Underlying supplement no. 1220 To prospectus dated May 30, 2006 and prospectus supplement dated May 30, 2006 Registration Statement no. 333-134553 Dated April 3, 2008 Rule 424(b)(2)

LEHMAN BROTHERS HOLDINGS INC.

Basket Consisting of the S&P 500^® Index (SPX), the MSCI United Kingdom Index^SM (MXGB), the MSCI EM (Emerging Markets) Index (MXEF), the Dow Jones EURO STOXX 50^® Index (SX5E) and the NASDAQ-100 Index^® (NDX)

General

• Lehman Brothers Holdings Inc. may from time to time offer and sell notes linked to a basket of indices. This underlying supplement no. 1220 describes a basket of indices (the “Basket”) consisting of the S&P 500^® Index, the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index, the Dow Jones EURO STOXX 50^® Index and the NASDAQ-100 Index^®, which we refer to in this underlying supplement as Basket Indices. The specific terms for each series of notes will be included in a product supplement. A separate term sheet or pricing supplement, as the case may be, will describe terms that apply specifically to the notes. We refer to such term sheets and pricing supplements generally as terms supplements. You should read the base prospectus, the MTN prospectus supplement, the relevant product supplement and any other related prospectus supplement, term sheet or pricing supplement, including the description of the Basket of the S&P 500^® Index, the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index, the Dow Jones EURO STOXX 50^® Index and the NASDAQ-100 Index^® set forth in this underlying supplement, carefully before you invest in the notes. Any terms used herein but not defined herein shall have the meaning given to them in the base prospectus, the MTN prospectus supplement, the relevant product supplement or the relevant terms supplement. This underlying supplement may not be used to sell securities unless accompanied by the base prospectus, the MTN prospectus supplement, the relevant product supplement, the relevant terms supplement and any other related prospectus supplements.

Investing in notes linked to a Basket consisting of the S&P 500^® Index, the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index, the Dow Jones EURO STOXX 50^® Index and the NASDAQ-100 Index^® involves a number of risks. See “ Risk Factors” beginning on page US-1 in this underlying supplement no. 1220, “Risk Factors” in the relevant product supplement and “Key Risks” in the relevant terms supplement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the notes or passed upon the accuracy or the adequacy of this underlying supplement no. 1220, the accompanying base prospectus, the MTN prospectus supplement, the relevant product supplement, the relevant terms supplement or any other related prospectus supplements. Any representation to the contrary is a criminal offense.

LEHMAN BROTHERS

April 3, 2008

“Standard & Poor’s”, “S&P”, “S&P 500” and “Standard & Poor’s 500” are trademarks of McGraw-Hill, Inc. and are expected to be licensed for use by Lehman Brothers Inc. and sub-licensed for use by Lehman Brothers Holdings Inc. The notes, linked to the performance of the S&P 500^® Index, are not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of investing in the notes.

“MSCI United Kingdom Index^SM” is a service mark of MSCI, Inc. (“MSCI”), the successor to Morgan Stanley Capital International, Inc.) and is expected to be licensed for use by Lehman Brothers Holdings Inc. The notes, which are linked to the performance of the MSCI United Kingdom Index^SM, are not sponsored, endorsed, sold or promoted by MSCI, and MSCI makes no representation regarding the advisability of investing in the notes.

“MSCI EM (Emerging Markets) Index” (formerly, the MSCI Emerging Markets Index^SM) is compiled and maintained by MSCI and is expected to be licensed for use by Lehman Brothers Holdings Inc. The notes which are linked to the performance of the MSCI EM (Emerging Markets) Index, are not sponsored, endorsed, sold or promoted by MSCI and MSCI makes no representation regarding the advisability of investing in the notes.

“Dow Jones EURO STOXX 50^®” and “STOXX^®” are registered trademarks of STOXX Limited and have been licensed for use by Lehman Brothers and sub-licensed for use by Lehman Brothers Holdings Inc. The notes, linked to the performance of the Dow Jones EURO STOXX 50^® Index are not sponsored, endorsed, sold or promoted by STOXX Limited, and STOXX Limited makes no representation regarding the advisability of investing in the notes.

“NASDAQ-100^®”, “NASDAQ-100 Index^®” and “Nasdaq^®” are registered trademarks of The Nasdaq Stock Market, Inc. (“Nasdaq”) and have been licensed for use by Lehman Brothers and sub-licensed for use by Lehman Brothers Holdings Inc. The notes, linked to the performance of the NASDAQ-100 Index^® are not sponsored, endorsed, sold or promoted by Nasdaq, and Nasdaq makes no representation regarding the advisability of investing in the notes.

Table of Contents

Underlying Supplement
Risk Factors	US-1
The Basket	US-5
The S&P 500® Index	US-6
The MSCI United Kingdom IndexSM.	US-11
The MSCI EM (Emerging Markets) Index.	US-18
The Dow Jones EURO STOXX 50® Index	US-24
The NASDAQ-100 Index®	US-29
MTN Prospectus Supplement
Risk Factors	S-3
Description of the Notes	S-12
Supplemental United States Federal Income Tax Consequences	S-36
Certain ERISA Considerations	S-43
Plan of Distribution	S-44
Appendix A	A-1
Base Prospectus
Prospectus Summary	1
General Information	6
Cautionary Statement Regarding Forward-Looking Statements	6
Use of Proceeds	7
Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Stock Dividends	7
Description of Debt Securities	8
Description of Warrants	19
Description of Purchase Contracts	23
Description of Preferred Stock	27
Description of Depositary Shares	30
Description of Common Stock	32
Description of Units	34
Form, Exchange and Transfer	37
Book-Entry Procedures and Settlement	38
United States Federal Income Tax Consequences	40
Plan of Distribution	54
Certain ERISA Considerations	58
Where You Can Find More Information	58
Legal Matters	59
Experts	59

