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Lehman Brothers Holdings Inc. Plan Trust – ‘10-K’ for 11/30/05

On:  Monday, 2/13/06, at 4:57pm ET   ·   For:  11/30/05   ·   Accession #:  1047469-6-1870   ·   File #:  1-09466

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/13/06  Lehman Brothers Holdings Inc … Tr 10-K       11/30/05    9:1.6M                                   Merrill Corp/New/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   1.49M 
 2: EX-12.01    Statement re: Computation of Ratios                 HTML     17K 
 3: EX-21.01    Subsidiaries of the Registrant                      HTML     53K 
 4: EX-23.01    Consent of Experts or Counsel                       HTML     19K 
 5: EX-24.01    Power of Attorney                                   HTML     15K 
 6: EX-31.01    Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
 7: EX-31.02    Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
 8: EX-32.01    Certification per Sarbanes-Oxley Act (Section 906)  HTML     10K 
 9: EX-32.02    Certification per Sarbanes-Oxley Act (Section 906)  HTML     10K 

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

Form 10-K

OR

Commission File Number 1-9466

Lehman Brothers Holdings Inc.
(Exact Name of Registrant as Specified in its Charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer' in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ý Accelerated filer o Non-accelerated filer o

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

The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the Registrant at May 31, 2005 (the last business day of the Registrant's most recently completed second fiscal quarter) was approximately $24,370,000,000. As of that date, 264,317,470 shares of the Registrant's common stock, $0.10 par value per share, were held by non-affiliates. For purposes of this information, the outstanding shares of common stock that were and that may be deemed to have been beneficially owned by directors and executive officers of the Registrant were deemed to be shares of common stock held by affiliates at that date.

As of January 31, 2006, 270,408,498 shares of the Registrant's common stock, $.10 par value per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of Lehman Brothers Holdings Inc.'s Definitive Proxy Statement for its 2006 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated in Part III.

LEHMAN BROTHERS HOLDINGS INC.

TABLE OF CONTENTS

LEHMAN BROTHERS HOLDINGS INC.

AVAILABLE INFORMATION

Lehman Brothers Holdings Inc. ("Holdings") files annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission ("SEC"). You may read and copy any document Holdings files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549, U.S.A. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 (or 1-202-551-8090). The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Holdings' electronic SEC filings are available to the public at http://www.sec.gov.

Holdings' public internet site is http://www.lehman.com. Holdings makes available free of charge through its internet site, via a link to the SEC's internet site at http://www.sec.gov, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Holdings also makes available through its internet site, via a link to the SEC's internet site, statements of beneficial ownership of Holdings' equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

In addition, Holdings currently makes available on http://www.lehman.com its most recent annual report on Form 10-K, its quarterly reports on Form 10-Q for the current fiscal year, its most recent proxy statement and its most recent annual report to stockholders, although in some cases these documents are not available on that site as soon as they are available on the SEC's site.

Holdings also makes available on http://www.lehman.com (i) its Corporate Governance Guidelines, (ii) its Code of Ethics (including any waivers therefrom granted to executive officers or directors) and (iii) the charters of the Audit, Compensation and Benefits, and Nominating and Corporate Governance Committees of its Board of Directors. These documents are also available in print without charge to any person who requests them by writing or telephoning:

Lehman Brothers Holdings Inc.
Office of the Corporate Secretary
1301 Avenue of the Americas
5^th Floor
New York, New York 10019, U.S.A.
1-212-526-0858

In order to view and print the documents referred to above (which are in the.PDF format) on Holdings' internet site, you will need to have installed on your computer the Adobe® Acrobat® Reader® software. If you do not have Adobe Acrobat, a link to Adobe Systems Incorporated's internet site, from which you can download the software, is provided.

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LEHMAN BROTHERS HOLDINGS INC.

PART I

As used herein, "Holdings" or the "Registrant" means Lehman Brothers Holdings Inc., a Delaware corporation, incorporated on December 29, 1983. Holdings and its subsidiaries are collectively referred to as the "Company," "Lehman Brothers," the "Firm," "we," "us" or "our". Our executive offices are located at 745 Seventh Avenue, New York, New York 10019, U.S.A., and our telephone number is 1-212-526-7000.

FORWARD-LOOKING STATEMENTS

Some of the statements contained or incorporated by reference in this Report, including those relating to the Company's strategy and other statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions, are forward-looking statements within the meaning of Section 21E of the Exchange Act. These statements are not historical facts but instead represent only management's expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include, but are not limited to, the risk factors discussed in Item 1A below and the factors listed in Management's Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Affecting Results of Operations in Part II, Item 7, of this Report.

As a global investment bank, our results of operations have varied significantly in response to global economic and market trends and geopolitical events. The nature of our business makes predicting the future trends of revenues difficult. Caution should be used when extrapolating historical results to future periods. Our actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any forward-looking statements and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

LEHMAN BROTHERS

Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients and high-net-worth individuals worldwide. We provide a full array of equities and fixed income sales, trading and research, investment banking services and investment management and advisory services. Our worldwide headquarters in New York and regional headquarters in London and Tokyo are complemented by offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific region. The Firm, through predecessor entities, was founded in 1850.

Through our subsidiaries, we are a global market-maker in all major equity and fixed income products. To facilitate our market-making activities, we are a member of all principal securities and commodities exchanges in the United States, as well as NASD, Inc., and we hold memberships or associate memberships on several principal international securities and commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Paris, Milan and Australian stock exchanges.

Our principal business activities are investment banking, capital markets and investment management. Through our investment banking, trading, research, structuring and distribution capabilities in equity and fixed income products, we continue to build on our client-flow business model, which is based on our principal focus of facilitating client transactions in all major global capital markets products and services. We generate client-flow revenues from institutional, corporate, government and high-net-worth clients by (i) advising on and structuring transactions specifically suited to meet client needs; (ii) serving as a market maker and/or intermediary in the global marketplace, including having securities and other financial instrument products available to allow clients to adjust their portfolios and risks across different market cycles; (iii) providing investment management and advisory services; and (iv) acting as an underwriter to clients. As part of our client-flow activities, we maintain inventory positions of varying amounts across a broad range of financial instruments. In addition, we also take proprietary trading and investment positions. The financial services industry is significantly influenced by worldwide economic conditions as well as other factors inherent in the global financial markets. As a result, revenues and earnings may vary from quarter to quarter and from year to year. We believe our client-flow orientation and the diversity of our business helps to mitigate overall

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LEHMAN BROTHERS HOLDINGS INC.

revenue volatility. See Part I, Item 1A, Risk Factors, in this Report for a discussion of certain material risks to our business, financial condition and results of operations.

We operate in three business segments (each of which is described below): Investment Banking, Capital Markets and Investment Management. Financial information concerning the Company for the fiscal years ended November 30, 2005, 2004 and 2003, including the amount of net revenues contributed by each segment in such periods, is set forth in the Consolidated Financial Statements and Notes thereto in Part II, Item 8, of this Report. Information with respect to our operations by business segment and net revenues by geographic area is set forth under the captions Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Segments and —Geographic Revenues in Part II, Item 7, of this Report, and in Note 18 to the Consolidated Financial Statements in Part II, Item 8, of this Report.

We are engaged primarily in providing financial services. Other businesses in which we are engaged represent less than 10 percent of each of consolidated assets, revenues and pre-tax income.

Investment Banking

The Investment Banking business segment provides advice to corporate, institutional and government clients throughout the world on mergers, acquisitions and other financial matters. Investment Banking also raises capital for clients by underwriting public and private offerings of debt and equity securities. Our Investment Banking professionals are responsible for developing and maintaining relationships with issuer clients, gaining a thorough understanding of their specific needs and bringing together the full resources of Lehman Brothers to accomplish their financial and strategic objectives.

Investment Banking is made up of Advisory Services and Global Finance activities that serve our corporate, institutional and government clients. The segment is organized into global industry groups—Communications, Consumer/Retailing, Financial Institutions, Financial Sponsors, Healthcare, Industrial, Media, Natural Resources, Power, Real Estate and Technology—that include bankers who deliver industry knowledge and expertise to meet clients' objectives. Specialized product groups within Advisory Services include mergers and acquisitions ("M&A") and restructuring. Global Finance serves our clients' capital-raising needs through specialized product groups in underwriting, private placements, leveraged finance and other activities associated with debt and equity products. Product groups are partnered with relationship managers in the global industry groups to provide comprehensive financial solutions for clients.

Lehman Brothers maintains investment banking offices in North America, Europe, the Middle East, Latin America and the Asia Pacific region.

The high degree of integration among our industry, product and geographic groups has allowed us to become a leading source of one-stop financial solutions for our global clients.

Mergers & Acquisitions.    Lehman Brothers has a long history of providing strategic advisory services to corporate, institutional and government clients around the world on a wide range of financial matters, including mergers and acquisitions, spin-offs, targeted stock transactions, share repurchase strategies, government privatization programs, takeover defenses and other strategic advice.

Restructuring.    Our Restructuring group provides full-service restructuring expertise on a global basis. The group provides advisory services to distressed companies, their creditors and potential purchasers, including providing out-of-court options for companies to avoid bankruptcy, helping companies and creditors move efficiently through the bankruptcy process and advising strategic and financial buyers on the unique challenges of buying distressed and bankrupt companies.

Underwriting.    We are a leading underwriter of initial and other public offerings of equity and fixed income securities, including listed and over-the-counter securities, government and agency securities and mortgage- and asset-backed securities.

Leveraged Finance.    Our global Leveraged Finance group provides comprehensive financing solutions for below-investment-grade clients across many industries through our high-yield bond, leveraged loan, bridge financing and mezzanine debt products.

Private Placements.    We have a dedicated Private Placement group focused on capital raising in the private equity and debt markets. Clients range from pre-initial public offering ("IPO") companies to well-established corporations that span many industries. The Private Placement group has experience in identifying sources, establishing structures

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LEHMAN BROTHERS HOLDINGS INC.

and placing common stock, convertible preferred stock, subordinated debt and senior debt, as well as utilizing a variety of financing techniques, including mezzanine debt, securitizations, project financings and sale-leasebacks.

Capital Markets

The Capital Markets business segment primarily represents institutional client-flow activities including prime brokerage, research, mortgage origination and securitization, secondary-trading and financing activities in fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments and investments. We are a leading global market-maker in numerous equity and fixed income products, including U.S., European and Asian equities, government and agency securities, money market products, corporate high-grade, high-yield and emerging market securities, mortgage- and asset-backed securities, preferred stock, municipal securities, bank loans, foreign exchange, financing and derivative products. We are one of the largest investment banks in terms of U.S. and pan-European listed equities trading volume and maintain a major presence in over-the-counter U.S. stocks, major Asian large capitalization stocks, warrants, convertible debentures and preferred issues. In addition, the secured financing business manages our equity and fixed income matched book activities, supplies secured financing to institutional clients and provides secured funding for our inventory of equity and fixed income products. The Capital Markets segment also includes proprietary activities as well as principal investing in real estate and private equity. Lehman Brothers combines the skills from the sales, trading and research areas of our Equities and Fixed Income Capital Markets businesses to serve the financial needs of our clients. This integrated approach enables us to structure and execute global transactions for clients and to provide worldwide liquidity in marketable securities.

Equities Capital Markets

The Equities Capital Markets business is responsible for our equities and equity-related operations and products worldwide. These products include listed and over-the-counter securities, American Depositary Receipts, convertibles, options, warrants and derivatives. We make markets in equity and equity-related securities and execute block trades on behalf of clients. We participate in the global equity and equity-related markets in all major currencies through our worldwide presence and membership in major stock exchanges. Equities Capital Markets is composed of Liquid Markets and Leveraged Businesses.

Liquid Markets.    Liquid Markets consists of our Single Stock cash trading, Flow Volatility and Program Trading businesses, which also includes Connectivity services. Single Stock trades are executed for clients in a conventional (calls to a sales person) or electronic fashion through external systems as well as our own LINKS platform. These trades can be executed manually or via algorithmic trading strategies based on client needs. Program Trading specializes in execution of trades on baskets of stocks, which can be executed on an agency or risk basis, as well as "riskless" arbitrage, in which we seek to benefit from temporary price discrepancies that occur when a security or index is traded in two or more markets. We deliver global electronic connectivity services to our clients, offering seamless electronic access to our trading desks and sources of liquidity around the world. Our flow volatility business facilitates client orders in listed options markets.

Leveraged Businesses.    Leveraged Businesses include Structured Volatility, Convertibles and Relative Value. Our global Structured Volatility business offers equity derivative capabilities across a wide spectrum of products and currencies, including over-the-counter options and other derivatives, to assist our clients in managing risk. The Convertibles business trades and makes markets in conventional and highly structured convertible securities. The Relative Value business includes our proprietary "risk" arbitrage activities, which involve the purchase of securities at discounts from the expected values that would be realized if certain proposed or anticipated corporate transactions (such as mergers, acquisitions, recapitalizations, exchange offers, reorganizations, bankruptcies, liquidations or spin-offs) were to occur, as well as facilitation of trades for clients who engage in these type of trading strategies.

Fixed Income Capital Markets

Lehman Brothers actively participates in key fixed income markets worldwide and maintains a 24-hour trading presence in global fixed income securities. We are a market-maker and participant in the new issue and secondary markets for a broad variety of fixed income securities. Fixed Income businesses include the following:

Government and Agency Obligations.    Lehman Brothers is one of the leading primary dealers in U.S. government securities, participating in the underwriting of and market-making in U.S. Treasury bills, notes and bonds, and securities

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LEHMAN BROTHERS HOLDINGS INC.

of federal agencies. We are also a market-maker in the government securities of all G7 countries, and participate in other major European and Asian government bond markets.

Corporate Debt Securities and Loans.    We make markets in fixed and floating rate investment grade debt worldwide. We are also a major participant in the preferred stock market, managing numerous offerings of long-term and perpetual preferreds and auction rate securities.

High-Yield Securities and Leveraged Bank Loans.    We also make markets in non-investment grade debt securities and bank loans. Lehman Brothers provides "one-stop" leveraged financing solutions for corporate and financial acquirers and high-yield issuers, including multi-tranche, multi-product acquisition financing. We are one of the leading investment banks in the syndication of leveraged loans.

Through our high grade and high yield sales, trading and underwriting activities, we make commitments to extend credit in loan syndication transactions. We also provide contingent commitments to investment and non-investment grade counterparties related to acquisition financings.

Money Market Products.    We hold leading market positions in the origination and distribution of medium-term notes and commercial paper. We are an appointed dealer or agent for numerous active commercial paper and medium-term note programs on behalf of companies and government agencies worldwide.

Mortgage Origination, Secured Lending and Mortgage- and Asset-Backed Securities. Lehman Brothers Bank, FSB, offers traditional and online mortgage banking services to individuals as well as institutions and their customers. Lehman Brothers Bankhaus AG, a German bank, offers lending and real estate financing to corporate and institutional borrowers worldwide. We originate commercial and residential mortgage loans through Lehman Brothers Bank, Lehman Brothers Bankhaus and other subsidiaries in the U.S., Europe and Asia. We are a leading underwriter of and market-maker in residential and commercial mortgage- and asset-backed securities and are active in all areas of secured lending, structured finance and securitized products. We underwrite and make markets in the full range of U.S. agency-backed mortgage products, mortgage-backed securities, asset-backed securities and whole loan products. We are also a leader in the global market for residential and commercial mortgages (including multi-family financing) and leases. In 2005, we established Lehman Brothers Commercial Bank, a Utah-chartered industrial loan company, in order to issue certificates of deposit to institutions and conduct certain lending activities.

