaddition, as a global investment bank, the Company is also a market-maker in a number of foreign currencies and activelytrades in the global commodity markets. Counterparties to the Company’s derivative product transactions are primarilyfinancial intermediaries (U.S. and foreign banks), securities firms, corporations, governments and their agencies, financecompanies, insurance companies, investment companies and pension funds.

The Company manages the risks associated with derivatives on an aggregate basis, along with the risks associated with its non-derivative trading and market-making activities in cash instruments, as part of its firmwide risk management policies. For afurther discussion of the Company’s risk management policies refer to the discussion which follows.

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

See Notes 1 and 12 to the Consolidated Financial Statements for a description of the Company’s accounting polices and afurther discussion of the Company’s Trading-Related Derivative Activities.

RISK MANAGEMENT

As a leading global investment banking company, risk is an inherent part of the Company’s businesses. Global markets, by theirnature, are prone to uncertainty and subject participants to a variety of risks. The Company has developed policies and pro-cedures to identify, measure and monitor each of the risks involved in its trading, brokerage and investment banking activitieson a global basis. The principal risks of Lehman Brothers are market, credit, liquidity, legal and operational risks. Risk Man-agement is considered to be of paramount importance. Consequently, the Company devotes significant resources across all ofits worldwide trading operations to the measurement, management and analysis of risk, including investments in personneland technology.

The Company seeks to reduce risk through the diversification of its businesses, counterparties and activities in geographicregions. The Company accomplishes this objective by allocating the usage of capital to each of its businesses, establishing trad-ing limits for individual products and traders and setting credit limits for individual counterparties, including regionalconcentrations. The Company seeks to achieve adequate returns from each of its businesses commensurate with the risks thatthey assume.

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

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

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

The CRM Department manages the credit exposure related to trading activities by giving initial credit approval forcounterparties, establishing credit limits by counterparty, country and industry group and by requiring collateral in appropriatecircumstances. In addition, the CRM Department strives to ensure that master netting agreements are obtained wheneverpossible. The CRM Department also considers the duration of transactions in making its credit decisions, along with thepotential credit exposure for complex derivative transactions. The CRM Department is responsible for the continuousmonitoring and review of counterparty credit exposure and creditworthiness and recommending valuation adjustments whereappropriate. Credit limits are reviewed periodically to ensure that they remain appropriate in light of market events or thecounterparty’s financial condition.

MARKET RISK Market risk represents the potential change in value of a portfolio of financial instruments due to changes inmarket rates, prices and volatilities. Market risk management also is an essential component of the Company’s overall risk man-agement framework. The Market Risk Management Department (“MRM Department”) has global responsibility for imple-menting the Company’s overall market risk management framework. It is responsible for the preparation and dissemination ofrisk reports, developing and implementing the firmwide Risk Management Guidelines and evaluating adherence to these

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guidelines. These guidelines provide a clear framework for risk management decision-making. To that end the MRM Depart-ment identifies and quantifies risk exposures, develops limits, and reports and monitors these risks with respect to the approvedlimits. The identification of material market risks inherent in positions includes, but is not limited to, interest rate, equity andforeign exchange risk exposures. In addition to these risks, the MRM Department also evaluates liquidity risks, credit andsovereign concentrations.

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

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

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

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

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

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

VALUE-AT-RISK For purposes of Securities and Exchange Commission (“SEC”) risk disclosure requirements, the Companydiscloses an entity-wide value-at-risk for virtually all of its trading activities. In general, value-at-risk measures potential lossof revenues at a given confidence level over a specified time horizon. Value-at-risk over a one-day holding period measuredat a 95% confidence level implies that potential loss of daily trading revenue will be at least as large as the value-at-risk amounton one out of every 20 trading days.

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

During 2000, the Company’s value-at-risk varied from a high of $23.7 million to a low of $18.4 million. During 1999, theCompany’s value-at-risk varied from a high of $36.2 million to a low of $19.0 million.

Average value-at-risk decreased in 2000 compared to 1999 due to the effects on the 1999 value-at-risk related to the extrememarket volatility experienced during the August-October 1998 period. Excluding the data points during this volatile timeperiod, the adjusted average value-at-risk was $18.9 million during 1999. Value-at-risk at November 30, 2000 and 1999 was$23.7 million and $19.2 million, respectively.

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

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

NEW ACCOUNTING DEVELOPMENTS

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

SFAS 133 will not affect the accounting for the Company’s trading-related derivative activities, as such derivatives are alreadyrecognized on a mark-to-market basis through earnings. Rather, SFAS 133 will affect the accounting for derivatives utilizedas hedging instruments as part of the Company’s end-user activities. As an end user, the Company primarily utilizes deriva-tives to modify the interest rate characteristics of its long-term debt and secured financing activities (“end-user derivative activ-ities”). The Company currently accounts for its end-user derivative activities on an accrual basis provided that the derivativeis deemed a highly effective hedge. SFAS 133 generally will require the Company to recognize its end-user derivatives at fairvalue through earnings, with an offset recognized through earnings for changes in the fair value of the hedged item. Any inef-fectiveness in a hedging relationship generally will require immediate earnings recognition. In addition to these changes, SFAS133 will result in certain derivatives no longer qualifying for hedge accounting, requiring such derivatives to be marked-to-market through earnings without offset. Derivatives that will not qualify for hedge accounting under SFAS 133 include U.S.dollar and foreign currency basis swaps.

2000 1999

Interest rate risk $12.8 $21.6

Equity price risk 11.2 11.9

Foreign exchange risk 2.1 3.2

Diversification benefit (5.3) (5.8)

Total Company $20.8 $30.9

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The Company has devoted significant resources to prepare for the adoption of SFAS 133. The adoption of SFAS 133 will nothave a material impact to the Company’s financial position or results of operations.

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

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

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

EFFECTS OF INFLATION

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

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REPORT OF INDEPENDENT AUDITORS

Report

The Board of Directors and Stockholders ofLehman Brothers Holdings Inc.

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

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

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

New York, New YorkJanuary 4, 2001

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Consolidated Statement of Income

Twelve months ended November 30

(in millions, except per share data) 2000 1999 1998

REVENUES

Principal transactions $ 3,713 $ 2,341 $ 1,373

Investment banking 2,216 1,682 1,441

Commissions 944 651 513

Interest and dividends 19,440 14,251 16,542

Other 134 64 25

Total revenues 26,447 18,989 19,894

Interest expense 18,740 13,649 15,781

Net revenues 7,707 5,340 4,113

NON-INTEREST EXPENSES

Compensation and benefits 3,931 2,707 2,086

Technology and communications 341 327 316

Brokerage and clearance 264 232 239

Professional fees 184 115 109

Business development 182 122 109

Occupancy 135 116 113

Other 91 90 89

Total non-interest expenses 5,128 3,709 3,061

Income before taxes and dividends on trust preferred securities 2,579 1,631 1,052

Provision for income taxes 748 457 316

Dividends on trust preferred securities 56 42

Net income $ 1,775 $ 1,132 $ 736

Net income applicable to common stock $ 1,679 $ 1,037 $ 649

Earnings per common share

Basic $ 6.89 $ 4.27 $ 2.68

Diluted $ 6.38 $ 4.08 $ 2.60

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Financial Condition

November 30

(in millions) 2000 1999

ASSETS

Cash and cash equivalents $ 5,160 $ 5,186

Cash and securities segregated and on deposit for regulatory and other purposes 2,434 1,989

Securities and other financial instruments owned:

Governments and agencies 27,381 29,959

Mortgages and mortgage-backed 24,670 22,643

Corporate equities 24,042 12,790

Corporate debt and other 16,098 11,096

Derivatives and other contractual agreements 9,583 10,306

Certificates of deposit and other money market instruments 3,433 2,265

105,207 89,059

Collateralized short-term agreements:

Securities purchased under agreements to resell 81,242 62,222

Securities borrowed 17,618 19,397

Receivables:

Brokers, dealers and clearing organizations 1,662 1,674

Customers 7,585 9,332

Others 1,135 1,354

Property, equipment and leasehold improvements

(net of accumulated depreciation and amortization

of $855 in 2000 and $903 in 1999) 671 485

Other assets 1,826 1,408

Excess of cost over fair value of net assets acquired

(net of accumulated amortization of

$138 in 2000 and $129 in 1999) 180 138

Total assets $224,720 $192,244

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Financial Condition (continued)

November 30

(in millions, except share data) 2000 1999

LIABILITIES AND STOCKHOLDERS’ EQUITY

Commercial paper and short-term debt $ 5,800 $ 5,476

Securities and other financial instruments sold but not yet purchased:

Governments and agencies 14,998 22,396

Derivatives and other contractual agreements 8,568 9,582

Corporate equities 6,623 12,344

Corporate debt and other 5,096 2,288

35,285 46,610

Collateralized short-term financing:

Securities sold under agreements to repurchase 110,225 81,083

Securities loaned 7,242 4,568

Payables:

Brokers, dealers and clearing organizations 1,922 1,184

Customers 11,637 10,971

Accrued liabilities and other payables 8,735 4,668

Long-term debt:

Senior notes 32,106 27,375

Subordinated indebtedness 3,127 3,316

Total liabilities 216,079 185,251

Commitments and contingencies

Preferred securities subject to mandatory redemption 860 710

STOCKHOLDERS’ EQUITY

Preferred stock 700 688

Common stock, $0.10 par value; 300,000,000 shares authorized;

Shares issued: 251,629,126 in 2000 and 245,238,920 in 1999;

Shares outstanding: 236,395,332 in 2000 and 239,825,620 in 1999 25 25

Additional paid-in capital 3,589 3,374

Accumulated other comprehensive income (net of tax) (8) (2)

Retained earnings 3,713 2,094

Other stockholders’ equity, net 597 254

Common stock in treasury, at cost: 15,233,794 shares in 2000

and 5,413,300 shares in 1999 (835) (150)

Total stockholders’ equity 7,781 6,283

Total liabilities and stockholders’ equity $224,720 $192,244

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Changes in Stockholders’ Equity

Twelve months ended November 30

(in millions) 2000 1999 1998

PREFERRED STOCK

5% Cumulative Convertible Voting, Series A:

Beginning balance $ 1 $ 1

Series A exchanged for Series B (1)

Ending balance 1

5% Cumulative Convertible Voting, Series B:

Beginning balance $ 238 457 507

Series A exchanged for Series B 1

Shares subject to redemption (150)

Shares repurchased (88) (220) (50)

Ending balance 238 457

5.94% Cumulative, Series C:

Beginning balance 250 250

Shares issued 250

Ending balance 250 250 250

5.67% Cumulative, Series D:

Beginning balance 200 200

Shares issued 200

Ending balance 200 200 200

7.115% Cumulative, Series E:

Beginning balance

Shares issued 250

Ending Balance 250

Redeemable Voting:

Beginning and ending balance

Total Preferred Stock, ending balance 700 688 908

COMMON STOCK(1)

Beginning balance 25 25 25

Ending balance 25 25 25

ADDITIONAL PAID-IN CAPITAL(1)

Beginning balance 3,374 3,521 3,423

RSUs exchanged for Common Stock (54) (63)

Employee stock-based awards 101 9 37

Shares issued to RSU Trust (210) (181)

Tax benefits from the issuance of stock-based awards 373 90 59

Other, net 5 (2) 2

Ending balance $3,589 $3,374 $3,521(1) Amounts have been retroactively adjusted to give effect for the two-for-one common stock split,

effected in the form of a 100% stock dividend, which became effective on October 20, 2000.

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Changes in Stockholders’ Equity (continued)

Twelve months ended November 30

(in millions) 2000 1999 1998

ACCUMULATED OTHER COMPREHENSIVE INCOME

Beginning balance $ (2) $ 15 $ 12

Translation adjustment, net(2) (6) (17) 3

Ending balance (8) (2) 15

RETAINED EARNINGS

Beginning balance 2,094 1,105 498

Net income 1,775 1,132 736

Dividends declared:

5% Cumulative Convertible Voting Series A and B Preferred Stock (9) (20) (25)

5.94% Cumulative, Series C Preferred Stock (15) (15) (8)

5.67% Cumulative, Series D Preferred Stock (11) (10) (4)

7.115% Cumulative, Series E Preferred Stock (12)

Redeemable Voting Preferred Stock (50) (50) (50)

Common Stock (59) (48) (37)

Other (5)

Ending balance 3,713 2,094 1,105

COMMON STOCK ISSUABLE

Beginning balance 1,768 1,318 911

RSUs exchanged for Common Stock (247) (83) (10)

Deferred stock awards granted 1,003 533 417

Ending balance 2,524 1,768 1,318

COMMON STOCK HELD IN RSU TRUST

Beginning balance (717) (422) (325)

Shares issued to RSU Trust (231) (441) (107)

RSUs exchanged for Common Stock 301 146 10

Ending balance (647) (717) (422)

DEFERRED STOCK COMPENSATION

Beginning balance (797) (627) (431)

Deferred stock awards granted (1,003) (533) (417)

Amortization of deferred compensation, net 520 363 221

Ending balance (1,280) (797) (627)

COMMON STOCK IN TREASURY, AT COST

Beginning balance (150) (430) (98)

Treasury stock purchased (1,203) (353) (469)

Employee stock-based awards 77 11 30

Shares issued to RSU Trust 441 622 107

Ending balance (835) (150) (430)

Total stockholders’ equity $7,781 $6,283 $5,413

(2) Net of income taxes of $(8) in 2000, $(11) in 1999, and $2 in 1998.

See Notes to Consolidated Financial Statements.

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Consolidated Statement of Cash Flows

Twelve months ended November 30

(in millions) 2000 1999 1998

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income $ 1,775 $ 1,132 $ 736

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization 102 88 91

Deferred tax provision (benefit) (169) (145) (284)

Amortization of deferred stock compensation 520 363 221

Other adjustments 65 (129) 80

Net change in:

Cash and securities segregated and on deposit (445) (806) (34)

Securities and other financial instruments owned (16,148) (12,059) (138)

Securities borrowed 1,779 (3,056) (2,195)

Receivables from brokers, dealers and clearing organizations 12 624 (105)

Receivables from customers 1,747 (1,574) 1,347

Securities and other financial instruments sold but not yet purchased (11,325) 17,807 (1,277)

Securities loaned 2,674 1,403 (4,681)

Payables to brokers, dealers and clearing organizations 738 (138) (833)

Payables to customers 666 1,768 (2,499)

Accrued liabilities and other payables 4,041 377 (152)

Other operating assets and liabilities, net (765) 686 (279)

Net cash provided by (used in) operating activities (14,733) 6,341 (10,002)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of senior notes 14,225 9,753 11,091

Principal payments of senior notes (8,353) (6,037) (4,298)

Proceeds from issuance of subordinated indebtedness 200 600

Principal payments of subordinated indebtedness (192) (370) (356)

Net proceeds from (payments for) commercial paper and short-term debt 324 (1,181) (1,161)

Resale agreements net of repurchase agreements 10,122 (6,488) 5,751

Payments for repurchases of preferred stock (88) (220) (50)

Payments for treasury stock purchases (1,203) (353) (469)

Dividends paid (149) (139) (122)

Issuances of common stock 99 8 61

Issuance of preferred stock, net of issuance costs 250 444

Issuance of trust preferred securities, net of issuance costs 690

Net cash provided by (used in) financing activities 15,035 (4,137) 11,491

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property, equipment and leasehold improvements, net (287) (73) (119)

Acquisition, net of cash acquired (41)

Net cash used in investing activities (328) (73) (119)

Net change in cash and cash equivalents (26) 2,131 1,370

Cash and cash equivalents, beginning of period 5,186 3,055 1,685

Cash and cash equivalents, end of period $ 5,160 $ 5,186 $ 3,055

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)

Interest paid totaled $18,500 in 2000, $13,513 in 1999 and $15,473 in 1998.

Income taxes paid totaled $473 in 2000, $103 in 1999 and $541 in 1998.

See Notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

Note 1 Summary of Significant Accounting Policies 6 1Note 2 Short-term Financings 64Note 3 Long-term Debt 65Note 4 Preferred Securities Subject to Mandatory Redemption 67Note 5 Preferred Stock 68Note 6 Common Stock 69Note 7 Incentive Plans 70Note 8 Earnings Per Common Share 73Note 9 Capital Requirements 74Note 10 Employee Benefit Plans 75Note 11 Income Taxes 76Note 12 Derivative Financial Instruments 78Note 13 Fair Value of Financial Instruments 83Note 14 Other Commitments and Contingencies 84Note 15 Segments 85Note 16 Quarterly Information (Unaudited) 87

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes

NOTE 1 / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION The consolidated financial statements include the accounts of Lehman Brothers Holdings Inc.(“Holdings”) and subsidiaries (collectively, the “Company” or “Lehman Brothers”). Lehman Brothers is one of the leadingglobal investment banks serving institutional, corporate, government and high-net-worth individual clients and customers.The Company’s worldwide headquarters in New York and regional headquarters in London and Tokyo are complementedby offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific Region. TheCompany is engaged primarily in providing financial services. The principal U.S. subsidiary of Holdings is Lehman BrothersInc. (“LBI”), a registered broker-dealer in the U.S. All material intercompany accounts and transactions have been eliminatedin consolidation.

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

The Company uses the trade date basis of accounting.

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

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

DERIVATIVE FINANCIAL INSTRUMENTS A derivative is typically defined as an instrument whose value is “derived” from anunderlying instrument, index or rate, such as a future, forward, swap, or option contract, or other financial instrument withsimilar characteristics. A derivative contract generally represents future commitments to exchange interest payment streams orcurrencies based on the contract or notional amount or to purchase or sell other financial instruments at specified terms on aspecified date.

Derivatives utilized for trading purposes are recorded at market or fair value in the Consolidated Statement of Financial Con-dition on a net by counterparty basis where a legal right of set-off exists and are netted across products when such provisionsare stated in the master netting agreement. The market or fair value related to swap and forward transactions, as well as optionsand warrants, is reported in the Consolidated Statement of Financial Condition as an asset or liability in Derivatives and othercontractual agreements, as appropriate. Margin on futures contracts is included in receivables and payables, as applicable.Changes in fair values of derivatives are recorded as principal transactions revenues in the current period. Market or fair valuefor trading-related instruments is generally determined by either quoted market prices (for exchange-traded futures andoptions) or pricing models (for over-the-counter swaps, forwards and options). Pricing models utilize a series of market inputsto determine the present value of future cash flows, with adjustments, as required for credit risk and liquidity risk. Further val-uation adjustments may be recorded, as deemed appropriate for new or complex products or for positions with significantconcentrations. These adjustments are integral components of the mark-to-market process. Credit-related valuation adjust-ments incorporate business and economic conditions, historical experience, concentrations, estimates of expected losses andthe character, quality and performance of credit sensitive financial instruments.

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

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

The Company also utilizes foreign exchange forward contracts to manage the currency exposure related to its net mone-tary investment in non-U.S. dollar functional currency operations. The gain or loss from revaluing these contracts isdeferred and reported within Accumulated other comprehensive income in stockholders’ equity. The related unrealizedreceivables or payables due from or to counterparties are included in receivables from or payables to brokers, dealers andclearing organizations.

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

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

SECURITIES BORROWED AND LOANED Securities borrowed and securities loaned are carried at the amount of cash collateraladvanced or received plus accrued interest. It is the Company’s policy to value the securities borrowed and loaned on a dailybasis, and to obtain additional cash as necessary to ensure such transactions are adequately collateralized.

PRIVATE EQUITY INVESTMENTS The Company carries its private equity investments, including its partnership interests, atfair value based upon the Company’s assessment of the underlying investments.

INVESTMENT BANKING Underwriting revenues and fees for merger and acquisition advisory services are recognized whenservices for the transactions are determined to be completed. Underwriting expenses are deferred and recognized at the timethe related revenues are recorded.

INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Stan-dards (“SFAS”) No. 109, “Accounting for Income Taxes.” The Company recognizes the current and deferred tax consequencesof all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. In thisregard, deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years andfor tax loss carry-forwards, if in the opinion of management, it is more likely than not that the deferred tax asset will be real-ized. SFAS 109 requires companies to set up a valuation allowance for that component of net deferred tax assets which does

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

not meet the “more likely than not” criterion for realization. Deferred tax liabilities are recognized for temporary differencesthat will result in taxable income in future years.

TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of foreign subsidiaries having non-U.S. dollar functionalcurrencies are translated at exchange rates at the statement of financial condition date. Revenues and expenses are translatedat average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statementsinto U.S. dollars, net of hedging gains or losses and taxes, are included in Accumulated other comprehensive income, a separatecomponent of stockholders’ equity. Gains or losses resulting from foreign currency transactions are included in theConsolidated Statement of Income.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are recordedat historical cost, net of accumulated depreciation and amortization. Depreciation is recognized on a straight-line basis overthe estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of their economic usefullives or the terms of the underlying leases. Internal use software which qualifies for capitalization under AICPA Statement ofPosition 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” is capitalized andsubsequently amortized over the softwares’ estimated useful life.

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

STOCK-BASED AWARDS SFAS No. 123, “Accounting for Stock-Based Compensation,” established financial accounting andreporting standards for stock-based employee compensation plans. SFAS No. 123 permits companies to either continueaccounting for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opin-ion No. 25 (“APB 25”) or using the fair value method prescribed by SFAS No. 123. The Company continues to follow APB25 and its related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expensehas been recognized for stock option awards because the exercise price was at or above the fair market value of the Company’scommon stock on the grant date.

STATEMENT OF CASH FLOWS For purposes of the Consolidated Statement of Cash Flows, the Company defines cash equiv-alents as highly liquid investments with original maturities of three months or less, other than those held for sale in theordinary course of business.

EARNINGS PER COMMON SHARE The Company computes earnings per common share in accordance with SFAS No. 128,“Earnings per Share.” Basic earnings per share is computed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion ofall dilutive securities. All share and per share amounts have been restated for the two-for-one common stock split, effected inthe form of a 100% stock dividend, which became effective October 20, 2000. See Notes 6 and 8 of Notes to ConsolidatedFinancial Statements for more information.

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NOTE 2 / SHORT-TERM FINANCINGS

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

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

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

BACK-UP CREDIT FACILITIES Holdings maintains a Revolving Credit Agreement (the “Credit Agreement”) with a syndicateof banks. Under the terms of the Credit Agreement, the banks have committed to provide up to $2 billion for up to 364 days.Any loans outstanding on the commitment termination date may be extended for up to an additional year at the option ofHoldings. The Credit Agreement contains covenants, which require, among other things that the Company maintain specifiedlevels of liquidity and tangible net worth.

In July 2000, the Company entered into a $1 billion Committed Securities Repurchase Facility (the “Facility”) for LehmanBrothers International (Europe) (“LBIE”), the Company’s major operating entity in Europe. The Facility provides securedmulti-currency financing for a broad range of collateral types. Under the terms of the Facility, the bank group will agree toprovide funding for up to one year on a secured basis. Any loans outstanding on the commitment termination date may beextended for up to an additional year at the option of LBIE. The Facility contains covenants that require, among other thingsthat LBIE maintain specified levels of tangible net worth.

There are no borrowings outstanding under either the Credit Agreement or the Facility. The Company may use the CreditAgreement and the Facility for general corporate purposes from time to time. The Company has maintained compliance withthe applicable covenants for both the Credit Agreement and the Facility at all times.

November 30

2000 1999

Commercial paper(2) 6.5% 5.5%

Short-term debt(3) 5.5% 4.0%

Securities sold under agreements to repurchase 6.0% 5.2%

(1) Includes master notes, corporate loans and other short-term financings.

(2) Includes weighted-average interest rates of 6.9% and 3.0% as of November 30, 2000 and 6.0% and 2.8% as of November 30, 1999

related to U.S. dollar and non-U.S. dollar obligations, respectively.

(3) Includes $587 million and $770 million of short-term debt with weighted-average interest rates of 3.3% and 1.4% as of

November 30, 2000 and 1999, respectively, related to non-U.S. dollar obligations.