Real Estate Investment.    In addition to our lending activities, we invest in commercial real estate in the form of debt, joint venture equity investments and direct ownership interests. We have interests in properties throughout the world.

Municipal and Tax-Exempt Securities.    Lehman Brothers is a major dealer in municipal and tax-exempt securities, including general obligation and revenue bonds, notes issued by states, counties, cities and state and local governmental agencies, municipal leases, tax-exempt commercial paper and put bonds.

Fixed Income Derivatives.    We offer a broad range of interest rate- and credit-based derivative products and related services. Derivatives professionals are integrated into all of our Fixed Income areas in response to the worldwide convergence of the cash and derivative markets. In 2005, Lehman Brothers established an energy trading business with global capability in power, natural gas and oil. The business will include futures, swaps, options and other structured products, as well as physical trading.

Foreign Exchange.    Our global foreign exchange operations provide market access and liquidity in all currencies for spot, forward and over-the-counter options markets around the clock. We offer our clients execution, analysis and hedging capabilities, utilizing foreign exchange as well as foreign exchange options and other foreign exchange derivatives. We also provide advisory services to central banks, corporations and investors worldwide, structuring innovative products to fit their specific needs. We make extensive use of our global macroeconomics research to advise clients on the appropriate strategies to minimize interest rate and currency risk.

Global Client Services

The Global Client Services group includes our Secured Financing, Prime Broker, Futures and Correspondent and Clearing businesses.

The Secured Financing business within Capital Markets engages in three primary functions: managing our equity and fixed income matched book activities, supplying secured financing to institutional clients and obtaining secured funding for our inventory of equity and fixed income products. Matched book funding involves borrowing and lending cash on a short-term basis to institutional clients collateralized by marketable securities, typically government or government

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LEHMAN BROTHERS HOLDINGS INC.

agency securities. We enter into these agreements in various currencies and seek to generate profits from the difference between interest earned and interest paid. Secured Financing works with our institutional sales force to identify clients that have cash to invest and/or securities to pledge to meet our financing and investment objectives and those of our clients. Secured Financing also coordinates with our Treasury group to provide collateralized financing for a large portion of our securities and other financial instruments owned. In addition to our activities on behalf of our U.S. clients, we are a major participant in the European and Asian repurchase agreement ("repo") markets, providing secured financing for our clients in those regions. Secured Financing provides margin loans in all markets for client purchases of securities, as well as securities lending and short-selling facilitation.

The Prime Broker business engages in full operations, clearing and processing services for its hedge fund and other clients. We offer a full suite of prime brokerage products and services, including margin financing and yield enhancement through synthetic and traditional products, global securities lending (including eBorrow, our online securities lending tool), full-service global execution platforms and research teams, customized risk management solutions, introduction of clients to suitable institutional investors, portfolio accounting and reporting solutions and personalized client service.

Our Futures business executes and clears futures transactions for clients on an agency basis. The Correspondent and Clearing business provides these services to broker-dealers that do not have the capacity themselves.

Global Distribution

Our institutional sales organizations encompass distinct global sales forces that have been integrated into the Capital Markets businesses to provide investors with the full array of products offered by Lehman Brothers.

Equities Sales.    Our Equities Capital Markets sales force provides an extensive range of services to institutional investors, focusing on developing long-term relationships though a comprehensive understanding of clients' investment objectives, while providing proficient execution and consistent liquidity in a wide range of global equity securities and derivatives.

Fixed Income Sales.    Our Fixed Income Capital Markets sales force is one of the most productive in the industry, serving the investing and liquidity needs of major institutional investors by employing a relationship management approach that provides superior information flow and product opportunities for our clients.

Research

Research at Lehman Brothers encompasses the full range of research disciplines, including quantitative, economic, strategic, credit, relative value and market-specific analysis. To ensure in-depth expertise within various markets, Equity Research has established regional teams on a worldwide basis that are staffed with industry and strategy specialists. Fixed Income Research provides expertise in U.S., European and Asian government and agency securities, derivatives, sovereign issues, corporate securities, high yield, asset- and mortgage-backed securities, indices, emerging market debt and municipal securities.

Investment Management

The Investment Management business segment consists of our Asset Management and Private Investment Management businesses.

Asset Management

Asset Management provides proprietary asset management products across traditional and alternative asset classes, through a variety of distribution channels, to individuals and institutions. It includes both the Neuberger Berman and Lehman Brothers Asset Management brands as well as our Private Equity business.

Neuberger Berman.    Neuberger Berman has provided money management products and services to individuals and families since 1939. We acquired Neuberger Berman in October 2003.

Neuberger Berman Private Asset Management. Neuberger Berman's Private Asset Management business provides discretionary, customized portfolio management across equity and fixed income asset classes for high-net-worth clients.

Neuberger Berman Family of Funds. The Neuberger Berman family of funds spans asset classes, investment styles and capitalization ranges. Its open-end mutual funds are available directly to investors or through distributors, and its

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LEHMAN BROTHERS HOLDINGS INC.

closed-end funds trade on major stock exchanges. Neuberger Berman is also a leading sub-advisor of funds for institutional clients, including insurance companies, banks and other financial services firms. Neuberger Berman also provides mutual fund asset allocation services to individuals and institutions through its Fund Advisory Service business.

Lehman Brothers Asset Management.    Lehman Brothers Asset Management specializes in investment strategies for institutional and qualified individual investors. While our strategies are numerous and diverse, our managers share a dedication to investment discipline that includes quantitative screening, fundamental analysis and risk management.

Institutional Asset Management. Lehman Brothers Institutional Asset Management provides a full range of asset management products for pensions, foundations, endowments and other institutions. It offers strategies across the risk/return spectrum, in cash, fixed income, equity and hybrid asset classes.

Absolute Return Strategies. Lehman Brothers' Absolute Return Strategies platform provides a wide range of hedge fund products to institutions and qualified individual clients. It offers proprietary single-manager funds, proprietary multiple-manager funds of funds and third-party single-manager funds.

Private Equity.    Private Equity provides opportunities in privately negotiated transactions across a variety of asset classes for institutional and high-net-worth individual investors. Our investment partnerships manage a number of private equity portfolios, with the Company's capital invested alongside that of our clients. Lehman Brothers creates funds and invests in asset classes in which we have strong capabilities, proprietary deal flow and an excellent reputation. Areas of specialty include Merchant Banking, Venture Capital, Real Estate, Fixed Income-Related Investments and Private Funds Investments. We also make other non-fund-related direct private equity investments.

Private Investment Management

Private Investment Management provides comprehensive investment, wealth advisory and capital markets execution services to high-net-worth individuals and middle-market businesses, leveraging all the resources of Lehman Brothers.

Investment Services.    Lehman Brothers investment professionals manage client relationships with high-net-worth individuals and businesses.

Portfolio Advisory.    Our Portfolio Advisory group supports our investment professionals with asset allocation, portfolio strategy and manager selection advice. The group creates customized portfolio recommendations, monitors client portfolios and analyzes both proprietary and third-party managers to ensure our clients' access to appropriate investment managers.

Wealth Advisory.    Our Wealth Advisory group supports our investment professionals by working with our clients and their advisors to recommend plans for preserving and enhancing wealth across generations.

The Lehman Brothers Trust Company.    The Lehman Brothers Trust Company offers a full suite of services, including fiduciary, investment planning and financial planning services. For businesses and institutional clients, the Trust Company structures and manages defined benefit and defined contribution plans, master trust/custody arrangements, employee stock ownership plans and nonqualified plans. The Trust Company includes a nationally chartered trust company as well as a Delaware state chartered trust company.

Capital Advisory.    Our Capital Advisory group works with investment professionals to provide integrated wealth management and corporate finance solutions for executives, small to mid-sized companies, private equity firms and professional sports franchise owners.

Institutional Client.    The Institutional Client group leverages the Lehman Brothers Capital Markets franchise to provide brokerage and market-making services to small and mid-sized institutional clients in the fixed income and equities capital markets. The group also leads our effort to establish business relationships with minority and women-owned financial firms, through our Partnership Solutions program.

Corporate

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

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LEHMAN BROTHERS HOLDINGS INC.

Risk Management

A description of our Risk Management infrastructure and procedures is contained in Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management in Part II, Item 7, of this Report. Information regarding our use of derivative financial instruments to hedge interest rate, currency, security and commodity price and other market risks is contained in Notes 1, 2, 3, 8, 9 and 10 to the Consolidated Financial Statements in Part II, Item 8, of this Report.

Competition

All aspects of our business are highly competitive. Lehman Brothers competes in U.S. and international markets directly with numerous other firms in the areas of securities underwriting and placement, corporate finance and strategic advisory services, securities sales and trading, prime brokerage, research, foreign exchange and derivative products, asset management and private equity, including investment banking firms, traditional and online securities brokerage firms, mutual fund companies and other asset managers, investment advisers, venture capital firms and certain commercial banks and, indirectly for investment funds, with insurance companies and others. Our competitive ability depends on many factors, including our reputation, the quality of our services and advice, product innovation, execution ability, pricing, advertising and sales efforts and the talent of our personnel. See Part I, Item 1A, Risk Factors, for a further discussion of the competitive risks to which we are exposed.

Regulation

The securities industry in the United States is subject to extensive regulation under both federal and state laws.

Holdings and its subsidiaries are regulated by the SEC as a Consolidated Supervised Entity. See Capital Requirements below and Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources—Liquidity Risk Management in Part II, Item 7, of this Report. Lehman Brothers Inc. ("LBI"), Neuberger Berman, LLC ("NB LLC") and Neuberger Berman Management Inc. ("NBMI") are registered with the SEC as broker-dealers; Lehman Brothers OTC Derivatives Inc. ("LOTC") is registered with the SEC as an OTC derivatives dealer; and LBI, NB LLC, NBMI, Lehman Brothers Asset Management LLC ("LBAM") and certain other of our subsidiaries are registered with the SEC as investment advisers. As such these entities are subject to regulation by the SEC and by self-regulatory organizations, principally the NASD (which has been designated by the SEC as NBMI's primary regulator), national securities exchanges such as the New York Stock Exchange ("NYSE") (which has been designated by the SEC as LBI's and NB LLC's primary regulator) and the Municipal Securities Rulemaking Board, among others. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. Various of our subsidiaries are registered as broker-dealers in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico.

Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales practices, market making and trading among broker-dealers, publication of research, margin lending, use and safekeeping of clients' funds and securities, capital structure, recordkeeping and the conduct of directors, officers and employees.

Registered investment advisers are subject to regulations under the Investment Advisers Act of 1940. Such requirements relate to, among other things, recordkeeping and reporting requirements, disclosure requirements, limitations on agency cross and principal transactions between an adviser and advisory clients, as well as general anti-fraud prohibitions.

Certain investment funds that we manage are registered investment companies under the Investment Company Act of 1940. Those funds and the Lehman Brothers entities that serve as the funds' investment advisers are subject to that act and the rules thereunder, which, among other things, regulate the relationship between a registered investment company and its investment adviser and prohibit or severely restrict principal transactions and joint transactions.

Violation of applicable regulations can result in legal and/or administrative proceedings, which may impose censures, fines, cease-and-desist orders or suspension or expulsion of a broker-dealer or an investment adviser, its officers or employees.

LBI and NB LLC are also registered with the Commodity Futures Trading Commission (the "CFTC") as futures commission merchants; and NB LLC, LBAM and other subsidiaries are registered as commodity pool operators and/or commodity trading advisers. These entities are subject to regulation by the CFTC and various domestic boards of trade and other commodity exchanges. Our U.S. commodity futures and options business is also regulated

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by the National Futures Association, a not-for-profit membership corporation that has been designated as a registered futures association by the CFTC.

The Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC and the NYSE thereunder have imposed substantial new or enhanced regulations and disclosure requirements in the areas of corporate governance (including director independence, director selection and audit, corporate governance and compensation committee responsibilities), equity compensation plans, auditor independence, pre-approval of auditor fees and services and disclosure and internal control procedures. We are committed to industry best practices in these areas and believe we are in compliance with the relevant rules and regulations.

The USA PATRIOT Act of 2001 contains anti-money laundering and anti-terrorism laws that mandate the implementation of various regulations applicable to banks, broker-dealers, futures commission merchants and other financial services companies, including standards for verifying client identity at account opening, standards for conducting enhanced due diligence and obligations to monitor client transactions and report suspicious activities. Through these and other provisions, the PATRIOT Act seeks to promote cooperation among financial institutions, regulators and law enforcement in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside of the U.S. contain similar provisions. We have established appropriate policies, procedures and internal controls that are designed to comply with these rules and regulations.

We do business in the international fixed income and equity markets and undertake international investment banking activities, principally through our regional headquarters in London and Tokyo. Lehman Brothers International (Europe) ("LBIE") is an authorized investment firm in the United Kingdom and is a member of the London, Frankfurt, Paris and Milan exchanges, among others. The U.K. Financial Services and Markets Act 2000 (the "FSMA") and rules promulgated thereunder govern all aspects of the United Kingdom investment business, including regulatory capital, sales, research and trading practices, use and safekeeping of client funds and securities, record keeping, margin practices and procedures, approval standards for individuals, periodic reporting and settlement procedures. Pursuant to the FSMA, certain of our subsidiaries are subject to regulations promulgated and administered by the Financial Services Authority. The European Union ("E.U.") Market Abuse Directive establishes a common regulatory framework for policing market manipulation and insider dealing in Europe, with offenses of dealing on the basis of inside information and manipulating the market, obligations on issuers to disclose inside information to the market and to maintain lists of all those with access to inside information and obligations on investment firms to report suspicious transactions and disclose information about research sources and methods and conflicts of interest. U.K. regulations implementing the Directive came into effect on July 1, 2005. Other member states in which we do business have largely completed implementation of the directive as well. In the U.K., regulated firms are bound by a number of other laws and regulations, namely the First and Second E.U. Money Laundering Directives, the Proceeds of Crime Act 2002, the Terrorism Act 2000, the Money Laundering Regulations 2003 and the FSA's Money Laundering sourcebook. Collectively, these require firms to have policies and controls around the identification of clients, reporting suspicious activity, staff training and awareness, record keeping and making use of international findings. We have established appropriate policies, procedures and internal controls that are designed to comply with these rules and regulations.

Lehman Brothers Japan Inc. ("LBJ") is a registered securities company in Japan and a member of the Tokyo Stock Exchange Inc., the Osaka Securities Exchange Co., Ltd., the Jasdaq Securities Exchange Inc., the Tokyo Financial Exchange Inc., and, as such, is regulated by the Financial Services Agency, the Securities Exchange Surveillance Commission, the Japan Securities Dealers Association, the Financial Futures Association of Japan, the Tokyo Metropolitan Government and those exchanges.