November 30

(in millions) 2000 1999

Commercial paper $3,643 $3,642

Short-term debt

Bank loans 320 238

Payables to banks 687 575

Other short-term debt(1) 1,150 1,021

Total $5,800 $5,476

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 / LONG-TERM DEBT

Of the Company’s long-term debt outstanding as of November 30, 2000, $654 million is repayable prior to maturity at theoption of the holder, at par value. These obligations are reflected in the above table as maturing at their put dates, which rangefrom fiscal 2001 to fiscal 2008, rather than at their contractual maturities, which range from fiscal 2004 to fiscal 2026. Inaddition, $1,732 million of the Company’s long-term debt is redeemable prior to maturity at the option of the Company undervarious terms and conditions. These obligations are reflected in the above table at their contractual maturity dates.

The Company’s interest in 3 World Financial Center was financed with U.S. dollar fixed-rate senior notes totaling $224 millionas of November 30, 2000. These notes were unconditionally guaranteed by American Express and collateralized by a firstmortgage on the property. During the first quarter of 2001, these notes were redeemed on their contractual maturity date.

U.S. Dollar Non-U.S. Dollar

Fixed Floating Fixed Floating November 30

(in millions) Rate Rate Rate Rate 2000 1999

SENIOR NOTES

Maturing in Fiscal 2000 $ 7,852

Maturing in Fiscal 2001 $ 1,929 $3,731 $ 789 $ 333 $ 6,782 3,588

Maturing in Fiscal 2002 1,698 2,587 887 701 5,873 4,448

Maturing in Fiscal 2003 2,290 1,501 754 444 4,989 3,736

Maturing in Fiscal 2004 1,757 388 883 554 3,582 3,308

Maturing in Fiscal 2005 2,217 575 234 733 3,759 385

December 1, 2005 and thereafter 5,418 74 1,070 559 7,121 4,058

Senior Notes 15,309 8,856 4,617 3,324 32,106 27,375

SUBORDINATED INDEBTEDNESS

Maturing in Fiscal 2000 198

Maturing in Fiscal 2001 194 6 200 194

Maturing in Fiscal 2002 450 38 488 488

Maturing in Fiscal 2003 475 475 475

Maturing in Fiscal 2004 190 190 190

Maturing in Fiscal 2005 94 7 101 101

December 1, 2005 and thereafter 1,516 150 7 1,673 1,670

Subordinated Indebtedness 2,919 194 14 3,127 3,316

Long-term Debt $18,228 $9,050 $4,631 $3,324 $35,233 $30,691

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As of November 30, 2000, the Company had approximately $10.5 billion available for the issuance of debt securities undervarious shelf registrations and debt programs, which includes $4.9 billion of issuance availability under the Company’s Euromedium-term note program.

As of November 30, 2000, the Company’s U.S. dollar and non-U.S. dollar debt portfolios included approximately $849 millionand $769 million, respectively, of debt for which the interest rates and/or redemption values or maturity have been linked tothe performance of various indices including industry baskets of stocks or commodities or events. Generally such notes areissued as floating rate notes or the interest rates on such index notes are effectively converted to floating rates based primarilyon LIBOR through the use of interest rate, currency and equity swaps.

END-USER DERIVATIVE ACTIVITIES The Company utilizes a variety of derivative products including interest rate, currencyand equity swaps as an end user to modify the interest rate characteristics of its long-term debt portfolio. The Company activelymanages the interest rate exposure on its long-term debt portfolio through the use of interest rate and currency swaps to moreclosely match the terms of the assets being funded and to minimize interest rate risk. In addition, the Company utilizes cross-currency swaps to hedge its exposure to foreign currency risk as a result of its non-U.S. dollar debt obligations, after consid-eration of non-U.S. dollar assets which are funded with long-term debt obligations in the same currency. In certain instances,two or more derivative contracts may be utilized by the Company to manage the interest rate nature and/or currency exposureof an individual long-term debt issuance. In these cases, the notional amount of the derivative contracts may exceed thecarrying value of the related long-term debt issuance.

At November 30, 2000 and 1999, the notional amounts of the Company’s interest rate, currency and equity swaps related toits long-term debt obligations were approximately $26.9 billion and $27.1 billion, respectively. In terms of notional amountsoutstanding, these derivative products mature as follows:

U.S. Non- Cross- November 30

(in millions) Dollar U.S. Dollar Currency 2000 1999

Maturing in Fiscal 2000 $ 6,935

Maturing in Fiscal 2001 $ 2,171 $ 206 $ 887 $ 3,264 3,059

Maturing in Fiscal 2002 3,140 746 630 4,516 4,178

Maturing in Fiscal 2003 3,273 806 94 4,173 3,778

Maturing in Fiscal 2004 2,018 143 816 2,977 3,225

Maturing in Fiscal 2005 2,371 276 698 3,345 475

December 1, 2005 and thereafter 6,959 989 685 8,633 5,424

Total $19,932 $3,166 $3,810 $26,908 $27,074

Weighted-average interest rate at November 30(1):

Receive rate 7.27% 3.93% 4.54% 6.54% 6.15%

Pay rate 7.47% 4.01% 7.39% 7.13% 6.05%

(1) Weighted-average interest rates were calculated utilizing non-U.S. dollar

interest rates, where applicable.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On an overall basis, the Company’s long-term debt-related end-user derivative activities resulted in an increase (decrease) ininterest expense of approximately $35 million, $(67) million and $(84) million in 2000, 1999 and 1998, respectively. In addition,the Company’s end-user derivative activities resulted in the following changes to the Company’s mix of fixed and floating ratedebt and effective weighted-average rates of interest:

NOTE 4 / PREFERRED SECURITIES SUBJECT TO MANDATORY REDEMPTION

Preferred securities subject to mandatory redemption is composed of the following issues:

November 30

(in millions) 2000 1999

Lehman Brothers Holdings Capital Trust I $325 $325

Lehman Brothers Holdings Capital Trust II 385 385

Trust Preferred Securities Subject to Mandatory Redemption 710 710

Cumulative Convertible Voting, Series A and Series B 150

Total $860 $710

November 30, 2000

Long-Term Debt Weighted-Average(1)

Before After Contractual Effective RateEnd User End User Interest After End User

(in millions) Activities Activities Rate Activities

USD Obligations

Fixed rate $18,228 $ 726

Floating rate 9,050 30,792

27,278 31,518

Non-USD Obligations 7,955 3,715

Total $35,233 $35,233 6.68% 7.13%

November 30, 1999

Long-Term Debt Weighted-Average(1)

Before After Contractual Effective RateEnd User End User Interest After End User

(in millions) Activities Activities Rate Activities

USD Obligations

Fixed rate $16,977 $ 353

Floating rate 7,653 27,902

24,630 28,255

Non-USD Obligations 6,061 2,436

Total $30,691 $30,691 6.30% 6.19%

(1) Weighted-average interest rates were calculated using non-U.S. dollar interest rates, where applicable.

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TRUST PREFERRED SECURITIES SUBJECT TO MANDATORY REDEMPTION During 1999, the Company formed two Delawarebusiness trusts for the purposes of: (a) issuing trust securities representing ownership interests in the assets of the trust; (b) invest-ing the gross proceeds of the trust securities in junior subordinated debentures of the Company; and (c) engaging in activitiesnecessary or incidental thereto. Two such trusts have issued securities to date, having an aggregate liquidation value of $710million. The following table summarizes the financial structure of each such trust at November 30, 2000:

CUMULATIVE CONVERTIBLE VOTING, SERIES A AND SERIES B The Convertible Voting Preferred Shares had a liquidationpreference of $39.10 per share. The Series A was issued in 1987. The Series B was issued in an exchange offer for the Series Aon July 11, 1997. During the first quarter of 2000, Holdings repurchased 2,258,311 of the Series B for an aggregate cost of $88million. During the fourth quarter, the Company exercised its option to redeem the shares of Cumulative Convertible Vot-ing Preferred Stock, Series A and Series B (together the “Convertible Voting Preferred”) effective December 15, 2000. As ofthat date the Convertible Voting Preferred Shares were no longer outstanding. As of November 30, 2000, 1,900 shares of theSeries A and 3,834,058 shares of the Series B were outstanding. Given the Company’s intention to redeem the remaining Con-vertible Voting Preferred, the $150 million aggregate redemption value was transferred on the Company’s Statement of Finan-cial Condition from Preferred stock to Preferred securities subject to mandatory redemption.

NOTE 5 / PREFERRED STOCK

Holdings is authorized to issue a total of 38,000,000 shares of preferred stock. At November 30, 2000 and 1999, Holdings had4,426,958 and 6,635,624, respectively, of shares authorized, issued and outstanding under various series as described below andunder “Cumulative Convertible Preferred Shares” in Note 4. All preferred stock has a dividend preference over Holdings’common stock in the paying of dividends and a preference in the liquidation of assets.

SERIES C On May 11, 1998, Holdings issued 5,000,000 Depository Shares, each representing 1/10th of a share of 5.94%Cumulative Preferred Stock, Series C (“Series C Preferred Stock”), $1.00 par value. These shares have a redemption priceof $500 per share, together with accrued and unpaid dividends. Holdings may redeem any or all of the outstanding shares ofSeries C Preferred Stock beginning on May 31, 2008. The $250 million redemption value of the shares outstanding atNovember 30, 2000 is classified on the Company’s Consolidated Statement of Financial Condition as a component ofPreferred stock.

Lehman Brothers Holdings Lehman Brothers Holdings Capital Trust I Capital Trust II

ISSUANCE DATE January 1999 April 1999

Trust Securities

Preferred securities issued 13,000,000 Series I 15,400,000 Series J

Liquidation preference per security $25 $25

Liquidation value (in millions) $325 $385

Coupon rate 8% 7.875%

Distributions payable Quarterly Quarterly

Distributions guaranteed by Lehman Brothers Holdings Inc. Lehman Brothers Holdings Inc.

Mandatory redemption date March 31, 2048 June 30, 2048

Redeemable by issuer on or after March 31, 2004 June 30, 2004

JUNIOR SUBORDINATED DEBENTURES

Principal amount outstanding (in millions) $325 $385

Coupon rate 8% 7.875%

Interest payable Quarterly Quarterly

Maturity date March 31, 2048 June 30, 2048

Redeemable by issuer on or after March 31, 2004 June 30, 2004

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SERIES D On July 21, 1998, Holdings issued 4,000,000 Depository Shares, each representing 1/100th of a share of 5.67%Cumulative Preferred Stock, Series D (“Series D Preferred Stock”), $1.00 par value. These shares have a redemption price of$5,000 per share, together with accrued and unpaid dividends. Holdings may redeem any or all of the outstanding shares ofSeries D Preferred Stock beginning on August 31, 2008. The $200 million redemption value of the shares outstanding atNovember 30, 2000 is classified on the Company’s Consolidated Statement of Financial Condition as a component ofPreferred stock.

SERIES E On March 28, 2000, Holdings issued 5,000,000 Depository Shares, each representing 1/100th of a share ofFixed/Adjustable Rate Cumulative Preferred Stock, Series E (“Series E Preferred Stock”), $1.00 par value. The initial cumu-lative dividend rate on the Series E Preferred Stock is 7.115% per annum through May 31, 2005; thereafter the rate will be thehigher of either the three-month U.S. Treasury Bill rate, the 10-year Treasury constant maturity rate or the 30-year U.S. Trea-sury constant maturity rate, in each case plus 1.15%, but in any event not less than 7.615% nor greater than 13.615%. Theseshares have a redemption price of $5,000 per share, together with accrued and unpaid dividends. Holdings may redeem anyor all of the outstanding shares of Series E Preferred Stock beginning on May 31, 2005. The $250 million redemption valueof the shares outstanding at November 30, 2000 is classified on the Company’s Consolidated Statement of Financial Condi-tion as a component of Preferred stock.

REDEEMABLE VOTING In 1994, Holdings issued the Redeemable Voting Preferred Stock to American Express and NipponLife for $1,000. The holders of the Redeemable Voting Preferred Stock are entitled to receive annual dividends through May31, 2002 in an amount equal to 50% of the amount, if any, by which the Company’s net income for the preceding year exceeds$400 million, up to a maximum of $50 million, prorated in the case of the last dividend period, which runs from December1, 2001 to May 31, 2002. For the years ended November 30, 2000 and 1999, the Company’s net income of $1,775 million and$1,132 million, respectively, resulted in the recognition of dividends in each year in the amount of $50 million on theRedeemable Voting Preferred Stock.

Holdings may not redeem shares of the Redeemable Preferred Stock prior to the final dividend payment. However, in theevent of a change of control of the Company, holders of the Redeemable Preferred Stock will have the right to require Hold-ings to redeem all of the stock for an aggregate redemption price equal to $50 million if such change of control occurs priorto November 30, 2001. If a change of control is not approved by a majority of Holdings’ Board of Directors, the funds forredemption must be raised by an offering of Holdings’ equity securities which are not redeemable. The Redeemable PreferredStock is not convertible into common stock.

NOTE 6 / COMMON STOCK

On September 20, 2000, Lehman Brothers’ Board of Directors declared a two-for-one common stock split, to be effected inthe form of a 100% stock dividend, which became effective on October 20, 2000. The par value of the common stock remainedat $0.10 per share. Accordingly, a transfer from paid-in capital to common stock of $12.5 million was made to preserve the parvalue of the post-split shares. All share and per share amounts have been restated for the effect of the split.

Changes in shares of Holdings’ common stock (the “Common Stock”) outstanding are as follows:

The Company had reserved for issuance approximately 2.4 million shares of Common Stock for conversion of the Convert-ible Voting Preferred.

November 30

2000 1999 1998

Shares outstanding, beginning of period 239,825,620 227,315,754 233,224,148

Exercise of stock options and other share issuances 10,015,048 1,925,642 6,259,766

Treasury stock purchases (25,245,336) (12,415,776) (17,168,160)

Issuances of shares to the RSU Trust 11,800,000 23,000,000 5,000,000

Shares outstanding, end of period 236,395,332 239,825,620 227,315,754

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During the years ended November 30, 2000, 1999 and 1998, the Company repurchased or acquired shares of its CommonStock at an aggregate cost of approximately $1,203 million, $353 million and $469 million, respectively. These shares wereacquired in the open market and from employees who had tendered mature shares to pay for the exercise cost of stock optionsand related tax withholding obligations. These shares are being reserved for future issuances under employee stock-basedcompensation plans.

In 1997, the Company established an irrevocable grantor trust (the “RSU Trust”) in order to provide common stock votingrights to employees who hold outstanding restricted stock units and to encourage employees to think and act like owners. TheRSU Trust was initially funded in 1997 with a total of 32.0 million shares consisting of 10.0 million treasury shares for restrictedstock unit (“RSU”) awards under the Employee Incentive Plan and 22.0 million new issue shares of Common Stock for RSUawards under the 1994 Management Ownership Plan. In 2000, 1999 and 1998, 11.8 million, 23.0 million and 5.0 million trea-sury shares, respectively, were transferred into the RSU Trust. At November 30, 2000, approximately 42.4 million shares wereheld in the RSU Trust with a total value of approximately $647 million. For accounting purposes, these shares are valued atweighted-average grant prices.

Shares transferred to the RSU Trust do not impact the total number of shares used in the computation of earnings percommon share because the Company considers the RSUs as common stock equivalents for purposes of this computation.Accordingly, the establishment of the RSU Trust has had no effect on the total equity, net income or earnings per share ofthe Company.

NOTE 7 / INCENTIVE PLANS

EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan (the “ESPP”) allows employees to purchase Com-mon Stock at a 15% discount from market value, with a maximum of $25,000 in annual aggregate purchases by any one indi-vidual. The number of shares of Common Stock authorized for purchase by eligible employees is 12.0 million. As of November30, 2000 and 1999, 5.2 million shares and 4.8 million shares, respectively, of Common Stock had been purchased by eligibleemployees through the ESPP.

1994 INCENTIVE PLANS The 1994 Management Replacement Plan (the “Replacement Plan”) provided awards similar to theAmerican Express common shares granted to Company employees which were canceled as of the date of the spin-off fromAmerican Express. Through November 30, 2000, a total of 3.9 million awards had been granted under the Replacement Plan,including both stock options and restricted stock; 0.4 million were outstanding at November 30, 2000. No future awards willbe granted under this plan.

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

1996 MANAGEMENT OWNERSHIP PLAN During 1996, the Company’s stockholders approved the 1996 Management Own-ership Plan (the “1996 Plan”) under which awards similar to those of the 1994 Plan may be granted, and under which up to42.0 million shares of Common Stock may be subject to awards. At November 30, 2000, RSU, PSU and stock option awardswith respect to 29.7 million shares of Common Stock have been made under the 1996 Plan of which 21.5 million areoutstanding and 8.2 million have been converted to freely transferable Common Stock.

EMPLOYEE INCENTIVE PLAN The Employee Incentive Plan (“EIP”) has provisions similar to the 1994 Plan and the 1996 Plan,and authorization for up to 156.0 million shares of Common Stock which may be subject to awards. At November 30, 2000,awards with respect to 125.9 million shares of Common Stock have been made under the EIP of which 112.5 million areoutstanding and 13.4 million have been converted to freely transferable Common Stock. Approximately 72.5 million of theoutstanding awards consist of RSUs and PSUs which have vesting and transfer restrictions extending through the year 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of RSUs outstanding under Holdings’ stock-based incentive plans:

RESTRICTED STOCK UNITS

Eligible employees receive RSUs as a portion of their total compensation in lieu of cash. There is no further cost to employ-ees associated with the RSU awards. The Company measures compensation cost for RSUs based on the market value of itsCommon Stock at the grant date and amortizes this amount to expense over the applicable vesting periods. RSU awards madeto employees have various vesting provisions and generally convert to unrestricted freely transferable Common Stock five yearsfrom the grant date. Holdings accrues a dividend equivalent on each RSU outstanding (in the form of additional RSUs), basedon dividends declared on its Common Stock.

In the third quarter of 2000, the Company delivered 11.5 million shares of its Common Stock to current and former employ-ees in satisfaction of RSUs awarded in 1995. Substantially all of the shares delivered were funded from the RSU Trust. TheCompany also received 3.6 million shares from current and former employees in satisfaction of applicable tax withholdingrequirements. Shares received were recorded as treasury stock at an aggregate value of $168 million.

Of the RSUs outstanding at November 30, 2000, approximately 23.5 million RSUs were vested, approximately 14.0 millionRSUs will vest during fiscal 2001, and the remaining RSUs will vest subsequent to November 30, 2001. At November 30,2000, approximately 42.4 million shares of the Company’s Common Stock were held in the RSU Trust.

In addition to the RSUs included in the previous table, the Company has awarded PSUs under the EIP to certain senior offi-cers. The number of PSUs which may be earned is dependent upon the achievement of certain performance levels withinpredetermined performance periods. At the end of a performance period, any PSUs earned will convert one-for-one to RSUswhich then vest in three, four or five years. As of December 31, 2000, approximately 6.9 million PSUs have been earned todate, subject to vesting and transfer restrictions. The compensation cost for the RSUs payable in satisfaction of PSUs is accruedover the combined performance and vesting periods.

Total compensation cost recognized during 2000, 1999 and 1998 for the Company’s stock-based awards was approximately$520 million, $363 million and $221 million, respectively.

1994 1996 Plan Plan EIP Total

Balance, November 30, 1997 23,796,350 2,385,758 31,977,174 58,159,282

Granted 167,732 1,222,800 22,800,302 24,190,834

Canceled (85,468) (224,954) (806,598) (1,117,020)

Exchanged for stock without restrictions (487,582) (211,128) (180,634) (879,344)

Balance, November 30, 1998 23,391,032 3,172,476 53,790,244 80,353,752

Granted 386,422 2,376,634 13,960,994 16,724,050

Canceled (122,826) (59,734) (3,678,534) (3,861,094)

Exchanged for stock without restrictions (9,375,418) (41,758) (733,752) (10,150,928)

Balance, November 30, 1999 14,279,210 5,447,618 63,338,952 83,065,780

Granted 56,503 2,730,011 19,434,315 22,220,829

Canceled (180,445) (490,009) (2,746,069) (3,416,523)

Exchanged for stock without restrictions (11,760,416) (7,487,129) (19,247,545)

Balance, November 30, 2000 2,394,852 7,687,620 72,540,069 82,622,541

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STOCK OPTIONS

At November 30, 2000 and 1999, approximately 18.0 million and 19.4 million stock options, respectively, were exercisable atweighted-average prices of $22.49 and $17.28, respectively. The weighted-average remaining contractual life of the stockoptions outstanding at November 30, 2000 is 5.28 years. The exercise price for all stock options awarded has been equal tothe market price of Common Stock on the day of grant.

The following table provides further details relating to Holdings’ stock options outstanding as of November 30, 2000:

The disclosure requirements of SFAS No. 123 require companies which elect not to record the fair value of stock-based com-pensation awards in the Consolidated Statement of Income to provide pro forma disclosures of net income and earningsper share in the notes to the consolidated financial statements as if the fair value of stock-based compensation had beenrecorded. The Company utilized the Black-Scholes option-pricing model to quantify the pro forma effects on net incomeand earnings per common share of the fair value of the stock options granted and outstanding during 2000, 1999 and 1998.Based on the results of the model, the weighted-average fair value of the stock options granted was $9.91, $6.99 and $6.18 for2000, 1999 and 1998, respectively. The weighted-average assumptions which were used for 2000, 1999 and 1998 included risk-free interest rates of 6.27%, 5.25% and 5.01%, an expected life of 3.6 years, 3.5 years and 4.0 years, and expected volatility of35%, 35% and 30%, respectively. In addition, annual dividends of $0.22, $0.18 and $0.15 were assumed for the 2000, 1999 and1998 options, respectively.

Options Outstanding Options Exercisable

Weighted- Weighted-Average Average

Weighted- Remaining Weighted- RemainingRange Of Number Average Contractual Number Average ContractualExercise Prices Outstanding Exercise Price Life (in years) Exercisable Exercise Price Life (in years)

$ 9.00-$ 9.99 729,688 $ 9.00 2.18 729,688 $ 9.00 2.18

$10.00-$19.99 4,472,094 $14.17 .95 4,433,084 $14.12 .88

$20.00-$29.99 25,407,604 $23.19 4.76 8,278,578 $22.56 2.68

$30.00-$39.99 17,809,838 $33.52 5.66 4,532,806 $32.72 4.22

$40.00-$49.99 5,998,415 $49.53 10.00

$50.00-$59.99 150,000 $55.56 4.97

54,567,639 $28.62 5.28 17,974,156 $22.49 2.60

Weighted-Average

1994 Replace- 1996 Exercise Expiration Plan ment Plan Plan EIP Total Price Dates

Balance, November 30, 1997 4,251,280 1,257,788 6,150,000 6,100,000 17,759,068 $11.82 1/98-5/04

Granted 14,424 6,950,000 14,748,340 21,712,764 $24.86 12/02-11/08

Exercised (1,978,802) (312,648) (2,550,330) (1,412,000) (6,253,780) $11.59

Canceled (834) (7,893,000) (7,893,834) $30.24

Balance, November 30, 1998 2,286,902 944,306 10,549,670 11,543,340 25,324,218 $17.32 2/99-11/08

Granted 56,238 4,300,000 16,881,168 21,237,406 $27.16

Exercised (889,598) (330,568) (234,560) (1,454,726) $11.10

Canceled (34,560) (3,670) (200,000) (589,912) (828,142) $22.12

Balance, November 30, 1999 1,418,982 610,068 14,649,670 27,600,036 44,278,756 $22.15 6/00-11/09

Granted 37,520 6,600,000 18,469,555 25,107,075 $34.89

Exercised (805,600) (257,500) (5,139,586) (3,273,872) (9,476,558) $17.04

Canceled (165,600) (238) (2,300,000) (2,875,796) (5,341,634) $24.89

Balance, November 30, 2000 485,302 352,330 13,810,084 39,919,923 54,567,639 $28.62 2/01-11/10

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s 2000, 1999 and 1998 pro forma net income would have been $1,725 million, $1,091 million and $723 million,respectively, compared to actual net income of $1,775 million, $1,132 million and $736 million, respectively. Pro forma earningsper common share for 2000, 1999 and 1998 would have been $6.32, $3.99 and $2.55, respectively, compared to actual earningsper common share of $6.38, $4.08 and $2.60, respectively. The pro forma amounts reflect the effects of the Company’sstock option grants and the 15% purchase discount from market value offered to the Company’s employees who participate inthe ESPP.