Lehman Brothers Bank, a federally chartered savings bank incorporated in Delaware, is regulated by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation ("FDIC"). Lehman Brothers Commercial Bank is subject to regulation by the FDIC and the Utah Commissioner of Financial Institutions. Lehman Brothers Bankhaus is regulated by the German Federal Supervisory Authority for the Financial Service Industry. Lehman Brothers Trust Company, N.A., which holds a national bank charter, is regulated by the Office of the Comptroller of the Currency of the United States. Lehman Brothers Trust Company of Delaware, a non-depository limited purpose trust company, is subject to oversight by the State Bank Commissioner of the State of Delaware. These bodies regulate such matters as policies and procedures on conflicts of interest, account administration and overall governance and supervisory procedures.

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LBI, LBIE, LBJ and many of our other subsidiaries are also subject to regulation by securities, banking and finance regulatory authorities, securities exchanges and other self-regulatory organizations in numerous other countries in which they do business.

We believe that we are in material compliance with applicable regulations.

We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our business. See Part I, Item 3, Legal Proceedings, in this Report for information about certain pending proceedings.

Capital Requirements

LBI, LOTC, NB LLC, NBMI, LBIE, the Tokyo branch of LBJ, Lehman Brothers Bank, our "AAA" rated derivatives subsidiaries (Lehman Brothers Financial Products Inc. and Lehman Brothers Derivative Products Inc.), Lehman Brothers Trust Company, N.A., Lehman Brothers Trust Company of Delaware and other subsidiaries of Holdings are subject to various capital adequacy requirements promulgated by the regulatory, banking and exchange authorities of the countries in which they operate and/or to capital targets established by various ratings agencies. The regulatory rules referred to above, and certain covenants contained in various debt agreements, may restrict Holdings' ability to withdraw capital from certain subsidiaries, which in turn could limit its ability to commit capital to other businesses, meet obligations or pay dividends to shareholders. Further information about these requirements and restrictions is contained in Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources in Part II, Item 7, of this Report and in Note 12 to the Consolidated Financial Statements in Part II, Item 8, of this Report.

In June 2004, the SEC approved a rule establishing a voluntary framework for comprehensive, group-wide risk management procedures and consolidated supervision of certain financial services holding companies. We applied for permission to operate under the rule and received approval effective December 1, 2005. The rule allows LBI to use an alternative method, based on internal models, to calculate net capital charges for market and derivative-related credit risk. Under this rule, Lehman Brothers is subject to group-wide supervision and examination by the SEC and is subject to minimum capital requirements on a consolidated basis generally consistent with the International Convergence of Capital Measurement and Capital Standards published by the Basel Committee on Banking Supervision. See Management's Discussion and Analysis of Financial Condition and Results of Operations—Accounting and Regulatory Developments—Consolidated Supervised Entity in Part II, Item 7, of this Report for more information.

Client Protection

LBI and NB LLC are members of the Securities Investor Protection Corporation ("SIPC"). Clients of LBI and NB LLC are protected by SIPC against some losses. SIPC provides protection against lost, stolen or missing securities (except loss in value due to a rise or fall in market prices) for clients in the event of the failure of the broker-dealer. Accounts are protected up to $500,000 per client with a limit of $100,000 for cash balances. In addition to being members of SIPC, LBI and NB LLC carry excess SIPC protection, which increases each client's protection up to the net equity of the account, subject to terms and conditions similar to SIPC. Like SIPC, the excess coverage does not apply to loss in value due to a rise or fall in market prices. Certain of our non-U.S. broker-dealer subsidiaries participate in programs similar to SIPC in certain jurisdictions.

Deposits in Lehman Brothers Bank and Lehman Brothers Commercial Bank are insured by the FDIC, subject to applicable limits per depositor. Lehman Brothers Bankhaus participates in the German Depositors Protection Fund, which insures deposits from non-bank clients, with applicable limits per depositor.

Insurance

We maintain insurance coverage in types and amounts and with deductibles that management believes are customary for companies of similar size and engaged in similar businesses. However, the insurance market is volatile, and there can be no assurance that any particular coverages will be available in the future on terms acceptable to us.

Employees

As of November 30, 2005, we employed approximately 22,900 persons. We consider our relationship with our employees to be good.

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You should carefully consider the following risks and all of the other information set forth in this Report, including the Consolidated Financial Statements and the Notes thereto. If any of the events or developments described below were actually to occur, our business, financial condition or results of operations could be adversely affected.

Market Risk

As a global investment bank, risk is an inherent part of our business. Our businesses are materially affected by conditions in the financial markets, and economic conditions generally, around the world. A favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, low inflation, low unemployment, strong business profitability and high business and investor confidence. Concerns about geopolitical developments, oil prices and natural disasters, among other things, can affect the global financial markets. In addition, economic or political pressures in a country or region may cause local market disruptions and currency devaluations, which may also affect markets generally. In the event of changes in market conditions, such as interest or foreign exchange rates, stock or real estate valuations or volatility, our businesses could be adversely affected in many ways, including those described below. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Market Risk for a further discussion of the market risks to which we are exposed.

Our Client-Flow Revenues May Decline in Adverse Market Conditions. We have been operating in a low interest rate market for the past several years (though, recently, central banks have been raising rates). Increasing or high interest rates and/or widening credit spreads, especially if such changes are rapid, may create a less favorable environment for certain of our businesses. In particular, in our mortgage origination and securitization businesses, rising interest rates may cause a decline in the volume of mortgage origination activity, and therefore may also decrease the volume of securitizations. Declining real estate values could also reduce our level of new mortgage loan originations and securitizations.

Our Investment Banking revenues, in the form of financial advisory and debt and equity underwriting fees, are directly related to the number and size of the transactions in which we participate and would therefore be adversely affected by a sustained market downturn.

A market downturn would likely lead to a decline in the volume of transactions that we execute for our clients and, therefore, to a decline in the revenues we receive from commissions and spreads earned from the trades we execute for our clients. In addition, because the fees that we charge for managing our clients' portfolios are in many cases based on the value of those portfolios, a market downturn that reduces the value of our clients' portfolios would reduce the revenue we receive from our asset management business. Even in the absence of a market downturn, below-market investment performance could reduce Investment Management revenues and assets under management.

We May Incur Losses in Our Capital Markets Business Segment Due to Fluctuations in Market Rates, Prices and Volatility. Market risk is inherent in our client-driven market-making transactions in equity and fixed income securities and derivatives and our mortgage origination and loan syndication activities. Fluctuations in market rates, prices and volatility can adversely affect the market value of our long or short inventory positions and, to the extent that such positions are not hedged, cause the Firm to incur losses. In our client-driven market-making transactions, we maintain substantial inventory positions from time to time, acting as a financial intermediary for our clients, and we hold inventory positions in the normal course of business to allow clients to rebalance their portfolios and diversify risks across market cycles. To the extent that we hold long inventory positions, a downturn in the market could result in losses from a decline in the value of those positions. On the other hand, to the extent that we have sold inventory short, an upturn in those markets could expose us to losses as we attempt to cover our short positions by acquiring assets in a rising market.

In our mortgage origination and securitization businesses, we are also subject to risks from decreasing interest rates. Most residential mortgages provide that the borrower may repay them early. Borrowers often exercise this right when interest rates decline. As prepayments increase, the value of mortgages held in inventory prior to securitization generally will decrease, and to the extent that prepayment risk has not been hedged, prepayments may result in a loss.

We also maintain long and short positions through our proprietary trading activities, and make principal investments in real estate and private equity, which are also subject to market risks. The value of these positions can be adversely

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affected by changes in market rates, prices and volatility.

Holding Large and Concentrated Positions May Expose Us to Losses. Concentration of risk may reduce revenues or result in losses in our market-making, block trading, underwriting, proprietary trading and lending businesses in the event of unfavorable market movements. We have committed substantial amounts of capital to these businesses, which often require us to take large positions in the securities of, or make large loans to, a particular issuer or issuers in a particular industry, country or region. Moreover, the trend in all major capital markets is towards larger and more frequent commitments of capital in many of these activities, and we expect this trend to continue.

Market Risk May Increase the Other Risks That We Face. In addition to the potentially adverse effects on our businesses described above, market risk could exacerbate other risks that we face. For example, if we were to incur substantial market risk losses, our need for liquidity could rise significantly, while our access to liquidity could be impaired. In addition, in conjunction with a market downturn, our clients and counterparties could incur substantial losses of their own, thereby weakening their financial condition and increasing our credit risk to them.

Credit Risk

We May Incur Losses Associated with Our Credit Exposures. Credit risk represents the possibility a counterparty or an issuer of securities or other financial instruments we hold or a borrower of funds from us will be unable to honor its contractual obligations to us. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Default risk may also arise from events or circumstances that are difficult to foresee or detect, such as fraud. Credit risk may arise, for example, from holding securities of third parties; entering into swap or other derivative contracts under which counterparties have obligations to make payments to us; executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries; and extending credit to our clients through bridge or margin loans or other arrangements. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk for a further discussion of the credit risks to which we are exposed. Our principal focus has been acting as an intermediary of credit. In recent years, we have expanded our activities associated with providing our clients access to credit and liquidity and have significantly expanded our swaps and other derivatives businesses. As a result, our credit exposures have increased in amount and in duration.

Defaults by Another Large Financial Institution Could Adversely Affect Financial Markets Generally. The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between the institutions. As a result, concerns about, or a default by, one institution could lead to significant market-wide liquidity problems, losses or defaults by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which we interact on a daily basis, and therefore could adversely affect Lehman Brothers.

Liquidity Risk

Liquidity, that is, ready access to funds, is essential to our businesses. Financial institutions rely on external borrowings for the vast majority of their funding, and failures in our industry are typically the result of insufficient liquidity.

An Inability to Access the Debt Markets Could Impair Our Liquidity. We maintain a liquidity pool available to Holdings that is intended to cover all expected cash outflows for one year in a stressed liquidity environment, which assumes, among other things, that during that year we cannot issue unsecured debt. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management, for a discussion of our liquidity needs and liquidity management.

To the extent that a liquidity event lasts for more than one year, or our expectations concerning the market conditions that exist during a liquidity event, or our access to funds, prove to be inaccurate (e.g., the level of secured financing "haircuts" (the difference between the market and pledge value of the assets) required to fund our assets in a stressed market event is greater than expected, or the amount of drawdowns under our commitments to extend credit in a stressed market environment exceeds our expectations), our ability to fund operations could be significantly impaired. Even within the one-year time frame contemplated by our liquidity pool, we depend on continuous access to secured financing in the repurchase and securities lending markets, which could be impaired by factors that are not

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specific to Lehman Brothers, such as a severe disruption of the financial markets.

We Are a Holding Company and Are Dependent on Our Subsidiaries for Funds. Since Holdings is primarily a holding company, our cash flow and consequent ability to pay dividends and satisfy our obligations under securities we issue are dependent upon the earnings of our subsidiaries and the distribution of those earnings as dividends or loans or other payments by those subsidiaries to us. Several of our principal subsidiaries are subject to various capital adequacy requirements promulgated by the regulatory, banking and exchange authorities of the countries in which they operate and/or to capital targets established by various ratings agencies. These regulatory rules, and certain covenants contained in various debt agreements, may restrict our ability to withdraw capital from our subsidiaries by dividends, loans or other payments. Further information about these requirements and restrictions is set forth in Note 12 to the Consolidated Financial Statements in Part II, Item 8, of this Report. Additionally, our ability to participate as an equity holder in any distribution of assets of any subsidiary upon liquidation is generally subordinate to the claims of creditors of the subsidiary.

Credit Ratings

Our borrowing costs and our access to the debt capital markets depend significantly on our credit ratings. A reduction in our credit ratings could increase our borrowing costs, limit our access to the capital markets and trigger additional collateral requirements in derivative contracts and other secured funding arrangements. Credit ratings are also important to us when competing in certain markets, such as longer-term over-the-counter derivatives. Therefore, a substantial reduction in our credit ratings would reduce our earnings and adversely affect our liquidity and competitive position. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Risk Management and—Credit Ratings, for additional information concerning our credit ratings.

Operational Risk

Operational Risks May Disrupt Our Businesses, Result in Regulatory Action Against Us or Limit Our Growth. We face operational risk arising from errors made in the execution, confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted for. Derivative contracts, particularly credit derivatives, are not always confirmed by the counterparties on a timely basis; while the transaction remains unconfirmed, we are subject to heightened credit and operational risk and in the event of a default may find it more difficult to enforce the contract. Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. Consequently, we rely heavily on our financial, accounting and other data processing systems. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and we expect that we will need to continue to upgrade and expand in the future to avoid disruption of, or constraints on, our operations.

In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a disruption involving electrical, communications, transportation or other services used by Lehman Brothers or third parties with which we conduct business, terrorist activities or disease pandemics. See Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management in Part II, Item 7, of this Report for a description of our Risk Management infrastructure and procedures.

Acquisitions or Joint Ventures Could Present Unforeseen Integration Obstacles or Costs. Acquisitions and joint ventures involve a number of risks and present financial, managerial and operational challenges, including difficulty with integrating personnel and financial and other systems, hiring additional management and other critical personnel and increasing the scope, geographic diversity and complexity of our operations. In addition, we may not realize the anticipated benefits from an acquisition, and we may be exposed to additional liabilities of any acquired business.

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LEHMAN BROTHERS HOLDINGS INC.

Legal, Regulatory and Reputational Risk

We Face Significant Litigation Risks in Our Businesses. The volume of litigation against financial services firms and the amount of damages claimed has increased over the past several years. We are exposed to potential liability under securities or other laws for materially false or misleading statements made in connection with securities and other transactions, potential liability for the "fairness opinions" and other advice we provide to participants in corporate transactions and disputes over the terms and conditions of complex trading arrangements. We also face the possibility that counterparties in complex or risky trading transactions will claim that we improperly failed to tell them of the risks or that they were not authorized or permitted to enter into these transactions with us and that their obligations to Lehman Brothers are not enforceable. In our Investment Management segment, we are exposed to claims against us for recommending investments that are not consistent with a client's investment objectives or engaging in unauthorized or excessive trading. During a prolonged market downturn, we would expect these types of claims to increase. We are also subject to claims arising from disputes with employees for alleged discrimination or harassment, among other things. These risks often may be difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time. We incur significant legal expenses every year in defending against litigation, and we expect to continue to do so in the future. See Part I, Item 3, Legal Proceedings, for a discussion of some of the legal and regulatory matters in which we are currently involved.

Extensive Regulation of Our Businesses Limits Our Activities and May Subject Us to Significant Penalties. Lehman Brothers, as a participant in the financial services industry, is subject to extensive regulation under both federal and state laws in the U.S. and under the laws of the many global jurisdictions in which we do business. We are also regulated by a number of self-regulatory organizations. The industry has experienced increased scrutiny from a variety of regulators, including the SEC, NYSE, NASD and state attorneys general. Penalties and fines sought by regulatory authorities in our industry have increased substantially over the last several years. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with Lehman Brothers. Consequently, these regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements. If we were found to have breached certain of these rules or regulations, we could face the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or prohibited from engaging in some of our business activities. See Part I, Item 1, Business—Regulation" for a further discussion of the regulatory environment in which we conduct our businesses.