NOTE 8 / EARNINGS PER COMMON SHARE

Earnings per share was calculated as follows (in millions, except for per share data):

Convertible Voting Preferred shares were convertible into common shares at a conversion price of approximately $61.50 pershare. However, for purposes of calculating dilutive earnings per share, preferred shares were assumed to be converted intocommon shares when basic earnings per share exceeds preferred dividends per share obtainable upon conversion (approxi-mately $3.08 on an annualized basis).

Three Years Ended

2000 1999 1998

NUMERATOR:

Net income $1,775 $1,132 $ 736

Preferred stock dividends 96 95 87

Numerator for basic earnings per share — income available to common stockholders $1,679 $1,037 $ 649

Convertible preferred stock dividends 8 17

Numerator for diluted earnings per share — income available to common stockholders

(adjusted for assumed conversion of preferred stock) $1,687 $1,054 $ 649

DENOMINATOR:

Denominator for basic earnings per share — weighted-average shares 243.8 243.0 241.8

Effect of dilutive securities:

Employee stock options 13.0 6.2 4.8

Restricted stock units 5.0 3.8 3.4

Preferred shares assumed converted into common 2.4 5.6

Dilutive potential common shares 20.4 15.6 8.2

Denominator for diluted earnings per share — adjusted weighted-average shares 264.2 258.6 250.0

BASIC EARNINGS PER SHARE $ 6.89 $ 4.27 $ 2.68

DILUTED EARNINGS PER SHARE $ 6.38 $ 4.08 $ 2.60

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NOTE 9 / CAPITAL REQUIREMENTS

The Company operates globally through a network of subsidiaries, with several subject to regulatory requirements. Inthe United States, LBI, as a registered broker-dealer, is subject to the Securities and Exchange Commission (“SEC”) Rule15c3-1, the Net Capital Rule, which requires LBI to maintain net capital of not less than the greater of 2% of aggregate debititems arising from customer transactions, as defined, or 4% of funds required to be segregated for customers’ regulatedcommodity accounts, as defined. At November 30, 2000, LBI’s regulatory net capital, as defined, of $1,984 million exceededthe minimum requirement by $1,874 million.

LBIE, a United Kingdom registered broker-dealer and subsidiary of Holdings, is subject to the capital requirements of theSecurities and Futures Authority (“SFA”) of the United Kingdom. Financial resources, as defined, must exceed the total finan-cial resources requirement of the SFA. At November 30, 2000, LBIE’s financial resources of approximately $1,897 millionexceeded the minimum requirement by approximately $381 million. Lehman Brothers Japan Inc.’s Tokyo branch, a regulatedbroker-dealer, is subject to the capital requirements of the Financial Services Agency and at November 30, 2000, had net capitalof approximately $400 million which was approximately $108 million in excess of the specified levels required. LehmanBrothers Bank, FSB (the “Bank”), the Company’s thrift subsidiary is regulated by the Office of Thrift Supervision (“OTS”).The Bank exceeds all regulatory capital requirements and is considered well capitalized by the OTS. Certain other non-U.S.subsidiaries are subject to various securities, commodities and banking regulations and capital adequacy requirements pro-mulgated by the regulatory and exchange authorities of the countries in which they operate. At November 30, 2000, theseother subsidiaries were in compliance with their applicable local capital adequacy requirements. In addition, the Company’s“AAA” rated derivatives subsidiaries, Lehman Brothers Financial Products Inc. (“LBFP”) and Lehman Brothers DerivativeProducts Inc. (“LBDP”), have established certain capital and operating restrictions which are reviewed by various ratingagencies. At November 30, 2000, LBFP and LBDP each had capital which exceeded the requirement of the most stringentrating agency by approximately $46 million and $26 million, respectively.

The regulatory rules referred to above, and certain covenants contained in various debt agreements may restrict Holdings’ability to withdraw capital from its regulated subsidiaries, which in turn could limit its ability to pay dividends to share-holders. At November 30, 2000, approximately $5.7 billion of net assets of subsidiaries were restricted as to the payment ofdividends to Holdings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 / EMPLOYEE BENEFIT PLANS

The Company provides various pension plans for the majority of its employees worldwide. In addition, the Company providescertain other postretirement benefits, primarily health care and life insurance, to eligible employees. The following summarizesthese plans:

Pension PostretirementBenefits Benefits

November 30 November 30

(in millions, except for weighted-average) 2000 1999 2000 1999

CHANGE IN BENEFIT OBLIGATION

Benefit obligation at beginning of year $654 $673 $ 47 $ 50

Service cost before expenses 14 22 1 1

Interest cost 46 45 4 3

Actuarial (gain) loss (5) (49) 1 (4)

Benefits paid (23) (32) (3) (3)

Foreign currency exchange rate changes (19) (5)

Benefit obligation at end of year $667 $654 $ 50 $ 47

CHANGE IN PLAN ASSETS

Fair value of plan assets at beginning of year $918 $817

Actual return on plan assets, net of expenses 36 123

Employer contribution 2 15

Benefits paid (23) (32)

Foreign currency exchange rate changes (19) (5)

Fair value of plan assets at end of year $914 $918

Funded (underfunded) status $247 $264 $(50) $(47)

Unrecognized net actuarial (gain) loss 31 (15) (22) (24)

Unrecognized prior service cost (credit) 17 17 (5) (6)

Prepaid (accrued) benefit cost $295 $266 $(77) $(77)

WEIGHTED-AVERAGE ASSUMPTIONS

Discount rate 7.42% 7.25% 7.75% 7.75%

Expected return on plan assets 10.88% 9.19%

Rate of compensation increase 4.96% 4.91% 5.00% 5.00%

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For measurement purposes, the annual health care cost trend rate was assumed to be 7.0% for the year ended November 30,2001. The rate was assumed to decrease at the rate of 0.5% per year to 5.5% in the year ended November 30, 2004 and remainat that level thereafter.

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

NOTE 11 / INCOME TAXES

The Company files a consolidated U.S. federal income tax return reflecting the income of Holdings and its subsidiaries.

The provision for income taxes consists of the following:

Twelve months ended November 30

(in millions) 2000 1999 1998

CURRENT

Federal $ 295 $ 121 $ 238

State 45 117 63

Foreign 577 364 299

917 602 600

DEFERRED

Federal (114) 2 (239)

State (54) (54) (6)

Foreign (1) (93) (39)

(169) (145) (284)

$ 748 $ 457 $ 316

(in millions) 1% Point Increase 1% Point Decrease

Effect on total service and interest cost components in fiscal 2000 $0.3 $(0.3)

Effect on postretirement benefit obligation at November 30, 2000 $4.0 $(3.9)

Pension Benefits Postretirement Benefits Twelve Months Ended Twelve Months Ended

November 30 November 30

(in millions) 2000 1999 1998 2000 1999 1998

COMPONENTS OF NET

PERIODIC BENEFIT COST

Service cost $ 14 $ 22 $ 23 $ 1 $ 1 $ 1

Interest cost 46 45 39 4 4 3

Expected return on plan assets (96) (77) (67)

Recognized net actuarial (gain) loss 1 2 (1) (2) (2) (1)

Unrecognized prior service cost (credit) 1 2

Net periodic benefit (income) cost $(34) $ (6) $ (6) $ 3 $ 3 $ 3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income before taxes included $1,287 million, $595 million, and $270 million that has also been subject to income taxes offoreign jurisdictions for 2000, 1999 and 1998, respectively.

The income tax provision differs from that computed by using the statutory federal income tax rate for the reasons shownbelow:

The effective tax rate increased in 2000 due to an overall increase in the level of pretax income, which lessened the relativeimpact of certain tax preference items. The increase was partially offset by a decrease in the state and local effective tax rate.

For the years ended November 30, 2000 and 1999, a net tax benefit of approximately $373 million and $90 million, respec-tively, relating to stock-based awards was credited to Additional paid-in capital. In addition, the Company recorded $(8) mil-lion, $(11) million and $2 million of tax (benefits)/provisions from the translation of foreign currencies, which was recordeddirectly in Accumulated other comprehensive income, for the fiscal years 2000, 1999 and 1998, respectively.

Effective for 2000, the Company permanently reinvested its earnings in certain foreign subsidiaries. As of November 30, 2000,$112 million of the Company’s accumulated earnings were permanently reinvested. At current tax rates, additional federal incometaxes (net of available tax credits) of $15 million would become payable if such income were to be repatriated.

Deferred income taxes are provided for the differences between the tax basis of assets and liabilities and their reported amountsin the consolidated financial statements. These temporary differences will result in future income or deductions for incometax purposes and are measured using the enacted tax rates that will be in effect when such items are expected to reverse.The Company provides for deferred income taxes on undistributed earnings of foreign subsidiaries, which are not permanently reinvested.

Twelve months ended November 30

(in millions) 2000 1999 1998

Federal income taxes at statutory rate $ 903 $ 571 $368

State and local taxes (6) 41 37

Tax-exempt income (130) (109) (71)

Amortization of goodwill 2 2 3

Foreign operations (15) (6) 3

Other, net (6) (42) (24)

$ 748 $ 457 $316

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

The net deferred tax assets are included in Other assets in the accompanying Consolidated Statement of Financial Condition.

The valuation allowance recorded against deferred tax assets at November 30, 2000 and 1999 will reduce goodwill if futurecircumstances permit recognition. The valuation allowance relates to temporary differences resulting from the 1988 acquisitionof E.F. Hutton Group, Inc. (now known as LB I Group Inc.) which are subject to separate company limitations. If futurecircumstances permit the recognition of the acquired tax benefit, then goodwill will be reduced.

The Company has approximately $14 million of NOL carryforwards, substantially all of which are attributable to theacquisition of LB I Group, Inc.

NOTE 12 / DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives are financial instruments whose value is based upon an underlying asset (e.g., treasury bond), index (e.g., S&P 500)or reference rate (e.g., LIBOR). Over-the-counter (“OTC”) derivative products are privately negotiated contractual agree-ments that can be tailored to meet individual client needs and include forwards, swaps and certain options including caps,collars and floors. Exchange-traded derivative products are standardized contracts transacted through regulated exchanges andinclude futures and certain option contracts listed on an exchange.

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

November 30

(in millions) 2000 1999

DEFERRED TAX ASSETS

Liabilities/accruals not currently deductible $ 439 $ 374

Deferred compensation 641 521

Unrealized trading and investment activity 75

Foreign tax credits 33 25

Undistributed earnings of foreign subsidiaries (net of credits) 12 36

NOL carryforwards 5 5

Other 95 69

$1,300 $1,030

Less: Valuation allowance 18 15

Total deferred tax assets net of valuation allowance $1,282 $1,015

DEFERRED TAX LIABILITIES

Excess tax over financial depreciation $ 121 $ 112

Pension and retirement costs 78 60

Unrealized trading and investment activity 51

Other 57 11

Total deferred tax liabilities $ 256 $ 234

Net deferred tax assets $1,026 $ 781

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

OPTIONS Option contracts provide the option purchaser (holder) with the right but not the obligation to buy or sell a finan-cial instrument, commodity or currency at a predetermined exercise price (strike price) during a defined period (AmericanOption) or at a specified date (European Option). The option purchaser pays a premium to the option seller (writer) for theright to exercise the option. The option seller is obligated to buy (put) or sell (call) the item underlying the contract at a setprice, if the option purchaser chooses to exercise. Option contracts also exist for various indices and are similar to options ona security or other instrument except that, rather than settling physical with delivery of the underlying instrument, they arecash settled. As a purchaser of an option contract, the Company is subject to credit risk, since the counterparty is obligated tomake payments under the terms of the option contract, if the Company exercises the option. As the writer of an option con-tract, the Company is not subject to credit risk but is subject to market risk, since the Company is obligated to make paymentsunder the terms of the option contract if exercised.

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

FUTURES AND FORWARDS Futures contracts are exchange-traded contractual commitments to either receive (purchase) ordeliver (sell) a standard amount or value of a financial instrument or commodity at a specified future date and price. Main-taining a futures contract requires the Company to deposit with the exchange an amount of cash or other specified assets assecurity for its obligation. Therefore, the potential for losses from exchange-traded products is limited. As of November 30,2000 the Company had approximately $1,505 million on deposit with futures exchanges consisting of cash and securities (cus-tomer and proprietary), and had posted approximately $302 million of letters of credit. Additionally, futures exchanges gen-erally require the daily cash settlement of unrealized gains/losses on open contracts with the futures exchange. Therefore,futures contracts provide a reduced funding alternative to purchasing the underlying cash position in the marketplace. Futurescontracts may be settled by physical delivery of the underlying asset or cash settlement (for index futures) on the settlementdate or by entering into an offsetting futures contract with the futures exchange prior to the settlement date.

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

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TRADING-RELATED DERIVATIVE ACTIVITIES Derivatives are subject to various risks similar to other financial instrumentsincluding market, credit and operational risk. In addition, the Company may also be exposed to legal risks related to its deriv-ative activities including the possibility that a transaction may be unenforceable under applicable law. The risks of derivativesshould not be viewed in isolation, but rather should be considered on an aggregate basis along with the Company’s othertrading-related activities. The Company manages the risks associated with derivatives on an aggregate basis along with therisks associated with its proprietary trading and market-making activities in cash instruments as part of its firmwide riskmanagement policies.

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

The following table reflects the notional/contract amounts of the Company’s Trading-Related Derivative Activities:

TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS

Of the total notional amounts at November 30, 2000 and 1999, approximately $3,171 billion and $2,706 billion are over-the-counter and $246 billion and $172 billion are exchange-traded, respectively. The total weighted-average maturity at Novem-ber 30, 2000, for over-the-counter and exchange-traded contracts was 3.88 years and 3.73 years, respectively. Approximately$1,213 billion of the notional/contract amount of the Company’s Trading-Related Derivative Activities mature within theyear ended November 30, 2001, of which approximately 36% have maturities of less than one month.

The Company records its Trading-Related Derivative Activities on a mark-to-market basis with realized and unrealized gainsand losses recognized currently in Principal transactions in the Consolidated Statement of Income. Unrealized gains and losseson derivative contracts are recorded on a net basis in the Consolidated Statement of Financial Condition for those transactionswith counterparties executed under a legally enforceable master netting agreement and are netted across products when suchprovisions are stated in the master netting agreement. The Company offers equity, fixed income and foreign exchange productsto its customers. Because of the integrated nature of the market for such products, each product area trades cash instrumentsas well as related derivative products.

Weighted-Notional/ AverageContract MaturityAmounts (in years)

November 30 November 30 November 30

(in millions) 2000 1999 2000

Interest rate and currency swaps and options (including caps, collars and floors) $2,406,501 $2,142,592 5.25

Foreign exchange forward and future contracts and options 458,593 418,481 .46

Other fixed income securities contracts (including futures contracts,

options and TBAs) 496,641 254,662 .77

Equity contracts (including equity swaps, futures, warrants and options) 55,355 62,053 .82

Commodity contracts (including swaps, futures, forwards and options) 347 173 1.69

Total $3,417,437 $2,877,961 3.88

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Listed in the following table is the fair value of the Company’s Trading-Related Derivative Activities as of November 30, 2000and 1999 as well as the average fair value of these instruments. Average fair values of these instruments were calculated basedupon month-end statement of financial condition values, which the Company believes do not vary significantly from the aver-age fair value calculated on a more frequent basis. Variances between average fair values and period-end values are due tochanges in the volume of activities in these instruments and changes in the valuation of these instruments due to variations inmarket and credit conditions.

FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS

Assets included in the table above represent the Company’s unrealized gains, net of unrealized losses for situations in whichthe Company has a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties. Therefore,the fair value of assets/liabilities related to derivative contracts at November 30, 2000 represents the Company’s net receiv-able/payable for derivative financial instruments before consideration of collateral. Included within the $9,583 million fairvalue of assets at November 30, 2000 was $8,643 million related to swaps and other OTC contracts and $940 million relatedto exchange-traded option and warrant contracts. Included within the $10,306 million fair value of assets at November 30,1999 was $9,002 million related to swaps and other OTC contracts and $1,304 million related to exchange-traded option andwarrant contracts.

The primary difference in risks related to OTC and exchange-traded contracts is credit risk. OTC contracts contain creditrisk for unrealized gains from various counterparties for the duration of the contract, net of collateral. With respect to OTCcontracts, including swaps, the Company views its net credit exposure to be $6,304 million at November 30, 2000, representingthe fair value of the Company’s OTC contracts in an unrealized gain position, after consideration of collateral.

Average Fair Value*Fair Value* Twelve Months Ended

November 30, 2000 November 30, 2000

(in millions) Assets Liabilities Assets Liabilities

Interest rate and currency swaps and options

(including caps, collars and floors) $4,349 $3,390 $ 4,525 $ 3,051

Foreign exchange forward contracts and options 902 1,361 1,180 961

Other fixed income securities contracts

(including options and TBAs) 496 418 1,269 1,113

Equity contracts (including equity swaps, warrants, and options) 3,836 3,399 6,664 5,885

Total $9,583 $8,568 $13,638 $11,010

Average Fair Value*Fair Value* Twelve Months Ended

November 30, 1999 November 30, 1999

(in millions) Assets Liabilities Assets Liabilities

Interest rate and currency swaps and options

(including caps, collars and floors) $ 4,807 $3,633 $4,406 $3,030

Foreign exchange forward contracts and options 878 1,310 1,226 1,287

Other fixed income securities contracts

(including options and TBAs) 254 195 257 240

Equity contracts (including equity swaps, warrants and options) 4,367 4,444 2,478 3,291

Commodity contracts (including swaps, forwards, and options) 15 5

Total $10,306 $9,582 $8,382 $7,853

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

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Counterparties to the Company’s OTC derivative products are primarily financial intermediaries (U.S. and foreign banks),securities firms, corporations, governments and their agencies, finance companies, insurance companies, investment compa-nies and pension funds. Collateral held related to OTC contracts generally includes cash and U.S. government and federalagency securities. Presented below is an analysis of the Company’s net credit exposure at November 30, 2000 for OTCcontracts based upon actual ratings made by external rating agencies or by equivalent ratings established and utilized by theCompany’s Credit Risk Management Department.

The Company is also subject to credit risk related to itsexchange-traded derivative contracts. Exchange-traded con-tracts, including futures and certain options, are transacteddirectly on the exchange. To protect against the potential for adefault, all exchange clearinghouses impose net capital require-ments for their membership. Additionally, the exchange clear-inghouse requires counterparties to futures contracts to postmargin upon the origination of the contract and for anychanges in the market value of the contract on a daily basis (cer-tain foreign exchanges provide for settlement within three

days). Therefore, the potential for losses from exchange-traded products is limited.

END-USER DERIVATIVE ACTIVITIES The Company utilizes a variety of derivative products as an end user to modify the inter-est rate characteristics of its long-term debt portfolio. The Company actively manages the interest rate exposure on its long-term debt portfolio through the use of interest rate and currency swaps to more closely match the terms of its debt portfolioto the assets being funded and to minimize interest rate risk. At November 30, 2000 and 1999, the notional amounts of theCompany’s end-user activities related to its long-term debt obligations were approximately $26.9 billion and $27.1 billion,respectively. (For a further discussion of the Company’s long-term debt related end-user derivative activities see Note 3.)

The Company also utilizes derivative products as an end user to modify its interest rate exposure associated with its securedfinancing activities, including securities purchased under agreements to resell, securities borrowed, securities sold under agree-ments to repurchase and securities loaned. At November 30, 2000 and 1999, the Company had $216 billion and $167 billion,respectively, of such secured financing activities. As with the Company’s long-term debt, its secured financing activities exposethe Company to interest rate risk. The Company, as an end user, manages the interest rate risk related to these activities byutilizing derivative financial instruments, including interest rate swaps and purchased options. The Company designates certain specific derivative transactions against specific assets and liabilities with matching maturities. In addition, the Companymanages the interest rate risk of anticipated secured financing transactions with derivative products. The Company activelymonitors the level of anticipated secured financing transactions to ensure there is a high degree of certainty that such securedfinancing transactions will be executed at levels at least equal to the designated derivative product transactions. At November30, 2000 and 1999, the Company, as an end user, utilized derivative financial instruments with an aggregate notional amountof $8.5 billion and $12.9 billion, respectively, to modify the interest rate characteristics of its secured financing activities. Thetotal notional amount of these agreements had a weighted-average maturity of 3.5 years and 2.3 years as of November 30,2000 and 1999, respectively. On an overall basis, the Company’s secured financing end-user derivative activities (decreased)increased net revenues by approximately $(14) million, $(13) million and $4 million for 2000, 1999 and 1998, respectively.

Counterparty S&P/Moody’s Net CreditRisk Rating Equivalent Exposure

1 AAA/Aaa 11%

2 AA – /Aa3 or higher 29%

3 A – /A3 or higher 39%

4 BBB – /Baa3 or higher 15%

5 BB – /Ba3 or higher 3%

6 B+/B1 or lower 3%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 / FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Financial instruments which are recorded at amounts that do not necessarily approximate market or fair value include long-term debt, certain secured financing activities and the related financial instruments utilized by the Company as an end user tomanage the interest rate risk of these exposures. The Company’s long-term debt is recorded at contractual or historicalamounts. The following table provides a summary of the fair value of the Company’s long-term debt and related end-userderivative activities. The fair value of the Company’s long-term debt was estimated using either quoted market prices ordiscounted cash flow analyses based on the Company’s current borrowing rates for similar types of borrowing arrangements.The fair value of the Company’s long-term debt is subject to changes in its credit spreads, which fluctuated significantly in2000 and 1999. The unrecognized net gain (loss) related to the Company’s end-user derivative activities reflects estimated fairvalues based on market rates at November 30, 2000 and 1999, respectively.

The Company carries its secured financing activities, including securities purchased under agreements to resell, securities bor-rowed, securities sold under agreements to repurchase, and securities loaned, at their original contract amount plus accruedinterest. As the majority of such financing activities are short-term in nature, carrying value approximates fair value. At Novem-ber 30, 2000 and 1999, the Company had $216 billion and $167 billion, respectively, of such secured financing activities. Aswith the Company’s long-term debt, its secured financing activities expose the Company to interest rate risk.

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

November 30

(in millions) 2000 1999

Carrying value of long-term debt $35,233 $30,691

Fair value of long-term debt 35,193 30,454

Unrecognized net gain (loss) on long-term debt $ 40 $ 237

Unrecognized net gain (loss) on long-term debt end user activities $ (201) $ (439)

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NOTE 14 / OTHER COMMITMENTS AND CONTINGENCIES

As of November 30, 2000 and 1999, the Company was contingently liable for $2.1 billion of letters of credit, primarily usedto provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodityexchanges, and other guarantees.

In connection with its financing activities, the Company had outstanding commitments under certain lending arrangementsof approximately $3.2 billion and $4.5 billion, at November 30, 2000 and 1999, respectively. These commitments require bor-rowers 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, the Company, through its high grade and high yield sales, trading and underwriting activities, makes commit-ments to extend credit in loan syndication transactions and then participates out a significant portion of these commitments.The Company had lending commitments to high grade borrowers of $4.4 billion and $2.9 billion at November 30, 2000 and1999, respectively. In addition, lending commitments to high yield borrowers totaled $1.3 billion and $1.4 billion at Novem-ber 30, 2000 and 1999, respectively. All of these commitments and any related draw downs of these facilities are typically securedagainst the borrower’s assets, have fixed maturity dates, and are generally contingent upon certain representations, warrantiesand contractual conditions applicable to the borrower. Total commitments are not indicative of actual risk or fundingrequirements, as the commitments may not be drawn or fully utilized, and the Company will continue to syndicate and/orsell these commitments.