Additional legislation and regulations, changes in rules imposed by regulatory authorities, self-regulatory organizations and exchanges or changes in the interpretation or enforcement of existing laws and rules may adversely affect our business and profitability. Our business may be materially affected not only by regulations applicable to us as an investment bank, but also by regulations of general application, including existing and proposed tax legislation and other governmental regulations and policies (including the interest rate and monetary policies of the Federal Reserve Board and other central banks) and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities.

Exposure to Reputational Risks Could Impact the Value of our Brand. Our reputation is critical in maintaining our relationships with clients, investors, regulators and the general public, and is a key focus in our risk management efforts. In recent years there have been a number of highly publicized cases involving fraud, conflicts of interest or other misconduct by employees in the financial services industry, and we run the risk that misconduct by our employees could occur. Misconduct by employees could include binding Lehman Brothers to transactions that exceed authorized limits or present unacceptable risks, or hiding from Lehman Brothers unauthorized or unsuccessful activities, which, in either case, may result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. In addition, in certain circumstances our reputation could be damaged by activities of our clients in which we participate, over which we have little or no control.

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Competitive Environment

All aspects of our business are highly competitive. Our competitive success depends on many factors, including our reputation, the quality of our services and advice, intellectual capital, product innovation, execution ability, pricing, sales efforts, and the talent of our personnel.

We Face Increased Competition Due to a Trend Toward Consolidation.    In recent years, there has been substantial consolidation and convergence among companies in the financial services industry. In particular, a number of large commercial banks, insurance companies and other broad-based financial services firms have established or acquired broker-dealers or have merged with other financial institutions. Many of these firms have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage, asset management and investment banking services, which may enhance their competitive position. They also have the ability to support investment banking and securities products with commercial banking, insurance and other financial services revenues in an effort to gain market share, which has resulted in pricing pressure in our businesses. We have experienced intense price competition in some of our businesses in recent years. For example, equity and debt underwriting and trading spreads and fees for lending and other activities have been under competitive pressures for a number of years.

Our Revenues May Decline Due to Competition from Alternative Trading Systems.    Securities and futures transactions are now being conducted through the internet and other alternative, non-traditional trading systems, and it appears that the trend toward alternative trading systems will continue and probably accelerate. A dramatic increase in computer-based or other electronic trading may adversely affect our commission and trading revenues.

Our Ability to Retain Our Key Employees is Critical to the Success of Our Business. Our people are our most important resource. Our ability to continue to compete effectively in our businesses will depend upon our ability to attract top talent and retain and motivate our existing employees while managing compensation costs.

Risk Management

We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our hedging strategies and other risk management techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated. Some of our methods of managing risk are based upon our use of observed historical market behavior. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate. Management of operational, legal and regulatory risk requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management, for a discussion of the policies and procedures we use to identify, monitor and manage the risks we assume in conducting our businesses.

Our world headquarters is a 1,000,000 square-foot owned office tower at 745 Seventh Avenue in New York City. In addition, we lease approximately 1,500,000 square feet of office space in the New York metropolitan area.

In addition to our offices in the New York area, we have offices in over 115 locations in the Americas. We also have offices in Europe and Asia.

Our European headquarters is an 820,000 square foot leased facility in the Canary Wharf development, east of the City of London. In addition to our European headquarters, we have an additional fifteen locations in Europe.

Our Asian headquarters is located in approximately 190,000 square feet of leased office space in the Roppongi Hills area of central Tokyo, Japan. We lease office space in eight other locations in Asia.

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All three of our business segments (as described herein) use the occupied facilities described above. We believe that the facilities we occupy are adequate for the purposes for which they are used, and the occupied facilities are well maintained.

Additional information with respect to facilities and lease commitments is set forth under the caption Lease Commitments in Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Report.

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

Although there can be no assurance as to the ultimate outcome, we generally have denied, or believe we have a meritorious defense and will deny, liability in all significant cases pending against us, including the matters described below, and we intend to defend vigorously each such case. Based on information currently available, we believe the amount, or range, of reasonably possible losses in connection with the actions against us, including the matters described below, in excess of established reserves, in the aggregate, not to be material to the Company's consolidated financial condition or cash flows. However, losses may be material to our operating results for any particular future period, depending on the level of our income for such period.

Actions Regarding Enron Corporation

Enron Securities Purchaser Actions.    In April 2002, a Consolidated Complaint for Violation of the Securities Laws was filed in the United States District Court for the Southern District of Texas (the "Texas District Court"), captioned In re Enron Corporation Securities Litigation (the "Enron Litigation"), alleging claims for violation of Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder, and the Texas Securities Act. The case was brought on behalf of a purported class of purchasers of Enron Corporation's publicly traded equity and debt securities between October 19, 1998 and November 27, 2001, against Holdings and eight other commercial or investment banks, 38 current or former Enron officers and directors, Enron's accountants, Arthur Andersen LLP (and affiliated entities and partners) and two law firms. The complaint sought unspecified compensatory and injunctive relief based on the theory that defendants engaged or participated in manipulative devices to inflate Enron's reported profits and financial condition, made false or misleading statements and participated in a scheme or course of business to defraud Enron's shareholders. Ultimately, after motion practice, on February 4, 2004, the Texas District Court entered an order dismissing the claims against Holdings and LBI under Section 10(b) and 20(a) of the Exchange Act. Subsequently, Holdings and LBI reached an agreement to settle this case, as well as the Washington State Investment Board action, discussed below, for $222.5 million. On October 19, 2005, the settlement was approved by the Texas District Court. That settlement did not resolve certain claims discussed below.

In May 2002, American National Insurance Company and certain of its affiliates filed a complaint against LBI, Holdings, Lehman Commercial Paper Inc. ("LCPI") and a broker formerly employed by Lehman. The amended complaint, filed in October 2003, is based on allegations similar to those in the Enron Litigation and asserts that plaintiffs relied on defendants' allegedly false and misleading statements in purchasing and continuing to hold Enron debt and equities in their LBI accounts. The amended complaint alleges violations of the Texas Securities Act, violations of the Texas Business and Commerce Code, fraud, breach of fiduciary duty, negligence and professional malpractice, and seeks unspecified compensatory and punitive damages. This action has been coordinated for pretrial purposes with the Enron Litigation in the Texas District Court.

In August 2002, a complaint was filed against Holdings and four other commercial or investment banks, among other defendants, by the Public Employees Retirement System of Ohio and three other state employee retirement plans, containing allegations similar to those in the Enron Litigation. Against Holdings, the complaint alleges claims for common law fraud and deceit, aiding and abetting common law fraud, conspiracy to commit fraud, negligent misrepresentation and violation of the Texas Securities Act, and seeks unspecified compensatory and punitive damages. This action has been consolidated with the Enron Litigation in the Texas District Court.

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In September 2002, the Washington State Investment Board, which is a named plaintiff in the Enron Litigation, filed a new purported class action. This action mirrored the Enron Litigation but alleges a longer class action period of September 9, 1997 to October 18, 1998. The amended complaint alleged claims against Holdings and LBI for violations of Sections 11 and 15 of the Securities Act. Plaintiffs sought unspecified compensatory damages, an accounting and disgorgement of certain defendants' alleged insider-trading proceeds, restitution and rescission. This action had been consolidated with the Enron Litigation in the Texas District Court. As indicated above, Holdings and LBI have settled this case and that settlement has been approved by the Texas District Court.

In April 2003, Westboro Properties LLC and Stonehurst Capital, Inc. filed a complaint against LBI, Holdings and other commercial or investment banks. Plaintiffs alleged that defendants engaged in violations of the Texas Securities Act, statutory fraud in stock transactions, fraud, negligence and professional malpractice, and violations Sections 12 and 15 of the Securities Act in inducing plaintiffs to purchase certain certificates, or investments, in two special purpose entities ("SPEs"), Osprey I and Osprey II. Plaintiffs also alleged that defendants aided and abetted Enron's fraud in setting up SPEs, allegedly falsifying Enron's books and records and in continuing to recommend Enron's stock. Plaintiffs sought unspecified actual, special and punitive damages and equitable relief. This action had been consolidated with the Enron Litigation in the Texas District Court. LBI and Holdings have settled this case and are awaiting final dismissal from the Texas District Court.

In September 2003, a purported class action complaint was filed against Holdings and seven other commercial or investment banks, among other defendants, by Sara McMurray on behalf of purchasers of Enron common stock between October 16, 1998 and November 27, 2001, making similar allegations as the Enron Litigation. Plaintiff alleges negligent misrepresentation, common law fraud, breach of fiduciary duty and aiding and abetting breach of fiduciary duty, and seeks unspecified damages for lost investment opportunities and lost benefit of the bargain. This action has been consolidated with the Enron Litigation in the Texas District Court. Plaintiff has filed a motion to voluntarily dismiss Holdings from the action without prejudice. The motion is pending before the Texas District Court. Similarly, in January 2004, a purported class action complaint was filed against Holdings and other commercial or investment banks, among other defendants, by William Young and Frank Conway on behalf of all persons who held Enron shares from April 13, 1999 through November 8, 2001. Making allegations similar to those in the Enron Litigation, plaintiffs allege claims for negligent misrepresentation and common law fraud and seek unspecified compensatory damages. This action has been coordinated for pretrial purposes with the Enron Litigation in the Texas District Court. Plaintiffs have filed a motion to voluntarily dismiss Holdings from the action without prejudice. The motion is pending before the Texas District Court.

Other Actions.    In August 2003, Al Rajhi Investment Corporation BV filed a petition against rating agencies, law firms, commercial and investment banks, including LBI and Holdings, and others. Plaintiff claims to have engaged in a commodities trade with Enron and to have effectively extended over $101 million of credit to Enron in reliance on misrepresentations. The amended complaint alleged that LBI and Holdings were involved in funding the LJM2 and the Osprey Trust transactions, that they were involved in Enron transactions used to inflate Enron's net worth and creditworthiness and that they made false and misleading statements in analysts' reports. The claims against LBI and Holdings were for conspiracy and for participation in a joint or common enterprise and seek actual and exemplary damages. This action had been coordinated for pretrial purposes with the Enron Litigation in the Texas District Court. In December 2005, plaintiff voluntarily dismissed its claims with prejudice as to all defendants, including LBI and Holdings.

In November 2003, a complaint was filed by Enron in the United States Bankruptcy Court for the Southern District of New York (the "New York Bankruptcy Court") against Lehman Brothers Finance S.A. ("LBF"), LBI, Holdings and LCPI. Among other things, the complaint seeks to avoid as preferential transfers and/or fraudulent conveyances approximately $236 million in payments made by Enron in the year prior to Enron's bankruptcy filing. These payments were made pursuant to transactions under a swap contract between LBF and Enron relating to Enron common stock. The parties have entered into a settlement agreement that will be presented to the Bankruptcy Court for approval.

Also in November 2003, Enron filed two nearly identical lawsuits against LCPI, LBIE and other commercial paper dealers and investors in the New York Bankruptcy Court. The complaints allege that monies paid by Enron in October and November 2002 to repurchase its outstanding commercial paper shortly before its maturity were preferential payments and/or fraudulent conveyances under the Bankruptcy Code. Among other things, the complaints seek to avoid and recover these payments from the defendants. In total, approximately $500 million is

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sought from LCPI and LBIE, nearly all of which relates to LCPI's role as intermediary between Enron and several co-defendant holders of the commercial paper.

In March 2004, LJM2 Liquidation Statutory Trust B and its managing trustee filed a complaint against the limited partners in LJM2 Co-Investment L.P., including LB I Group Inc., alleging that the limited partners improperly rescinded a capital call. The complaint asserts claims against the LB I Group Inc. for violations of the Delaware Revised Uniform Limited Partnership Act, for breach of the partnership and subscription agreements, for breach of the credit agreement, for tortious interference, for aiding and abetting a breach of fiduciary duty, for avoidable transfer, for breach of the covenant of good faith and fair dealing, for unjust enrichment, for breach of the partnership agreement and for conspiracy to engage in fraudulent transfer. Plaintiffs seek monetary damages of approximately $75 million in the aggregate from the limited partners, plus interest and costs, as well as specific enforcement of the obligation to make capital contributions. The action is currently pending in Delaware Chancery Court. This case has been settled in principle subject to final documentation.

In April 2004, LJM2 Liquidation Statutory Trust B and its managing trustee filed an amended complaint against the limited partners of LJM2 Co-Investment, L.P., including LB I Group Inc., alleging that the distributions to the limited partners were fraudulent transfers and violated the Delaware Revised Uniform Limited Partnership Act. Plaintiffs seek monetary damages of approximately $75 million in the aggregate from the limited partners, plus interest and costs. The action is currently pending in the United States Bankruptcy Court for the Northern District of Texas. This case has been settled in principle subject to final documentation.

First Alliance Mortgage Company Matters

During 1999 and the first quarter of 2000, LCPI provided a warehouse line of credit to First Alliance Mortgage Company ("FAMCO"), a subprime mortgage lender, and LBI underwrote the securitizations of mortgages originated by FAMCO. In March 2000, FAMCO filed for bankruptcy protection in the United States Bankruptcy Court for the Central District of California (the "California Bankruptcy Court"). In August 2001, a purported adversary class action (the "Class Action") was filed in the California Bankruptcy Court, allegedly on behalf of a class of FAMCO borrowers seeking equitable subordination of LCPI's (among other creditors') liens and claims. In October 2001, the complaint was amended to add LBI as a defendant and to add claims for aiding and abetting alleged fraudulent lending activities by FAMCO and for unfair competition under the California Business and Professions Code. In August 2002, a Second Amended Complaint was filed, which added a claim for punitive damages and extended the class period from May 1, 1996, until FAMCO's bankruptcy filing. The complaint sought actual and punitive damages, the imposition of a constructive trust on all proceeds paid by FAMCO to LCPI and LBI, disgorgement of profits and attorneys' fees and costs.

In November 2001, the Official Joint Borrowers Committee (the "Committee") initiated an adversary proceeding, allegedly on behalf of the FAMCO-related debtors, in the California Bankruptcy Court by filing a complaint against LCPI, LBI, Holdings and several individual officers and directors of FAMCO and its affiliates. As to the Lehman defendants, the Committee asserted various bankruptcy claims for avoidance of liens, aiding and abetting and breach of fiduciary duty. In December 2001, the Committee amended its complaint, dropping Holdings as a defendant.

The United States District Court for the Central District of California (the "California District Court") withdrew the reference to the California Bankruptcy Court in both of these cases and in February 2002 consolidated them before the California District Court. In November 2002, the California District Court entered an order defining the class in the Class Action as all persons who acquired mortgage loans from FAMCO from May 1, 1996 through March 31, 2000, which were used as collateral for FAMCO's warehouse credit line with LCPI or were securitized in transactions underwritten by LBI. The class claims were subsequently limited to the period 1999 forward. Trial began in February 2003.