As of November 30, 2000, the Company had pledged securities, primarily fixed income, having a market value of approxi-mately $30.4 billion, as collateral for securities borrowed having a market value of approximately $28.7 billion.

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

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

At November 30, 2000 and 1999, the Company had commitments to invest up to $357 million and $411 million, respectively,directly and through partnerships in private equity related investments. These commitments will be funded as required throughthe end of the respective investment periods, principally expiring in 2004.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONCENTRATIONS OF CREDIT RISK As a leading global investment bank, the Company is actively involved in securitiesunderwriting, brokerage, distribution and trading. These and other related services are provided on a worldwide basis to alarge and diversified group of clients and customers, including multinational corporations, governments, emerging growthcompanies, financial institutions and individual investors.

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

Securities and other financial instruments owned by the Company include U.S. government and agency securities, and secu-rities issued by non-U.S. governments, which in the aggregate, represented 12% of the Company’s total assets at November30, 2000. In addition, primarily all of the collateral held by the Company for resale agreements represented 36% of total assetsat November 30, 2000, and consisted of securities issued by the U.S. government, federal agencies or non-U.S. governments.The Company’s most significant industry concentration is financial institutions, which include other brokers and dealers, com-mercial banks and institutional clients. This concentration arises in the normal course of the Company’s business.

LEASE COMMITMENTS The Company leases office space and equipment throughout the world and is a party to a groundlease with the Battery Park City Authority covering its headquarters at 3 World Financial Center which extends through 2069.Total rent expense for 2000, 1999 and 1998 was $47 million, $37 million and $39 million, respectively. Certain leases on officespace contain escalation clauses providing for additional rentals based upon maintenance, utility and tax increases.

Minimum future rental commitments under non-cancelable operating leases (net of subleases of $57 million) are as follows:

NOTE 15 / SEGMENTS

Lehman Brothers 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 worldon mergers, acquisitions and other financial matters. The Division also raises capital for clients by underwriting public andprivate offerings of debt and equity securities.

The Capital Markets Division includes the Company’s institutional sales, trading, research and financing activities in equityand fixed income cash and derivatives products. Through the Division, the Company is a global market-maker in numerousequity and fixed income products, including U.S., European and Asian equities, government and agency securities, moneymarket 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 Division also includes the Company’s riskarbitrage and secured financing businesses, as well as, realized and unrealized gains and losses related to the Company’s directprivate equity investments. The financing business manages the Company’s equity and fixed income matched book activities,supplies secured financing to institutional clients and customers, and provides secured funding for the Company’s inventoryof equity and fixed income products.

(in millions)

Fiscal 2001 $ 65

Fiscal 2002 60

Fiscal 2003 55

Fiscal 2004 69

Fiscal 2005 71

December 1, 2005 and thereafter 1,013

$1,333

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Client Services revenues reflect earnings from the Company’s private client and private equity businesses. Private clientrevenues reflect the Company’s high-net-worth retail customer flow activities as well as asset management fees earnedfrom these clients. Private equity revenues include the management and incentive fees earned in the Company’s role as general partner for twenty private equity partnerships. In addition, these revenues also include the appreciation of its generalpartnership interests.

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

The following are net revenues by geographic region:

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

Twelve Months ended November 30

(in millions) 2000 1999 1998

U.S. $4,492 $3,160 $2,692

Europe 2,389 1,650 870

Asia Pacific and other 826 530 551

Total $7,707 $5,340 $4,113

Investment Capital Client(in millions) Banking Markets Services Total

NOVEMBER 30, 2000

Net revenue $2,179 $4,689 $ 839 $7,707

Earnings before taxes(1) $ 499 $1,801 $ 279 $2,579

Segment assets (billions) $ 0.5 $213.8 $10.4 $224.7

NOVEMBER 30, 1999

Net revenue $1,664 $3,093 $ 583 $5,340

Earnings before taxes(1) $ 509 $ 978 $ 144 $1,631

Segment assets (billions) $ 0.3 $182.5 $ 9.4 $192.2

NOVEMBER 30, 1998

Net revenue $1,401 $2,113 $ 599 $4,113

Earnings before taxes(1) $ 530 $ 359 $ 163 $1,052

Segment assets (billions) $ 0.6 $141.3 $12.0 $153.9

(1) And before dividends on preferred securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 / QUARTERLY INFORMATION (unaudited)

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

2000 1999

(in millions, except per share amounts) Nov. 30 Aug. 31 May 31 Feb. 29 Nov. 30 Aug. 31 May 31 Feb. 28

Total revenues $6,414 $7,359 $6,334 $6,340 $4,701 $4,765 $4,932 $4,591

Interest expense 4,716 5,307 4,579 4,138 3,290 3,409 3,477 3,473

Net revenues 1,698 2,052 1,755 2,202 1,411 1,356 1,455 1,118

Non-interest expenses:

Compensation and benefits 806 1,067 912 1,145 715 688 738 567

Other expenses 338 312 285 263 258 251 251 242

Total non-interest expenses 1,144 1,379 1,197 1,408 973 939 989 809

Income before taxes and dividends

on trust preferred securities 554 673 558 794 438 417 466 309

Provision for income taxes 141 202 166 239 122 112 126 96

Dividends on trust preferred

securities 14 14 14 14 15 15 10 2

Net income $ 399 $ 457 $ 378 $ 541 $ 301 $ 290 $ 330 $ 211

Net income applicable to

common stock $ 386 $ 444 $ 366 $ 482 $ 292 $ 279 $ 268 $ 198

Weighted-average shares

Basic 241.9 242.3 246.3 246.1 241.5 242.6 244.2 243.8

Diluted 265.4 265.0 265.3 262.4 258.0 258.2 260.8 251.6

Earnings per common share

Basic $ 1.60 $ 1.83 $ 1.49 $ 1.96 $ 1.21 $ 1.15 $ 1.10 $ 0.81

Diluted $ 1.46 $ 1.68 $ 1.39 $ 1.84 $ 1.14 $ 1.10 $ 1.05 $ 0.79

Dividends per common share $0.055 $0.055 $0.055 $0.055 $0.045 $0.045 $0.045 $0.045

Book value per common share

(at period end) $28.78 $27.58 $25.59 $24.40 $22.75 $21.46 $20.29 $19.36

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SELECTED FINANCIAL DATA

Data

The following table summarizes certain consolidated financial information included in the audited consolidated financialstatements.

Twelve Months ended November 30

(in millions, except per share, other data and financial ratios) 2000 1999 1998 1997 1996

CONSOLIDATED STATEMENT OF INCOMERevenues:

Principal transactions $ 3,713 $ 2,341 $ 1,373 $ 1,461 $ 1,579Investment banking 2,216 1,682 1,441 1,275 981Commissions 944 651 513 423 362Interest and dividends 19,440 14,251 16,542 13,635 11,298Other 134 64 25 89 40

Total revenues 26,447 18,989 19,894 16,883 14,260Interest expense 18,740 13,649 15,781 13,010 10,816

Net revenues 7,707 5,340 4,113 3,873 3,444

Non-interest expenses:Compensation and benefits 3,931 2,707 2,086 1,964 1,747Other expenses 1,197 1,002 975 972 976Severance and other charges 84

Total non-interest expenses 5,128 3,709 3,061 2,936 2,807

Income before taxes and dividends on trustpreferred securities 2,579 1,631 1,052 937 637

Provision for income taxes 748 457 316 290 221Dividends on trust preferred securities 56 42

Net income $ 1,775 $ 1,132 $ 736 $ 647 $ 416

Net income applicable to common stock $ 1,679 $ 1,037 $ 649 $ 572 $ 378

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (AT PERIOD END)Total assets $224,720 $192,244 $153,890 $151,705 $128,596Total assets excluding matched book(a) 143,478 130,022 111,509 108,099 96,256Long-term debt(b) 35,233 30,691 27,341 20,261 15,922Preferred securities subject to mandatory redemption 860 710Total stockholders’ equity 7,781 6,283 5,413 4,523 3,874Total capital(c) 43,874 37,684 32,754 24,784 19,796

PER SHARE DATA(d)

Net income $ 6.38 $ 4.08 $ 2.60 $ 2.36 $ 1.62Dividends declared per common share $ 0.22 $ 0.18 $ 0.15 $ 0.12 $ 0.10Book value per common share (at period end) $ 28.78 $ 22.75 $ 18.53 $ 16.70 $ 14.42

OTHER DATA (AT PERIOD END)

Ratio of total assets to total stockholders’ equity and preferred securities 26.0X 27.5X 28.4X 33.5X 33.2X

Ratio of total assets excluding matched book to total stockholders’ equity and preferred securities(a) 16.6X 18.6X 20.6X 23.9X 24.8X

Employees 11,326 8,893 8,873 8,340 7,556

FINANCIAL RATIOS (%):Compensation and benefits/net revenues 51.0 50.7 50.7 50.7 50.7Pretax operating margin 33.5 30.5 25.6 24.2 18.5Effective tax rate 29.0 28.0 30.0 30.9 35.4Return on average common equity(e) 26.6 20.8 15.2 15.6 12.1

(a) Matched book represents “securities purchased under agreements to resell” (“reverse repos”) to the extent that such balance is less than “securities sold under agreements torepurchase” (“repos”) as of the statement of financial condition date. Several nationally recognized rating agencies consider such reverse repos to be a proxy for matched bookassets when evaluating the Company’s capital strength and financial ratios. Such agencies consider matched book assets to have a low risk profile and exclude such amounts inthe calculation of leverage (total assets divided by total stockholders’ equity and trust preferred securities). Although there are other assets with similar risk characteristics on theCompany’s Consolidated Statement of Financial Condition, the exclusion of reverse repos from total assets in this calculation reflects the fact that these assets are matched againstliabilities of a similar nature, and therefore require minimal amounts of capital support. Accordingly, the Company believes the ratio of total assets excluding matched book to totalstockholders’ equity and trust preferred securities to be a more meaningful measure of the Company’s leverage.

(b) Long-term debt includes senior notes and subordinated indebtedness.(c) Total capital includes long-term debt, stockholders’ equity and preferred securities subject to mandatory redemption.(d) All share and per share data have been restated for the two-for-one common stock split effective October 20, 2000.(e) After redeemable preferred dividend.

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Richard S. Fuld, Jr.Chairman and Chief Executive Officer

Michael L. AinslieFormer President and Chief Executive Officer of Sotheby’s Holdings

John F. AkersRetired Chairman of InternationalBusiness Machines Corporation

Roger S. BerlindTheatrical Producer

Thomas H. CruikshankRetired Chairman and Chief Executive Officer ofHalliburton Company

Dr. Henry KaufmanPresident of Henry Kaufman &Company, Inc.

John D. MacomberPrincipal of JDM Investment Group

Dina MerrillDirector and Vice Chairman ofRKO Pictures, Inc. and Actress

Board of Directors

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Operating Committee

Richard S. Fuld, Jr.*Chairman and Chief Executive Officer

Jasjit S. BhattalManaging Director Chief Executive Officer, Lehman Brothers Asia

J. Stuart FrancisManaging DirectorInvestment Banking

Dave GoldfarbManaging DirectorChief Financial Officer

Joseph M. Gregory*Managing DirectorChief Administrative Officer

Jeremy M. Isaacs*Managing DirectorChief Executive Officer,Lehman Brothers Europe & Asia

Bradley H. Jack*Managing DirectorHead of Investment Banking

Theodore P. JanulisManaging DirectorCo-Head of Fixed Income

Stephen M. Lessing*Senior Client Relationship Manager& Head of Private Client Group

Roberto LlamasManaging DirectorChief Human Resources Officer

Herbert H. McDade, IIIManaging DirectorCo-Head of Fixed Income

Roger B. NagioffManaging DirectorCo-Head of Equities

Michael J. OdrichManaging DirectorHead of Private Equity

James A. RosenthalManaging DirectorHead of Strategy, Recruiting & E-Commerce

Mark RufehManaging DirectorChief Operations Officer

Thomas A. RussoManaging Director Chief Legal Officer

Robert S. ShafirManaging DirectorCo-Head of Equities

Jeffrey Vanderbeek*Managing DirectorHead of Capital Markets

Jarett F. WaitManaging DirectorCo-Head of E-Commerce

Paul G. ZoidisManaging DirectorInvestment Banking

* Member of Lehman Brothers’ Executive Committee

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VICE CHAIRMEN OF LEHMAN BROTHERS INC.

Howard L. Clark, Jr.Vice Chairman and Member of Board of DirectorsLehman Brothers Inc.

Frederick FrankVice Chairman andMember of Board of DirectorsLehman Brothers Inc.

Allan S. KaplanVice ChairmanLehman Brothers Inc.

Harvey M. KruegerVice Chairman andMember of Board of DirectorsLehman Brothers Inc.

Sherman R. Lewis, Jr.Vice Chairman andMember of Board of DirectorsLehman Brothers Inc.

Thomas A. RussoVice ChairmanLehman Brothers Inc.

VICE CHAIRMEN OF LEHMAN BROTHERS INTERNATIONAL (EUROPE)

Ruggero F. MagnoniVice Chairman andMember of Board of DirectorsLehman Brothers International(Europe)

Raymond G.H. SeitzVice Chairman andMember of Board of DirectorsLehman Brothers International(Europe)

Vice Chairmen

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THE AMERICAS

World Headquarters – New York3 World Financial CenterNew York, NY 10285(212) 526-7000

Albany80 State StreetAlbany, NY 12207(518) 463-5244

Atlanta3414 Peachtree RoadAtlanta, GA 30326(404) 262-4800

BermudaLehman Re Ltd.Ram Re House, 46 Reid StreetHamilton HM12, Bermuda441-294-0000

Boston260 Franklin StreetBoston, MA 02110(617) 330-5800

Two International PlaceBoston, MA 02110(617) 946-3991

Buenos AiresTorre Alem PlazaAv. Leandro N. Alem 8551001 Buenos AiresArgentina5411-4319-2700

Chicago190 South LaSalle StreetChicago, IL 60603(312) 609-7200

401 South LaSalle StreetChicago, IL 60605(312) 845-4787

Cleveland1375 East 9th StreetCleveland, OH 44114(800) 321-3861(216) 621-8300

ColumbusHQ Crosswoods Center100 East Campus View Blvd.Worthington, OH 43235(614) 438-2600

DallasChase Tower2200 Ross AvenueDallas, TX 75201(214) 720-5400

DaytonCourthouse Plaza NEDayton, OH 45402(800) 421-5677(937) 226-4800

Hato Rey (San Juan)270 Munoz RiveraHato Rey, PR 00918(787) 759-8915

Houston600 Travis StreetHouston, TX 77002(713) 236-3950

1111 Bagby StreetHouston, TX 77002(800) 231-7811(713) 652-7100

Locations Worldwide

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Jersey City101 Hudson StreetJersey City, NJ 07302(201) 524-4000

Los Angeles601 South Figueroa StreetLos Angeles, CA 90017(213) 362-2500

Westwood Center1100 Glendon AvenueLos Angeles, CA 90024(800) 582-4904

10880 Wilshire BoulevardLos Angeles, CA 90024(310) 481-2600

Menlo Park155 Linfield DriveMenlo Park, CA 94025(650) 289-6000

Mexico CityAv. Paseo de la Reforma 265Col. CuauhtemocMexico City, Mexico 06500525-242-4900

Miami1221 Brickell AvenueMiami, FL 33131(305) 789-8700

MontevideoRincon 487Montevideo, Uruguay598-2402-5716

Nashville1130 Eighth Avenue SouthNashville, TN 37203(888) 272-6454

New York1 World Financial CenterNew York, NY 10281(800) 392-5000(212) 526-7000

280 Park AvenueWest BuildingNew York, NY 10017(800) 221-7083(212) 681-2700

50 BroadwayNew York, NY 10004(212) 526-7000

1 World Trade CenterNew York, NY 10048(212) 526-7000

Palm Beach450 Royal Palm WayPalm Beach, FL 33480(800) 924-0148

Philadelphia1600 Market StreetPhiladelphia, PA 19103(215) 231-9300

San Francisco555 California StreetSan Francisco, CA 94104(415) 274-5400

Sao PauloAv. Brigadeiro Faria Lima1276-ED OS BandirantesSao Paulo, Brazil5511-3037-8000

SeattleBank of America Tower701 Fifth AvenueSeattle, WA 98104(206) 344-5870

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TorontoThe Exchange TowerP.O. Box 444130 King Street WestToronto ON M5X 1E4416-955-1900

Washington, D.C.800 Connecticut Avenue NWWashington, D.C. 20006(202) 452-4700

WilmingtonLehman Brothers Bank, FSB921 North Orange StreetWilmington, DE 19801(302) 654-6179

EUROPE & THE MIDDLE EAST

Regional Headquarters - LondonOne BroadgateLondon EC2M 7HA England44-207-601-0011

AmsterdamRembrandt TowerAmstelplein 11096 HA AmsterdamThe Netherlands312-0561-2800

FrankfurtLehman Brothers Bankhaus AGGruneburgweg #1860322 Frankfurt, Germany496-915-3070

MadridPaseo de la Castellana 40-928046 Madrid, Spain349-1426-2180

MilanPiazza Del Carmine 420121 Milan, Italy390-272-1581

MunichFunf HofeAm Eisbach 380538 Munich, Germany49-89-3782-8818

Paris21 Rue de Balzac75406 Paris, Cedex 08, France331-5389-3000

RomePiazza di Spagna00187 Rome, Italy390-667-5231

Stockholm17 Vastra Tradgardsgatan111 86 Stockholm, Sweden46-8796-2200

Tel AvivAsia House4 Weizman StreetTel Aviv, Israel972-3696-6122

ZurichTalstrasse 828021 Zurich, Switzerland411-287-8842

Locations Worldwide (continued)

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ASIA PACIFIC

Regional Headquarters – TokyoArk Mori Building 12-32 Akasaka 1 ChomeMinato-ku, Tokyo 107, Japan813-5571-7000

BangkokLehman Brothers (Thailand) LimitedM. Thai Tower, All Seasons Place87 Wireless RoadPhatumwan, Bangkok 10330Thailand662-654-0667

BeijingChina World Trade CenterNo. 1 Jianguomenwai AvenueBeijing, The Peoples Republic of China8610-6505-0301

Hong Kong38/F, One Pacific Place88 Queensway, Hong Kong852-2869-3000

JakartaBapindo Plaza Tower 2JL Jend SudirmanKav 54-55Jakarta 12190, Indonesia622-1527-8201

MelbourneLehman Brothers Australia Pty. Limited140 William StreetMelbourne, Australia 3000613-9607-8498

SeoulOriental Chemical Building50 Sokong Dong Chung KuSeoul, Korea822-775-3600

SingaporeNo. 5 Temasek BoulevardSuntec City TowerSingapore 010365-433-6288

Taipei205 Tun Hua North RoadTaipei, TaiwanRepublic of China8862-2545-7900

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Common StockTicker Symbol: LEHThe common stock of Lehman BrothersHoldings Inc. is listed on the New YorkStock Exchange and on the PacificExchange. As of January 30, 2001, there were 22,554 holders of record of the Company’s common stock. On January 31, 2001, the last reported salesprice of Lehman Brothers’ commonstock was $82.28.

Annual MeetingLehman Brothers’ annual meeting ofstockholders will be held on Tuesday,April 3, 2001 at 10:30 a.m. at 3 WorldFinancial Center, 26th Floor, 200Vesey Street, New York, New York10285.

DividendsEffective January 2001, LehmanBrothers’ Board of Directors increasedthe fiscal 2001 dividend rate to $0.28per common share from an annualdividend rate of $0.22 per share in fiscal 2000. The dividend rate reflectsLehman Brothers’ two-for-one stocksplit on October 20, 2000. Dividendson the Company’s common stock aregenerally payable, following declara-tion by the Board of Directors, on the last business day of February, May,August and November.

Registrar and Transfer Agent forCommon StockQuestions regarding dividends, trans-fer requirements, lost certificates,changes of address, direct deposit of dividends, the direct purchase anddividend reinvestment plan, or otherinquiries should be directed to:

The Bank of New YorkShareholders Services DepartmentP.O. Box 11258Church Street StationNew York, New York 10286-1258 Telephone: (800) 824-5707 (U.S.)(610) 312-5303 (non.U.S.)E-mail:[email protected]: http://www.stockbny.com

Direct Purchase and DividendReinvestment PlanLehman Brothers’ Direct Purchaseand Dividend Reinvestment Plan pro-vides both existing stockholders andfirst-time investors with an alternativemeans of purchasing the Company’sstock. The plan has no minimumstock ownership requirements for eligibility and enrollment. Plan participants may reinvest all or a portion of cash dividends and/ormake optional cash purchases up to amaximum of $175,000 per year with-out incurring commissions or servicecharges. Additional information andenrollment forms can be obtainedfrom the Company’s Transfer Agentlisted above.

Annual Report and Form 10-KLehman Brothers will make availableupon request copies of this AnnualReport and the Annual Report onForm 10-K as filed with the Securitiesand Exchange Commission. Requestsmay be directed to:

Jeffrey A. WeliksonCorporate SecretaryLehman Brothers Holdings Inc.1 World Financial Center, 27th FloorNew York, New York 10281Telephone: (646) 836-2250

Independent AuditorsErnst & Young LLP787 Seventh AvenueNew York, New York 10019Telephone: (212) 773-3000

Investor Relations(212) 526-8381

Media Relations(212) 526-4379

Website Addresshttp://www.lehman.com

Other Stockholder Information

PRICE RANGE OF COMMON STOCKThree months ended

2000 1999

Nov. 30 Aug. 31 May 31 Feb. 29 Nov. 30 Aug. 31 May 31 Feb. 28

High $80.0000 $72.5117 $51.7188 $47.5000 $41.9375 $31.2813 $33.7500 $29.9375

Low $49.5000 $40.8125 $36.2500 $31.0625 $26.6563 $24.1250 $25.0313 $20.4375

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Page 99: Where Vision Gets Built

Lehman Brothers. The Mission.

Our Firm.We are a rapidly growing global institutional investment bank with a heritage of over 150 years of success. As a growthcompany in a growth industry, our atmosphere is charged with entrepreneurial energy. We are a culture of “we’s”, not“I’s”, with a commitment to access and teamwork. The hallmark of our success will be our reputation as a firm that generates and supports exceptional levels of opportunity and initiative.

Our Clients.Our One-Firm culture allows us to team up and bring together the best of Lehman Brothers to meet our clients’ mostimportant needs. We do this by taking the initiative to reach out to our clients; by listening carefully to understand theirneeds; by developing innovative and tailored solutions; and by delivering the full resources and strength of the Firm to provide superb execution of those solutions. The hallmark of our success will be that our clients look to us first as theirlead investment bank.

Our People.Our success depends on the strength of our people. Our goal is to attract and develop exceptionally talented people whoshare our passion for individual excellence and our commitment to teamwork. We do this by attracting the best person tofill every role within the Firm; by developing everyone to reach their full potential; by fostering the mindset that finishingsecond is unacceptable; and by working together in an environment of integrity, respect and trust as One Firm. The hall-mark of our success will be our wide recognition as a unique firm in which exceptional people build rewarding careers.

Our Shareholders.As employees, we are all shareholders of Lehman Brothers and are deeply committed to building the value of the Firm.Our goal is to deliver superior returns to all of our shareholders. We do this by committing to opportunities that offerexceptional returns; by focusing on productivity, expense discipline and profitability; by managing our risks and maintain-ing our financial strength; and by preserving our reputation. The hallmark of our success will be the strength of our long-term record of value creation for our shareholders.

TABLE OF CONTENTS

Financial Highlights 1Letter to Stockholders and Clients 2Creating Opportunity 6Building Value 10Delivering Performance 22Business Review 26Financial Review 36Board Members and Officers 89Locations Worldwide 92Other Stockholder Information 96 D

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Where Vision Gets Built SM

ANNUAL REPORT 20003 WORLD FINANCIAL CENTER, NEW YORK, NY 10285 WWW.LEHMAN.COM

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