In June 2003, the California District Court dismissed plaintiffs' claim for punitive damages. Also in June 2003, the jury rendered its verdict, finding LBI and LCPI liable for aiding and abetting FAMCO's fraud. The jury found damages of $50.9 million and held the Lehman defendants responsible for 10% of those damages. In July 2003, the California District Court entered findings of fact and conclusions of law relating to all claims still pending and holding that any transfers to LCPI were not fraudulent and its liens were not avoidable, nor was equitable subordination of amounts owed by FAMCO to LCPI at the time of the Chapter 11 filing warranted. Judgment was entered in November 2003 on the jury verdict. LBI and LCPI are appealing the jury verdict to the United States Court of Appeals for the Ninth Circuit and both sets of plaintiffs are appealing various rulings of the California District Court.

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In June 2003, the Attorney General of the State of Florida filed a civil complaint against LCPI in the Circuit Court of the 17^th Judicial Circuit in and for Broward County, Florida, alleging violations of the Florida Unfair and Deceptive Trade Practices Act and common law fraud. The allegations arise out of LCPI's relationship with FAMCO insofar as FAMCO did business with Florida borrowers. The Florida Attorney General alleges in the complaint that, among other things, LCPI provided financing to FAMCO, despite LCPI's purported knowledge that FAMCO was engaged in "predatory lending" practices. The Complaint seeks a permanent injunction, compensatory and punitive damages, civil penalties, attorney's fees and costs.

In re Fleming Securities Litigation

In February 2003, a lawsuit captioned Massachusetts State Carpenters Pension Fund v. Fleming Companies, Inc., et al. was filed in the 160^th District Court of Dallas County, Texas, asserting claims arising under Sections 11, 12(a) (2), and 15 of the Securities Act. The action was brought on behalf of a purported class of investors who purchased in two simultaneous Fleming securities offerings in June 2002 that raised approximately $378 million. LBI's share of these offerings as underwriter was 27.5%. The complaint alleged that the prospectus and registration statement for the offerings contained false and misleading statements or omitted material facts concerning, among other things, deductions Fleming took on vendor invoices, its accounting for recognition of income, amortization of long term assets and use of capitalized interest and the performance of Fleming's retail operations. The complaint sought unspecified damages and costs. In addition to Fleming, the suit named as defendants ten officers and/or directors of Fleming, Fleming's auditor, and the underwriters of the offerings, including LBI.

The case was removed to the United States District Court for the Northern District of Texas. The underwriters were contractually entitled to customary indemnification from Fleming, but in April 2003, Fleming filed for bankruptcy protection. Also in April 2003, plaintiffs filed a virtually identical second lawsuit in the United States District Court for the Eastern District of Texas.

In June 2003, the Judicial Panel on Multidistrict Litigation consolidated the securities litigations concerning Fleming to which LBI was not a party in the United States District Court for the Eastern District of Texas. Subsequently, in September 2003, plaintiffs in the two Massachusetts State Carpenters Pension Fund cases to which LBI is a party, and plaintiffs in the consolidated actions, jointly filed a Third Consolidated Amended Class Action Complaint, which, as to LBI, in substance re-alleged the claims set forth in the original Massachusetts State Carpenters Pension Fund cases. Thereafter, in June 2004, plaintiffs filed a Fourth Consolidated Amended Class Action Complaint adding details to the allegations in the prior complaint concerning lead plaintiffs' purchases in the offerings, and a Fifth Complaint was filed in December 2004, which added no new allegations or claims against LBI.

The parties agreed to a settlement of this action as to which the Court granted final approval on November 29, 2005.

IPO Allocation Cases

LBI was named as a defendant in approximately 192 purported securities class actions that were filed between March and December 2001 in the United States District Court for the Southern District of New York (the "New York District Court"). The actions, which allege improper IPO allocation practices, were brought by persons who, either directly or in the aftermarket, purchased IPO securities during the period between March 1997 and December 2000. The plaintiffs allege that Lehman and other IPO underwriters required persons receiving allocations of IPO shares to pay excessive commissions on unrelated trades and to purchase shares in the aftermarket at specified escalating prices. The plaintiffs, who seek unspecified compensatory damages, claim that these alleged practices violated various provisions of the federal securities laws, specifically sections 11, 12(a)(2) and 15 of the Securities Act, sections 10(b) and 20(a) of the Exchange Act. The 192 actions in which LBI was named a defendant have been consolidated into 83 cases, each involving a distinct offering. Those 83 consolidated cases, and approximately 226 others in which LBI is not named as a defendant, have been coordinated for pretrial purposes before a single judge.

In January 2002, a separate consolidated class action, entitled In re Initial Public Offering Antitrust Litigation, was filed in the New York District Court against LBI, among other underwriters, alleging violations of federal and state antitrust laws. The complaint alleges that the underwriter defendants conspired to require customers who wanted IPO allocations to pay the underwriters a percentage of their IPO profits in the form of commissions on unrelated trades to purchase other, less attractive securities and to buy shares in the aftermarket at predetermined escalating prices. In November 2003, the court dismissed the antitrust action on the grounds that the conduct alleged was impliedly immune from the antitrust laws. On appeal, the United States Court of Appeals for the Second Circuit reversed the New York District Court's decision in September 2005.

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In April 2002, a suit was filed in Delaware Chancery Court by Breakaway Solutions Inc. ("Breakaway"), which names LBI and two other underwriters as defendants (the "Delaware Action"). The complaint purports to be brought on behalf of a class of issuers who issued securities in IPOs through at least one of the defendants during the period January 1998 through October 2000 and whose securities increased in value 15% or more above the original price within 30 days after the IPO. It alleges that defendants underpriced IPO securities and allocated those underpriced securities to certain favored customers in return for alleged arrangements with the customers for increased commissions on other transactions and alleged tie-in arrangements. The complaint asserts claims for breaches of contract, of the implied covenant of good faith and fair dealing and of fiduciary duty, and for indemnification or contribution and unjust enrichment or restitution. Breakaway seeks, among other relief, class certification, injunctive relief, an accounting, declarations requiring defendants to indemnify Breakaway in the pending consolidated IPO securities class actions and determining that Breakaway has no indemnification obligation to defendants in those actions, and compensatory damages. In August 2004, the court denied defendants' motion to dismiss. On motion by defendants, the court reconsidered its prior decision and by order dated December 8, 2005, dismissed all but Breakaway's claim for breach of fiduciary duty.

In September 2005, Breakaway commenced an action in the New York State Supreme Court, New York County, naming the same defendants (the "New York Action"). This action alleges that LBI, as a co-manager of Breakaway's initial public offering and in conjunction with the other underwriter defendants, breached a fiduciary duty to Breakaway and breached the covenant of good faith and fair dealing implied in the underwriting agreement among Breakaway and the underwriters by allegedly underpricing Breakaway's shares in the IPO. Unlike the Delaware Action, which Breakaway purports to bring on behalf of a class of issuers, the New York Action concerns claims brought only on behalf of Breakaway.

IPO Fee Litigation

Harold Gillet, et al. v. Goldman Sachs & Co., et al.; Yakov Prager, et al. v. Goldman, Sachs & Co., et al.; David Holzman, et al. v. Goldman, Sachs & Co., et al.    Beginning in November 1998, four purported class actions were filed in the New York District Court against in excess of 25 underwriters of IPO securities, including LBI. The cases were subsequently consolidated into In re Public Offering Antitrust Litigation. Plaintiffs, alleged purchasers of securities issued in certain IPOs, seek compensatory and injunctive relief for alleged violations of the antitrust laws based on the theory that the defendants fixed and maintained fees for underwriting certain IPO securities at supra-competitive levels. In February 2001, the New York District Court granted defendants' motion to dismiss the Consolidated Amended Complaint, concluding that the purchaser plaintiffs lacked standing under the antitrust laws to assert the claims. On appeal, the United States Court of Appeals for the Second Circuit reversed and remanded the case to the New York District Court for further proceedings, including potential dismissal of the claims based on additional arguments raised in the motion to dismiss. The New York District Court, in an order dated February 24, 2004, dismissed plaintiffs' claims for monetary damages allowing only their claims for injunctive relief to proceed.

In re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation.    In April 2001, the New York District Court consolidated four actions pending before the court brought by bankrupt issuers of IPO securities against more than 20 underwriter defendants (including LBI). In July 2001, the plaintiffs filed a consolidated class action complaint seeking unspecified compensatory damages and injunctive relief for alleged violations of the antitrust laws based on the theory that the defendant underwriters fixed and maintained fees for underwriting certain IPO securities at supra-competitive levels. Two of the four original plaintiffs subsequently withdrew their claims.

Metricom Securities Litigation

In August 2002, an amended complaint was filed in the United States District Court for the Northern District of California captioned In re Metricom Securities Litigation. The action is brought on behalf of a purported class of investors who purchased the common stock of Metricom, Inc., during the period from June 21, 1999, to July 2, 2001. Plaintiffs name various officers, directors and selling shareholders of Metricom, along with LBI as lead underwriter and the four other co-managing underwriters of an offering of Metricom common stock in February 2000. The underwriters are contractually entitled to customary indemnification from Metricom in connection with the offering, but prior to the commencement of this action, Metricom filed for bankruptcy protection. The February 2000 offering raised approximately $500 million, of which Lehman's underwriting share was 28.5%. Against the underwriters, plaintiffs allege violations of Sections 11 and 12(2) of the Securities Act and of Section 10(b) of the Exchange Act. The complaint alleges that the prospectus and registration statement for the offering failed to disclose material facts concerning, among other things, Metricom's flawed business plan and marketing strategy. The complaint seeks class

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action status, unspecified damages and costs.

In May 2003, the court dismissed that complaint. In July 2003, plaintiffs filed a second amended complaint that drops claims against the underwriters under the Exchange Act but realleges claims against them under the Securities Act. On April 29, 2004, the United States District Court for the Northern District of California dismissed the second amended complaint with prejudice, and the plaintiffs are appealing that decision to the United States Court of Appeals for the Ninth Circuit.

Mirant Securities Litigation

In November 2002, an amended complaint was filed in the United States District Court for the Northern District of Georgia, Atlanta Division, captioned In re Mirant Corporation Securities Litigation. The action is brought on behalf of a purported class of investors who purchased the securities of Mirant Corporation during the period from September 26, 2000 and September 5, 2002. Plaintiffs name Mirant, various officers and directors, Mirant's former parent, The Southern Company, along with its officers and directors, LBI, as a member of the underwriting syndicate, and eleven other underwriters of Mirant's IPO of common stock in September, 2000. The underwriters are contractually entitled to customary indemnification from Mirant, but Mirant filed for bankruptcy protection in July 2003. The IPO raised approximately $1.467 billion, of which Lehman's underwriting share was 9%. Against the underwriters, plaintiffs allege violations of Section 11 of the Securities Act. The complaint alleges that the prospectus and registration statement for the offering contained false and misleading statements or failed to disclose material facts concerning, among other things, Mirant's alleged misconduct in energy markets in the State of California, the accounting for Mirant's interest in a United Kingdom-based company, Western Power Distribution, and other accounting issues. The complaint seeks class action certification, unspecified damages and costs.

Mutual Fund Related Litigation

In re Mutual Funds Investment Litigation.    In September 2004, LBI and two LBI employees were added as defendants to a consolidated class action pending in the United States District Court for the District of Maryland (the "Maryland District Court") purportedly brought by a class of investors against Federated Investors, Inc. ("Federated") and numerous of its subsidiaries, directors, trustees and employees, together with certain traders and broker-dealers, and others. The action had been consolidated before the United States District Court for the Western District of Pennsylvania and transferred to the Maryland District Court in March 2004 pursuant to an order of the Judicial Panel on Multidistrict Litigation. The consolidated amended class action complaint alleged that LBI and two LBI employees violated the securities laws, including Section 10 of the Exchange Act and Section 36(b) and 48(a) of the Investment Company Act of 1940, aided and abetted a breach of fiduciary duty, and were unjustly enriched as a result of trading in the Federated family of mutual funds allegedly conducted by LBI customers through LBI. The consolidated amended class action complaint sought unspecified damages. On March 7, 2005, the defendants, including LBI and its two employees, filed motions to dismiss the complaint. On November 3, 2005, United States District Court Judge Catherine C. Blake rendered a decision dismissing, as against, among others, LBI and the two LBI employees, (1) the federal securities law claims with prejudice, and (2) the state law claims without prejudice, on the basis that they are preempted under the Securities Litigation Uniform Standards Act of 1998.

In re Excelsior, Federated and Scudder.    In September 2004, Holdings and LBI were added as defendants to a consolidated shareholder derivative action pending in the Maryland District Court against Federated and numerous of its subsidiaries and directors, together with certain financial institutions and individuals. The action had been consolidated before the United States District Court for the Western District of Pennsylvania and transferred to the Maryland District Court in March 2004 pursuant to an order of the Judicial Panel on Multidistrict Litigation. The consolidated amended complaint contained allegations that LBI aided and abetted a breach of fiduciary duty, interfered with contracts, engaged in a civil conspiracy, and were unjustly enriched, in connection with trading of the Federated family of mutual funds allegedly conducted by LBI customers through LBI. The consolidated amended complaint seeks unspecified damages. After plaintiffs agreed to voluntarily dismiss Holdings from the action, on March 4, 2005, United States District Court Judge Catherine C. Blake rendered a decision dismissing the complaint as against Holdings. On March 7, 2005, the defendants, including LBI, filed motions to dismiss the complaint. On November 3, 2005, Judge Blake entered an order dismissing the complaint as against, among other defendants, LBI.

Research Analyst Independence Litigations

Since the announcement of the final global regulatory settlement regarding alleged research analyst conflicts of interest at various investment banking firms in the United States, including LBI, and various federal and state regulators and

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self-regulatory organizations in April 2003 (the "Final Global Settlement"), a number of purported class actions were filed, resulting in three consolidated actions, against LBI in federal court, which are specific to LBI's research of particular companies (Razorfish, Inc., RealNetworks, Inc. and RSL Communications, Inc.): Swack, et al. v. Lehman Brothers Inc, in the United States District Court for the District of Massachusetts ("Massachusetts District Court") (Razorfish); DeMarco v. Lehman Brothers Inc., et al., in the New York District Court (RealNetworks); and Fogarazzo v. Lehman Brothers Inc., in the New York District Court (RSL Communications). All the actions allege conflicts of interest between LBI's investment banking business and research activities and seek to assert claims pursuant to Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. In the purported class action relating to RSL Communications, plaintiffs have filed an amended consolidated complaint, containing essentially the same allegations as the original complaints, but adding two other investment banks as defendants (Fogarazzo, et al. v. Lehman Brothers Inc., et al.).

In DeMarco, which relates to Real Networks, the New York District Court issued an order in 2004 granting LBI's motion for summary judgment and dismissing the claims. In Swack, which relates to LBI's research on Razorfish, Inc., the Massachusetts District Court issued an order in August 2005 dismissing the action.

In June 2003, a purported derivative action, Bader and Yakaitis P.S.P. and Trust, et al. v. Michael L. Ainslie, et al., relating to the Final Global Settlement was filed in New York State Supreme Court, New York County. The suit names Holdings and its Board of Directors as defendants and contends that the Board should have been aware of and prevented the alleged misconduct that resulted in the settlement with regulators. In December 2003, plaintiffs filed an amended complaint, reiterating the allegations concerning the alleged failure to detect and prevent conduct resulting in the Final Global Settlement and adding allegations concerning the alleged failure to detect and prevent conduct relating to purportedly improper IPO allocation practices, discussed more fully above under the heading IPO Allocation Cases.

WorldCom Bondholders Litigation

Holdings and LBI (together, the "Lehman Defendants"), along with other underwriters of WorldCom, Inc. bonds, were named as defendants in certain securities class and individual actions commenced beginning on or about July 19, 2002 alleging that the offering materials issued in connection with certain securities offerings were false and misleading. Certain of the lawsuits (some of which were originally filed in various state courts and removed to federal court) were transferred by order of the Judicial Panel on Multidistrict Litigation to the New York District Court..

All defendants, including the Lehman Defendants, have settled the class action claims. That settlement was approved by the District Court by decision dated September 21, 2005. The Lehman Defendants contributed $62.7 million to that settlement. That settlement did not resolve claims brought by certain investors who opted out of the class action and filed separate actions.

On June 22, 2005, the underwriter defendants agreed to settle Public Employees' Retirement System of Ohio, et al. v. Bernard J. Ebbers, et al., and the Lehman Defendants contributed $787,500 toward that settlement. On August 8, 2005, the underwriter defendants agreed to settle New York City Employees' Retirement System,, et al. v. Bernard J. Ebbers, et al., and the Lehman Defendants contributed $1.6 million toward that settlement. On October 8, 2005, the underwriter defendants agreed to settle the various actions filed on behalf of plaintiffs represented by Lerach Coughlin Stoia Geller Rudman & Robbins, LLP in various courts throughout the United States. The Lehman Defendants contributed $10.7 million toward the Lerach settlement. On December 31, 2005, the underwriter defendants agreed to settle SunTrust Bank, et al. v. Ebbers, et al., and the Lehman Defendants contributed $40,012 toward that settlement.

Several individual actions remain pending against the underwriter defendants, including the Lehman Defendants. These remaining cases are Adcock, et al. v. Ebbers, et al., Escude v. Ebbers, et al., Kemp v. Ebbers, et al., Pacific Life Ins., et al., v. J.P. Morgan Chase & Co., et al., Utah State Retirement Board v. Ebbers, et al., and Shriners Hospital for Children v. Alexander, et al. Court-supervised negotiations are ongoing in the latter three actions. The Lehman Defendants' total exposure for these actions is not material.

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PART II

Holdings' common stock, par value $0.10 per share, is listed on the New York Stock Exchange and on the Pacific Exchange. As of January 31, 2006, there were 270,408,498 shares of our common stock outstanding and approximately 22,450 holders of record. On February 10, 2006, the last reported sales price of our common stock was $137.50. The table below shows the high and low sales prices for the common stock for each fiscal quarter within the two most recent fiscal years:

Price Range of Common Stock

In January 2006, our Board of Directors increased the fiscal 2006 annual common stock dividend rate to $0.96 per share from an annual dividend rate of $0.80 per share in fiscal 2005 and $0.64 per share in fiscal 2004. Dividends on the common stock are generally payable, following declaration by the Board of Directors, in February, May, August and November.

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The table below sets forth information with respect to purchases made by or on behalf of Holdings or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended), of our common stock during the quarter ended November 30, 2005.

(1)

We have an ongoing common stock repurchase program, pursuant to which we repurchase shares in the open market on a regular basis. As previously announced, in January 2005 our Board of Directors authorized the repurchase of up to approximately 65 million shares of our common stock in fiscal 2005. Of this amount, approximately 35 million shares were authorized for repurchase to offset dilution due to employee stock plans in 2005, and up to an additional 30 million shares were authorized for repurchase in fiscal 2005, subject to market conditions, for the possible acceleration of 2006 requirements to offset dilution due to employee stock plans. The number of shares authorized to be repurchased in the open market is reduced by the actual number of Employee Offset Shares (as defined below) received.

(2)

Represents shares of common stock withheld in satisfaction of the exercise price of stock options and tax withholding obligations upon option exercises and conversion of restricted stock units (collectively, "Employee Offset Shares").

Our Board of Directors has authorized the repurchase in 2006, subject to market conditions, of up to 40 million shares of Holdings common stock in 2006, for the management of the Firm's equity capital, including offsetting 2006 dilution due to employee stock plans. Our Board also authorized the repurchase in 2006, subject to market conditions, of up to an additional 15 million shares, for the possible acceleration of repurchases to offset a portion of 2007 dilution due to employee stock plans. This authorization supersedes the stock repurchase program authorized in January 2005. For more information about the repurchase program and employee stock plans, see Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources—Stock Repurchase Program in Part II, Item 7, Notes 11 and 14 to the Consolidated Financial Statements in Part II, Item 8, and Security Ownership of Certain Beneficial Owners and Management in Part III, Item 12, in this Report.

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The following table summarizes certain consolidated financial information.

Selected Financial Data

In millions, except per common share and selected data and financial ratios

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Notes to Selected Financial Data:

(1)

Non-personnel expenses exclude the following items: 1) real estate reconfiguration charges of $19 million, $77 million and $128 million for the years ended November 2004, 2003 and 2002, respectively, September 11^th related (recoveries)/expenses of $(108) million and $127 million for the years ended November 30, 2002 and 2001, respectively, and 3) regulatory settlement of $80 million for the year ended November 30, 2002.

(2)

We adopted FIN 46R effective February 29, 2004, which required us to deconsolidate the trusts that issued the preferred securities. Accordingly, at and subsequent to February 29, 2004, preferred securities subject to mandatory redemption were reclassified to Junior Subordinated notes. Dividends on preferred securities subject to mandatory redemption, which were presented as Dividends on trust preferred securities in the Consolidated Statement of Income through February 29, 2004, are included in Interest expense in periods subsequent to February 29, 2004.

(3)

Net assets represent total assets excluding: 1) cash and securities segregated and on deposit for regulatory and other purposes, 2) securities received as collateral, 3) securities purchased under agreements to resell, 4) securities borrowed and 5) identifiable intangible assets and goodwill. We believe net assets is a measure more useful to investors than total assets when comparing companies in the securities industry because it excludes certain assets considered to have a low-risk profile and identifiable intangible assets and goodwill. Net assets as presented are not necessarily comparable to similarly-titled measures provided by other companies in the securities industry because of different methods of calculation.^(a)

(4)

Tangible equity capital represents total stockholders' equity plus junior subordinated notes (and at November 30, 2003, 2002 and 2001, preferred securities subject to mandatory redemption), less identifiable intangible assets and goodwill.^(b) See "MD&A—Liquidity, Funding and Capital Resources—Balance Sheet and Financial Leverage" for additional information about tangible equity capital. We believe total stockholders' equity plus junior subordinated notes to be a more meaningful measure of our equity because the junior subordinated notes are subordinated and have maturities at issuance from 30 to 49 years. In addition, a leading rating agency views these securities as equity capital for purposes of calculating net leverage. Further, we do not view the amount of equity used to support identifiable intangible assets and goodwill as available to support our remaining net assets. Tangible equity capital as presented is not necessarily comparable to similarly-titled measures provided by other companies in the securities industry because of different methods of calculation.

(5)

Total capital includes long-term borrowings (including junior subordinated notes) and total stockholders' equity and, at November 30, 2003 and prior year-ends, preferred securities subject to mandatory redemption. We believe total capital is useful to investors as a measure of our financial strength.

(6)

The book value per common share calculation includes amortized restricted stock units granted under employee stock award programs, which have been included in total stockholders' equity.

(7)

Gross leverage ratio is defined as total assets divided by total stockholders' equity.

(8)

Net leverage ratio is defined as net assets (see note 3 above) divided by tangible equity capital (see note 4 above). We believe net leverage is a more meaningful measure of leverage to evaluate companies in the securities industry. In addition, many of our creditors and a leading rating agency use the same definition of net leverage. Net leverage as presented is not necessarily comparable to similarly-titled measures provided by other companies in the securities industry because of different methods of calculation.

(9)

Assets under management at November 30, 2003 have been restated to include $3.9 billion of discretionary brokerage cash management assets.

(10)

Average common stockholders' equity in 2003 was appropriately weighted for the effect of the equity issued in connection with the Neuberger Berman acquisition on October 31, 2003. Return on average common stockholders' equity is computed by dividing net income applicable to common stock for the period by average common stockholders' equity. Average common stockholders' equity for the years ended November 2005, 2004, 2003, 2002 and 2001 was $14.7 billion, $12.8 billion, $9.1 billion, $8.1 billion and $7.3 billion, respectively.

(11)

Average tangible common stockholders' equity in 2003 was appropriately weighted for the effect of the equity issued in connection with the Neuberger Berman acquisition on October 31, 2003. Return on average tangible common stockholders' equity is computed by dividing net income applicable to common stock for the period by average tangible common stockholders' equity. Average tangible common stockholders' equity equals average total common stockholders' equity less average identifiable intangible assets and goodwill. Average identifiable intangible assets and goodwill for the years ended November 2005, 2004, 2003, 2002 and 2001 was $3.3 billion, $3.5 billion, $471 million, $191 million and $174 million, respectively. Management believes tangible common stockholders' equity is a meaningful measure because it reflects the common stockholders' equity deployed in our businesses.

(a)

Net Assets calculation:

(b)

Tangible equity capital calculation:

(i)

Preferred securities subject to mandatory redemption at November 30, 2003, 2002 and 2001.

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LEHMAN BROTHERS HOLDINGS INC.

Contents

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company", "Lehman Brothers", "we", "us" or "our") is one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individual clients. Our worldwide headquarters in New York and regional headquarters in London and Tokyo are complemented by offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific region. Through our subsidiaries, we are a global market-maker in all major equity and fixed income products. To facilitate our market-making activities, we are a member of all principal securities and commodities exchanges in the U.S. and we hold memberships or associate memberships on several principal international securities and commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Paris, Milan and Australian stock exchanges.

Our principal businesses are investment banking, capital markets and investment management, which, by their nature, are subject to volatility primarily due to changes in interest and foreign exchange rates, valuation of financial instruments and real estate, global economic and political trends and industry competition. Through our investment banking, trading, research, structuring and distribution capabilities in equity and fixed income products, we continue to build on our client-flow business model. The client-flow business model is based on our principal focus of facilitating client transactions in all major global capital markets products and services. We generate client-flow revenues from institutional, corporate, government and high-net-worth clients by (i) advising on and structuring transactions specifically suited to meet client needs; (ii) serving as a market-maker and/or intermediary in the global marketplace, including having securities and other financial instrument products available to allow clients to adjust their portfolios and risks across different market cycles; (iii) providing investment management and advisory services; and (iv) acting as an underwriter to clients. As part of our client-flow activities, we maintain inventory positions of varying amounts across a broad range of financial instruments that are marked to market daily and give rise to principal transactions and net interest revenue. In addition, we also maintain inventory positions (long and short) through our proprietary trading activities, and make principal investments in real estate and private equity. The financial services industry is significantly influenced by worldwide economic conditions as well as other factors inherent in the global financial markets. As a result, revenues and earnings may vary from quarter to quarter and from year to year.

All references to the years 2005, 2004 and 2003 in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") refer to our fiscal years ended November 30, 2005, 2004 and 2003, or the last day of such fiscal years, as the context requires, unless specifically stated otherwise.

Some of the statements contained in this MD&A, including those relating to our strategy and other statements that are predictive in nature, that depend on or refer to future events or conditions or that include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates" and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are not historical facts but instead represent only management's expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include, but are not limited to, the factors discussed under "Certain Factors Affecting Results of Operations" below and in Part I, Item 1A, Risk Factors, in this Form 10-K.

As a global investment bank, our results of operations have varied significantly in response to global economic and market trends and geopolitical events. The nature of our business makes predicting the future trends of net revenues difficult. Caution should be used when extrapolating historical results to future periods. Our actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Our financial condition and results of operations may be affected by uncertain or unfavorable economic, market, legal and other conditions. These conditions include but are not limited to:

Market Risk

Changes in interest and foreign exchange rates, financial instruments and real estate valuations and increases in volatility can increase credit and market risks and may also affect client-flow-related revenues and proprietary trading revenues as well as affect the volume of debt and equity underwritings and merger and acquisition transactions. See Risk Management—Market Risk in this MD&A for more information.

Competitive Environment

All aspects of our business are highly competitive. Our competitive ability depends on many factors, including our reputation, the quality of our services and advice, intellectual capital, product innovation, execution ability, pricing, sales efforts and the talent of our employees. See Part I, Item 1—Business—Competition in this Form 10-K for more information about competitive matters.

Business Environment

Concerns about geopolitical developments, oil prices and natural disasters, among other things, can affect the global financial markets. Accounting and corporate governance scandals in recent years have had a significant effect on investor confidence. See Executive Overview—Business Environment and—Economic Outlook in this MD&A for additional information.

Liquidity

Liquidity and liquidity management are of critical importance in our industry. Liquidity could be affected by the inability to access the long-term or short-term debt, repurchase or securities-lending markets or to draw under credit facilities, whether due to factors specific to us or to general market conditions. In addition, the amount and timing of contingent events, such as unfunded commitments and guarantees, could adversely affect cash requirements and liquidity. To mitigate these risks, our liquidity and funding policies have been conservatively designed to maintain sufficient liquid financial resources to continually fund our balance sheet and to meet all expected cash outflows, for one year in a stressed liquidity environment. See Liquidity, Funding and Capital Resources—Liquidity Risk Management in this MD&A for more information.

Credit Ratings

Our access to the unsecured funding markets is dependent on our credit ratings. A reduction in our credit ratings could adversely affect our access to liquidity alternatives and our competitive position, and could increase the cost of funding or trigger additional collateral requirements. See Liquidity, Funding and Capital Resources—Credit Ratings in this MD&A for more information.

Credit Exposure

Credit exposure represents the possibility that a counterparty will be unable to honor its contractual obligations. Although we actively manage credit exposure daily as part of our risk management framework, counterparty default risk may arise from unforeseen events or circumstances. See Risk Management—Credit Risk in this MD&A for more information.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal or outsourced processes, people, infrastructure and technology, or from external events. We seek to minimize these risks through an effective internal control environment. See Risk Management—Operational Risk in this MD&A for more information.

Legal, Regulatory and Reputational Risk

The securities and financial services industries are subject to extensive regulation under both federal and state laws in the U.S. and under the laws of the many other jurisdictions in which we do business. We also are regulated by a number of

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

self-regulatory organizations such as the National Association of Securities Dealers, the Municipal Securities Rulemaking Board and the National Futures Association, and by national securities and commodities exchanges, including the New York Stock Exchange. As of December 1, 2005, Holdings became regulated by the SEC as a consolidated supervised entity ("CSE"), and as such, we are subject to group-wide supervision and examination by the SEC, and accordingly, we are subject to minimum capital requirements on a consolidated basis. Violation of applicable regulations could result in legal and/or administrative proceedings, which may impose censures, fines, cease-and-desist orders or suspension of a firm, its officers or employees. The scrutiny of the financial services industry has increased over the past several years, which has led to increased regulatory investigations and litigation against financial services firms.

Legislation and rules adopted both in the U.S. and around the world have imposed substantial new or more stringent regulations, internal practices, capital requirements, procedures and controls and disclosure requirements in such areas as financial reporting, corporate governance, auditor independence, equity compensation plans, restrictions on the interaction between equity research analysts and investment banking employees and money laundering.

The trend and scope of increased compliance requirements has increased costs necessary to ensure compliance. Our reputation is critical in maintaining our relationships with clients, investors, regulators and the general public, and is a key focus in our risk management efforts.

We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our business, including actions brought against us and others with respect to transactions in which we acted as an underwriter or financial advisor, actions arising out of our activities as a broker or dealer in securities and actions brought on behalf of various classes of claimants against many securities firms and lending institutions, including us. See Part I, Item 1—Business—Regulation and Part I, Item 3—Legal Proceedings in this Form 10-K for more information about legal and regulatory matters.

See Part I, Item 1A, Risk Factors, in this Form 10-K for additional information about these and other risks inherent in our business.

Summary of Results

Net income totaled $3.3 billion, $2.4 billion and $1.7 billion in 2005, 2004 and 2003, respectively, increasing 38% in 2005 and 39% in 2004 from the corresponding 2004 and 2003 periods, respectively. Diluted earnings per share were $10.87, $7.90 and $6.35 in 2005, 2004 and 2003, respectively, up 38% in 2005 and 24% in 2004 from the corresponding 2004 and 2003 periods, respectively. Net revenues were $14.6 billion, $11.6 billion and $8.6 billion in 2005, 2004 and 2003, respectively, up 26% and 34% from the corresponding 2004 and 2003 periods.

These record results in fiscal 2005 reflect the enhanced scale we have built and the geographic and product diversification we have achieved, and our continued discipline around managing expenses, risk and capital.

During 2005, we continued to strengthen and grow our firm. We achieved record net revenues, net income and diluted earnings per share in 2005 for the second consecutive fiscal year. These results were driven by record net revenues in each business segment and in each geographic region.

Net revenues grew 26% in 2005 compared with 2004. Investment Banking business segment revenues increased 32% compared with 2004, propelled by record revenues in Global Finance—Debt, and Global Finance—Equity, and the second highest revenues ever in Advisory Services. Capital Markets business segment net revenues rose 27% in 2005 compared with 2004, reflecting a record performance in Fixed Income and second highest Equities net revenues. Investment Management business segment net revenues rose 14% in 2005 compared with 2004 on record levels of both Private Investment Management and Asset Management revenues, and assets under management grew to $175 billion. Non-U.S. net revenues increased to a record $5.4 billion, representing 37% of total net revenues in 2005, up from 29% in 2004, as both the Europe and Asia Pacific and other regions achieved double-digit net revenue growth.

(2)

Market share, volume and ranking statistics in this MD&A were obtained from Thomson Financial.

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Net revenues grew 34% in 2004 compared with 2003, reflecting increases in each of our three business segments and in each geographic region. Investment Banking business segment revenues rose 27% in 2004 compared with 2003 propelled by improvements in Global Finance—Equity and Advisory Services. Capital Markets net revenues rose 28% in 2004 compared with 2003, reflecting robust Fixed Income net revenues and improved Equities net revenues. Investment Management business segment net revenues rose 87% in 2004 compared with 2003, primarily due to increased Asset Management revenues associated with business acquisitions, complemented by improved results in the Private Investment Management component of this business segment.

Business Environment

As a global investment bank, our results of operations can vary in response to global economic and market trends and geopolitical events. A favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, low inflation, low unemployment, strong business profitability and high business and investor confidence. These factors can influence (i) levels of debt and equity security issuance and M&A activity, which can affect our Investment Banking business, (ii) trading volumes, financial instrument and real estate valuations and client activity in secondary financial markets, which can affect our Capital Markets businesses and (iii) wealth creation, which can affect both our Capital Markets and Investment Management businesses.

The global market environment during 2005 was generally favorable for our businesses due to a combination of factors—positive economic growth, improved corporate profitability, strong equity markets, and low long-term interest rates by historical standards. The global equity markets rose, driven by strong earnings reports and positive economic data, notwithstanding record high oil prices and continued geopolitical and inflationary concerns. Global yield curves continued to flatten and corporate credit spreads remained generally tight. The economies of Asia (excluding Japan) continued their strong growth in 2005, while the European and Japanese economies grew more slowly. At various points in 2005, market conditions became more challenging due to higher energy prices, the aftermath of the hurricanes in the southeast U.S. and concerns that these factors could translate into higher core inflation. Oil prices reaching $70 a barrel and higher than expected producer and consumer price indices also added uncertainty, volatility and a higher risk premium to the capital markets. However, both the consumer and the markets generally proved to be remarkably resilient.

Equity markets.    The global equity markets reported broad gains during 2005, due primarily to positive economic data and strong earnings reports. Higher valuations served to fuel the equity origination calendar, such that industry-wide volumes were very strong and pipelines continued to build. In 2005, the New York Stock Exchange, Dow Jones Industrial Average, S&P 500 and NASDAQ indices rose 9%, 4%, 6%, and 6%, respectively, when compared to 2004. In the European equity markets, the FTSE and DAX rose 15% and 26%, respectively, in 2005 when compared to 2004. In Asia, the Nikkei and Hang Seng indices rose 36% and 6%, respectively, in 2005 when compared to 2004.

Global trading volumes improved in 2005 compared to 2004. In the U.S., trading volumes for all major indices increased in 2005 compared with 2004, as continued low interest rates and improved corporate profitability created a more favorable environment for equity products. Average daily trading volumes of FTSE 100 stocks declined 6% compared with 2004, while the trading volumes of DAX composite stocks rose 7% compared with 2004. Volumes on the Nikkei and Hang Seng exchanges rose 30% and 6%, respectively, in 2005 compared with 2004.

Fixed income markets.    Throughout 2005 interest rates continued to remain low and the yield curve continued to flatten, as longer term yields were little affected by the Federal Funds Rate increases which totaled 200 basis points. Credit and swap spreads while generally tight, widened slightly in response to the flatter treasury curve. Conditions in Europe were somewhat less favorable than the U.S., as growth remained slow and the Euro weakened. Japan continued on its recovery path, with the Bank of Japan providing favorable monetary policies which continued to support liquidity and growth. Total global debt origination rose 13% in 2005 compared with 2004 on higher levels of investment-grade debt issuances partially offset by a decline in high-yield origination volumes.

Mergers and acquisitions.    Stronger stock valuations and the favorable interest rate environment during 2005 kept both strategic buyers and financial sponsors very active in M&A. Announced M&A volumes rose 56% in 2005 compared with 2004, while completed M&A volumes rose 31% in the period.

Economic Outlook

The financial services industry is significantly influenced by worldwide economic conditions in both banking and capital markets. We expect global GDP growth of 2.6% for 2006, a level that continues to provide a favorable underpinning for

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

this industry. We expect the Fed to continue raising rates to 5% by mid-2006 and then keeping interest rates steady. The end of the Fed's rising interest rate cycle in the past has been positive for our sector. We expect that corporate profitability will remain resilient, and we are looking for corporate earnings to increase by 8% to 10% in 2006. Additionally, U.S. corporate balance sheets remain strong and operating cash flows solid, with cash on hand amounting to approximately 10% of total balance sheets, giving corporations a higher degree of flexibility for mergers and acquisitions, buybacks and dividends. Although we remain wary of geopolitical risk, the growing deficits in the U.S., and China's efforts to rein in growth, we see resiliency in the global economy as a whole.

Equity markets.    The environment for the equity markets became more positive in 2005 compared with 2004. Liquidity remained available and industry-wide equity-offering pipelines continued to grow. We expect the equity offering calendar to remain robust through 2006, as reasonably strong corporate profitability and a low inflation outlook are expected to increase confidence in the marketplace.

Fixed income markets.    We see a continued constructive environment for fixed income origination, given low absolute interest rates, credit spreads remaining in line with historical averages, refinancings of debt maturing in calendar 2006 and the expected increase in M&A and financial-sponsor-related financings. We expect both fixed-income-related products and the fixed income investor base to continue to grow with a continuing global trend of more liquidity requirements being sourced from the capital markets. We also believe a reasonably strong primary debt market should have a positive impact on secondary market flows.

Fixed income activity is driven in part by the absolute level of interest rates, but also is highly correlated with the degree of volatility, the shape of the yield curve and credit quality, which in the aggregate, impact the overall business environment. The fixed income investor base has changed dramatically from long-only investors of a few years ago to a rapidly-growing hedge fund and an expanding international investor base. Investors now employ far more developed risk mitigation tools to manage their portfolios. In addition, in recent years the Fed has become more transparent in communicating its intentions, as evidenced by the market's ability to successfully absorb twelve consecutive 25 basis-point Fed Funds rate hikes from June 1, 2004 through November 30, 2005, to bring the Fed Funds rate to 4%. We believe that the Fed will continue its pattern of raising rates until it reaches 5% in 2006. In addition, the size and diversity of the global fixed income marketplace has become significantly larger and broader over the last several years. We expect approximately $8.5 trillion of global fixed income origination in calendar 2006, staying constant with 2005 issuance levels, but almost double the $4.3 trillion issued in calendar 2000.

Mergers and acquisitions.    During fiscal 2005, M&A activity increased significantly, and we expect this to continue. Companies are still looking to grow, and strategic M&A is an increasingly viable option to achieve these growth objectives, particularly for companies with liquid and strong balance sheets and stronger stock valuations.

During fiscal 2004 and 2005, activity from strategic buyers increased, and we expect the M&A fee pool in fiscal 2006 to continue to grow compared with fiscal 2005. Financial sponsor M&A also has been an important factor driving the increase in activity.

Asset management and high net worth.    Capital markets continued to be resilient in 2005, and growing economies translate into wealth. We aspire to be a provider of choice among the high-net-worth client base, given our growing product breadth and strong performance. Our outlook for asset management and services to high-net-worth individuals is positive, given favorable demographics, higher savings rates globally and intergenerational wealth transfer. The high-net-worth client increasingly seeks multiple providers and greater asset diversification along with a high service component. We believe the significant expansion of our asset management business and the strong investment-return performance of our asset managers, coupled with our cross-selling initiatives, position us well for continued growth in 2006.

Overview

We achieved record net revenues, net income and diluted earnings per share in 2005 for the second consecutive fiscal year. Net revenues were $14.6 billion, $11.6 billion and $8.6 billion in 2005, 2004 and 2003, respectively, up 26% and 34% from the corresponding 2004 and 2003 periods. Net income totaled $3.3 billion, $2.4 billion and $1.7 billion in 2005, 2004 and 2003, respectively, up 38% and 39% from the corresponding 2004 and 2003 periods.

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Diluted earnings per share were $10.87, $7.90 and $6.35 in 2005, 2004 and 2003, respectively, up 38% in 2005 and 24% in 2004 from the corresponding 2004 and 2003 periods, respectively.

Return on average common stockholders' equity³ was 21.6%, 17.9% and 18.2% in 2005, 2004 and 2003, respectively. Return on average tangible common stockholders' equity was 27.8%, 24.7% and 19.2% in 2005, 2004 and 2003, respectively.

Compensation and benefits expense as a percentage of net revenues was 49.3%, 49.5% and 49.9% in 2005, 2004 and 2003, respectively. Non-personnel expenses as a percentage of net revenues were 17.7%, 20.1% and 20.7% in 2005, 2004 and 2003, respectively. Pre-tax margin was 33.0%, 30.4% and 29.3% in 2005, 2004 and 2003, respectively.

Net Revenues

Net revenues totaled $14.6 billion, $11.6 billion and $8.6 billion in 2005, 2004 and 2003, respectively, representing three consecutive years of record net revenues. Net revenues grew 26% in 2005 compared with 2004, reflecting the highest ever net revenues in each of our three business segments and in each geographic region.

Principal Transactions, Commissions and Net Interest Revenues

In both the Capital Markets and Investment Management business segments, we evaluate net revenue performance based on the aggregate of Principal transactions, Commissions and Interest and dividends revenue net of Interest expense ("Net interest revenue"). These revenue categories include realized and unrealized gains and losses, commissions associated with client transactions and the interest and dividend revenue or interest expense associated with financing or hedging positions. Caution should be used when analyzing these revenue categories individually because they may not be indicative of the overall performance of the Capital Markets and Investment Management business segments. Principal transactions, Commissions and Net interest revenue in the aggregate rose 26% in 2005 compared with 2004 and 27% in 2004 compared with 2003.

Principal transactions revenue improved 37% in 2005 compared with 2004, driven by improvements across both fixed income and equity products, including a higher contribution from non-U.S. regions. In Fixed Income Capital Markets the notable increases were in commercial mortgages and real estate, residential mortgages and interest rate products. The

(3)

Return on average common stockholders' equity and return on average tangible common stockholders' equity are computed by dividing net income applicable to common stock for the period by average common stockholders' equity and average tangible common stockholders' equity, respectively. We believe average tangible common stockholders' equity is a meaningful measure because it reflects the common stockholders' equity deployed in our businesses. Average tangible common stockholders' equity equals average common stockholders' equity less average identifiable intangible assets and goodwill and is computed as follows:

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

2005 increase in net revenues from equity capital market products was driven by higher trading volumes and improved equity valuations globally as well as increases in financing and derivative activities. Principal transactions revenue improved 33% in 2004 compared with 2003. Then-record fixed income revenues in 2004, with notable improvements in mortgage and interest rate products over the prior year, contributed to the principal transactions revenue increase, together with stronger equity net revenues, particularly in equity derivatives.

Commission revenues rose 12% in 2005 compared with 2004 on higher global trading volumes. Commission revenues increased 27% in 2004 compared with 2003, reflecting commission revenue attributable to the acquisition of Neuberger Berman Inc. and its subsidiaries ("Neuberger") complemented by growth in our trading volumes, despite generally lower market volumes.

Interest and dividends revenue and Interest expense are a function of the level and mix of total assets and liabilities (primarily financial instruments owned and sold but not yet purchased, and collateralized borrowing and lending activities), the prevailing level of interest rates and the term structure of our financings. Interest and dividends revenue and Interest expense are integral components of our evaluation of our overall Capital Markets activities. Net interest revenue in 2005 declined 8% compared with 2004, due to higher short-term interest rates and a flatter yield curve, partially offset by higher levels of interest and dividend earning assets. Interest and dividends revenue and Interest expense rose 73% and 84%, respectively, in 2005 compared with 2004, attributable to higher short-term interest rates coupled with higher levels of interest- and dividend-earning assets and interest-bearing liabilities. Net interest revenue in 2004 rose 4% compared with 2003 principally due to an increase in interest-earning assets. Interest and dividends revenue and Interest expense rose 11% and 12%, respectively, in 2004 compared with 2003 attributable to higher levels of interest- and dividend-earning assets and interest-bearing liabilities coupled with a modest upward shift in interest rates.

Investment Banking

Investment banking revenues result from fees and commissions received for underwriting public and private offerings of fixed income and equity securities, fees and other revenues associated with advising clients on M&A activities, as well as other corporate financing activities. Investment banking revenues rose to record levels in 2005, increasing 32% compared with 2004. The 2005 results reflected our highest levels of revenues in Global Finance—Debt and Global Finance—Equity, and the highest level of Advisory Services revenues since fiscal 2000. Investment banking revenues increased 27% in 2004 compared with 2003, reflecting substantial revenue increases in Global Finance—Equity and Advisory Services and continued strength from our Global Finance—Debt business. See Business Segments—Investment Banking in this MD&A for a discussion and analysis of our Investment Banking business segment.

Asset Management and Other

Asset management and other revenues primarily result from asset management activities in the Investment Management business segment. Asset management and other revenues rose 19% in 2005 compared with 2004. The growth in 2005 primarily reflects higher asset management fees attributable to the growth in assets under management. The significant increase in 2004 compared with 2003 is attributable primarily to the October 31, 2003 acquisition of Neuberger, complemented by higher private equity management and incentive fees.

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Non-Interest Expenses

Non-interest expenses were $9.8 billion, $8.1 billion, and $6.1 billion in 2005, 2004 and 2003, respectively. Non-interest expenses in 2004 and 2003 include a real estate reconfiguration charge discussed further below. Significant portions of certain expense categories are variable, including compensation and benefits, brokerage and clearance, and business development. We expect these variable expenses as a percentage of net revenues to remain in approximately the same proportions for future periods. We continue to maintain a strict discipline in managing expenses.

Compensation and benefits.    Compensation and benefits totaled $7.2 billion, $5.7 billion and $4.3 billion in 2005, 2004, and 2003, respectively. Compensation and benefits expense as a percentage of net revenues continued to decrease and was 49.3%, 49.5%, and 49.9% in 2005, 2004 and 2003, respectively. Employees totaled approximately 22,900, 19,600 and 16,200 at November 30, 2005, 2004 and 2003, respectively. The growth in employees in 2005 is primarily attributable to higher levels of business activity across the firm, as well as investments in the continued growth of the franchise. The increase in employees in 2004 reflects a combination of business acquisitions and organic growth. Compensation and benefits expense includes both fixed and variable components. Fixed compensation, consisting primarily of salaries, benefits and amortization of previous years' deferred equity awards, totaled $3.2 billion, $2.6 billion and $2.0 billion in 2005, 2004 and 2003, respectively, up 21% in 2005 from 2004 and 30% in 2004 from 2003. The growth of fixed compensation in both comparison periods was due primarily to increases in employees. Variable compensation, consisting primarily of incentive compensation, commissions and severance, totaled $4.0 billion, $3.1 billion and $2.3 billion in 2005, 2004 and 2003, respectively, up 30% in 2005 compared to 2004 and 35% in 2004 from 2003, as higher net revenues resulted in higher incentive compensation. Amortization of deferred stock compensation awards was $1,055 million, $800 million and $625 million in 2005, 2004 and 2003, respectively.

Non-personnel expenses.    Non-personnel expenses totaled $2.6 billion, $2.3 billion and $1.8 billion in 2005, 2004 and 2003, respectively. Non-personnel expenses as a percentage of net revenues were 17.7%, 20.1%, and 20.7% in 2005, 2004, and 2003, respectively. The increase in non-personnel expenses in 2005 compared with 2004 is primarily attributable to increased technology, occupancy and costs associated with higher levels of business activity.

Technology and communications expenses rose 9% in 2005 compared with 2004 reflecting increased costs associated with the continued expansion and development of our Capital Markets platforms and infrastructure, and increased technology costs to create further efficiencies in our mortgage origination businesses. Occupancy expenses increased 16% in 2005 compared with 2004 primarily attributable to growth in our global space requirements due to higher levels of employees. Brokerage and clearance expenses rose 11% in 2005 compared with 2004, due primarily to higher transaction volumes in certain Capital Markets products. Professional fees and business development expenses increased 12% and 11%, respectively, in 2005 compared with 2004 due primarily to the higher levels of business activity. Other expenses increased 18% in 2005 compared with 2004 due to a number of factors, including an increase in mutual fund distribution and administration costs related to the growth in assets under management, as well as an increase in charitable contributions.

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

The increase in non-personnel expenses in 2004 is attributable to a number of factors, including business acquisitions coupled with increased technology initiatives, higher occupancy costs and higher levels of business activity. Technology and communications expenses rose 28% in 2004 compared with 2003 reflecting the business acquisitions, the depreciation of technology assets at new facilities, and increased costs associated with the continued build-out of Capital Markets platforms and infrastructure. Brokerage and clearance expenses rose 23% in 2004 compared with 2003, due primarily to higher volumes in Capital Markets products and expansion in equities-related businesses. Occupancy expenses increased 32% in 2004 compared with 2003 primarily attributable to the business acquisitions and the increased cost of our new facilities in London and Tokyo. Professional fees increased 59% in 2004 compared with 2003 due to the business acquisitions and higher recruiting and legal fees. Business development expenses increased 42% in 2004 compared with 2003 due to the higher level of business activity and the business acquisitions. Other expenses increased 66% in 2004 compared with 2003 attributable primarily to the business acquisitions, including mutual fund distribution costs and the amortization of intangible assets.

Real estate reconfiguration charge.    Non-interest expenses in 2004 and 2003 include pre-tax real estate charges of $19 million and $77 million, respectively ($11 million and $45 million after-tax, respectively), associated with our 2002 decision to dispose of certain excess real estate. In March 2004, we reached an agreement to exit virtually all of our remaining leased space at our downtown New York City location, which clarified the loss on the location and resulted in the $19 million charge. See Note 17 to the Consolidated Financial Statements for additional information about the real estate reconfiguration charge.

Insurance settlement.    During 2004, we entered into a settlement with our insurance carriers relating to several legal proceedings noticed to the carriers and initially occurring prior to January 2003. Under the terms of the insurance settlement, the insurance carriers agreed to pay us $280 million. During 2004, we also entered into a Memorandum of Understanding to settle the In re Enron Corporation Securities Litigation class action lawsuit for $223 million. The settlement with our insurance carriers and the settlement under the Memorandum of Understanding did not result in a net gain or loss in our Consolidated Statement of Income as the $280 million settlement with our insurance carriers represented an aggregate settlement associated with several matters, including Enron, Worldcom and other matters. See Part I, Item 3—Legal Proceedings in this Form 10-K for additional information about the Enron securities class action and related matters.

Income Taxes

The provisions for income taxes totaled $1.6 billion, $1.1 billion and $765 million in 2005, 2004 and 2003, respectively. These provisions resulted in effective tax rates of 32.5%, 32.0% and 30.2% for 2005, 2004 and 2003, respectively. The increases in the effective tax rates in 2005 and 2004 compared with the prior years were primarily due to higher levels of pre-tax income, which reduced the effect of certain permanent differences. See Note 16 to the Consolidated Financial Statements for additional information about income taxes.

Business Acquisitions and Dispositions

Capital Markets.    During 2004, we acquired three residential mortgage origination platforms for an aggregate cost of approximately $184 million. We believe these acquisitions add long-term value to our mortgage franchise by allowing further vertical integration of the business platform. Mortgage loans originated by the acquired companies are intended to provide a more cost-efficient source of loan product for our securitization pipeline. We sold our reverse mortgage originator in 2004 for approximately $42 million. During 2003, we acquired controlling interests in two mortgage loan originators for an aggregate cost of approximately $35 million. Net employees added as a result of these acquisitions and disposition totaled approximately 1,300 and 2,000 for 2004 and 2003, respectively.

Investment Management.    In October 2003, we purchased Neuberger as part of our strategic plan to build out our Investment Management business segment. The Neuberger acquisition increased our revenues from fee-based activities, allowing for reduced cross-cycle earnings volatility, while at the same time the acquisition has increased opportunities for revenue synergies across business segments. We purchased Neuberger for a net purchase price of approximately $2.5 billion, including equity consideration of $2.1 billion and cash consideration and incremental costs of $0.7 billion, and excluding cash and short-term investments acquired of $276 million.

In October 2003, we also acquired substantially all of the operating assets of Crossroads, a diversified private equity fund manager, which expanded our global private equity franchise. In January 2003, we acquired the fixed income asset

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

management business of Lincoln Capital Management, a fixed income asset management platform. The cost of these acquisitions aggregated $137 million.

These acquisitions were made as part of our strategic plan to build out our Investment Management business segment. On the dates of acquisition, employees associated with these entities aggregated approximately 1,400.

We operate in three business segments: Investment Banking, Capital Markets and Investment Management. These business segments generate revenues from institutional, corporate, government and high-net-worth individual clients across each of the revenue categories in the Consolidated Statement of Income. Net revenues also contain certain internal allocations, including funding costs and regional transfer pricing which are centrally managed.

The following table summarizes the net revenues of our business segments:

Business Segments

(1)

Includes the Real estate reconfiguration charge recognized in 2004 and 2003 which have not been allocated to our segments.

Investment Banking

(1)

Excludes Real estate reconfiguration charges.

The Investment Banking business segment is made up of Advisory Services and Global Finance activities that serve our corporate and government clients. The segment is organized into global industry groups—Communications, Consumer/Retailing, Financial Institutions, Financial Sponsors, Healthcare, Industrial, Media, Natural Resources, Power, Real Estate and Technology—that include bankers who deliver industry knowledge and expertise to meet clients' objectives. Specialized product groups within Advisory Services include M&A and restructuring. Global Finance serves our clients' capital raising needs through underwriting, private placements, leveraged finance and other activities associated with debt and equity products. Product groups are partnered with relationship managers in the global industry groups to provide comprehensive financial solutions for clients.

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Investment Banking Revenues⁴

Investment Banking revenues totaled $2.9 billion, $2.2 billion and $1.7 billion in 2005, 2004 and 2003, respectively. Investment Banking revenues increased 32% in 2005 compared with 2004, reflecting record Global Finance—Debt and Global Finance—Equity revenues and the highest level of Advisory Services revenues since fiscal 2000. Investment Banking revenues increased 27% in 2004 compared with 2003, reflecting significant revenue increases in Global Finance—Equity and Advisory Services.

Global Finance—Debt revenues were a record $1,304 million in 2005, increasing 30% over 2004 with global debt origination market volumes and our volumes increasing 13% and 8%, respectively, over the same period. Revenues in 2005 reflect strong global investment-grade underwriting, which benefited from continued low interest rates, strong investor demand across a flattening yield curve and credit spreads at historic average levels. Revenues in 2005 also benefited from a higher level of client-driven derivative and other capital market-related transactions with our investment banking clients providing fees of $318 million in 2005, compared with fees of $140 million in 2004. Our global debt origination ranking improved to number two for calendar 2005, up from number four for calendar 2004 while our global market share for publicly-reported debt origination was 6.6% in calendar year 2005 compared with 6.8% in calendar year 2004. Our debt origination fee backlog at November 30, 2005 was a record $219 million on lead volumes of $51 billion, up 48% and 38%, respectively, from November 30, 2004. Debt origination backlog may not be indicative of the level of future business due to the frequent use of the shelf registration process. Global Finance—Debt revenues were $1,002 million in 2004, up 2% compared with robust 2003 revenue levels. Our global debt origination volumes in 2004 rose 6% compared with 2003, consistent with the 6% increase in industry-wide global debt origination volumes over the same period, as clients continued to take advantage of low interest rates and tight credit spreads. Improved leveraged finance revenues in 2004 essentially offset a decline in high grade revenues. Our global debt origination ranking improved to number four for calendar 2004, up from number five for calendar 2003, while our market share declined slightly to 6.8% in calendar 2004 compared with 7.0% in calendar 2003.

Global Finance—Equity revenues grew 47% in 2005 to a record $824 million compared with 2004. Our publicly reported equity underwriting volumes rose 7% in 2005 compared with 2004 while industry-wide global equity origination market volumes remained relatively flat over the same period. In addition to our increased volume, our 2005 revenues also reflect a change in the mix of underwriting revenues with particular strength in initial public offerings. Although overall 2005 equity underwriting volumes industry-wide remained relatively flat, IPO and follow-on activity increased. Common stock underwriting activity in 2005 benefited from increased monetization activity by financial sponsors. We substantially increased our market share for publicly reported global equity underwriting transactions for the second consecutive year to 4.8% in calendar 2005 compared with 4.3% for calendar year 2004 and 3.3% in calendar 2003. Our equity-related fee backlog (for both filed and unfiled transactions) at November 30, 2005 was approximately $305 million on lead volume of $19 billion, up 9% and 46%, respectively, over November 30, 2004. Global Finance—Equity revenues grew 54% in 2004 compared with 2003 as improved investor confidence and corporate profitability drove improved equity origination volumes. Industry-wide equity origination volumes rose 48% in 2004 compared with 2003, while our equity origination volumes rose 51% in the same period.

(4)

Debt and equity underwriting volumes are based on full credit for single-book managers and equal credit for joint-book managers. Debt underwriting volumes include both publicly registered and Rule 144A issues of high-grade and high-yield bonds, sovereign, agency and taxable municipal debt, non-convertible preferred stock and mortgage- and asset-backed securities. Equity underwriting volumes include both publicly registered and Rule 144A issues of common stock and convertibles. Because publicly reported debt and equity underwriting volumes do not necessarily correspond to the amount of securities actually underwritten and do not include certain private placements and other transactions, and because revenue rates vary among transactions, publicly reported debt and equity underwriting volumes may not be indicative of revenues in a given period. Additionally, because Advisory Services volumes are based on full credit to each of the advisors in a transaction, and because revenue rates vary among transactions, Advisory Services volumes may not be indicative of revenues in a given period.

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LEHMAN BROTHERS HOLDINGS INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Advisory Services revenues were at our second highest level ever at $766 million in 2005, up 22% compared with 2004. Industry-wide completed and announced transaction volumes increased 31% and 56%, respectively, in 2005 compared with 2004 while our completed and announced volumes increased 24% and 98%, respectively, for the period. Increased M&A volumes benefited from stable equity markets, increased financial sponsor activity as well as improved world economies in 2005. Our global market share for publicly reported completed transactions declined to 13.8% for calendar 2005 compared with 15.5% in calendar year 2004. Our M&A fee backlog at November 30, 2005 was $247 million on volume of $236 billion, up 83% and 225%, respectively, over November 30, 2004. M&A advisory fees rose 65% in 2004 compared with 2003, as we substantially improved our M&A market position for completed transactions in calendar 2004 with a 15.5% market share, up from a 9.0% market share for calendar 2003. M&A completed market transaction volumes increased 34% in fiscal 2004, driven by an improved economy and higher stock market valuation.

Non-interest expenses rose 27% in 2005 compared with 2004, attributable to an increase in compensation and benefits expense related to improved performance, and higher non-personnel expenses related to increased business activity. Non-interest expenses rose 21% in 2004 compared with 2003, attributable to an increase in compensation and benefits expense related to improved performance coupled with higher non-personnel expenses—principally business development expenses.

Income before taxes was $855 million, $587 million and $401 million in 2005, 2004 and 2003, respectively, up 46% in both the 2005 and 2004 comparison periods. Pre-tax margin increased to 30% in 2005, up from 27% in 2004 and 23% in 2003.

Capital Markets