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This underlying supplement no. 1220, the relevant terms supplement, the relevant product supplement and the accompanying base prospectus and MTN prospectus supplement contain the terms of the notes. In making your investment decision, you should rely only on the information contained or incorporated by reference in this underlying supplement no. 1220, the relevant terms supplement, the relevant product supplement and the accompanying base prospectus and MTN prospectus supplement with respect to the notes offered and with respect to Lehman Brothers Holdings Inc. We have not authorized anyone to give you any additional or different information. The information in this underlying supplement no. 1220, the relevant terms supplement, the relevant product supplement and the accompanying base prospectus and MTN prospectus supplement may be accurate only as of the dates of each of these documents, respectively.

The notes described in this underlying supplement no. 1220, the relevant terms supplement, and the relevant product supplement are not appropriate for all investors, and involve important legal and tax consequences and investment risks, which should be discussed with your professional advisers. You should be aware that the regulations of the Financial Industry Regulatory Authority, Inc. and the laws of certain jurisdictions (including regulations and laws that require brokers to ensure that investments are suitable for their customers) may limit the availability of the notes. This underlying supplement no. 1220, the relevant terms supplement, the relevant product supplement and the accompanying base prospectus and MTN prospectus supplement do not constitute an offer to sell or a solicitation of an offer to buy the notes in any circumstances in which such offer or solicitation is unlawful.

In this underlying supplement no. 1220, the relevant terms supplement, the relevant product supplement and the accompanying base prospectus and MTN prospectus supplement, “we,” “us” and “our” refer to Lehman Brothers Holdings Inc., unless the context requires otherwise.

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RISK FACTORS

Your investment in notes linked to a Basket consisting of the S&P 500^® Index, the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index, the Dow Jones EURO STOXX 50^® Index and the NASDAQ-100 Index^® will involve certain risks. Investing in the notes is not equivalent to investing directly in the component stocks of a Basket Index. You should consider carefully the following discussion of risks before you decide that an investment in notes linked to the Basket is suitable for you. In addition, you should consider carefully the discussion of risks set forth in the relevant product supplement before you decide that an investment in the notes is suitable for you.

Each publisher may adjust its respective Basket Index in a way that affects its level and adversely affects the value of your note, and each publisher has no obligation to consider your interests.

Standard & Poor’s (“S&P”), a division of The McGraw-Hill Companies, Inc. and the publisher of the S&P 500^® Index, is responsible for calculating and maintaining the S&P 500^® Index. We are not affiliated with S&P in any way (except for licensing arrangements discussed below in “The S&P 500^® Index”) and have no way to control or predict its actions, including any errors in or discontinuation of disclosure regarding its methods or policies relating to the calculation of the S&P 500^® Index.

MSCI, Inc., the publisher of the MSCI United Kingdom Index^SM and the MSCI EM (Emerging Markets) Index, is responsible for calculating and maintaining the MSCI United Kingdom Index^SM and the MSCI EM (Emerging Markets) Index. We are not affiliated with MSCI in any way (except for licensing arrangements discussed below in “The MSCI United Kingdom Index^SM” and “The MSCI EM (Emerging Markets) Index”) and have no way to control or predict its actions, including any errors in or discontinuation of disclosure regarding its methods or policies relating to the calculation of the MSCI United Kingdom Index^SM and the MSCI EM (Emerging Markets) Index.

STOXX Limited, a joint venture between Deutsche Börse AG, Dow Jones & Company and SWX Swiss Exchange AG, and the publisher of the Dow Jones EURO STOXX 50^® Index, is responsible for calculating and maintaining the Dow Jones EURO STOXX 50^® Index. We are not affiliated with STOXX Limited in any way (except for licensing arrangements discussed below in “The Dow Jones EURO STOXX 50^® Index”) and have no way to control or predict its actions, including any errors in or discontinuation of disclosure regarding its methods or policies relating to the calculation of the Dow Jones EURO STOXX 50^® Index.

The Nasdaq Stock Market, Inc. (“Nasdaq”), the publisher of the NASDAQ-100 Index^®, is responsible for calculating and maintaining the NASDAQ-100 Index^®. We are not affiliated with Nasdaq in any way (except for licensing arrangements discussed below in “The NASDAQ-100 Index^®”) and have no way to control or predict its actions, including any errors in or discontinuation of disclosure regarding its methods or policies relating to the calculation of the NASDAQ-100 Index^®.

Each of S&P, MSCI, STOXX Limited and Nasdaq (each an “Index Sponsor” and collectively, the “Index Sponsors”) can add, delete or substitute the stocks underlying its Basket Index or make other methodological changes that could change the level of its Basket Index. You should realize that the changing of companies included in any Basket Index may affect such Basket Index, and in turn the Basket, as a newly added company may perform significantly better or worse than the company or companies it replaces. Additionally, each of the S&P, MSCI, STOXX Limited and Nasdaq may alter, discontinue or suspend calculation or dissemination of its Basket Index. Any of these actions could affect the level of the Basket and adversely affect the value of your notes. None of the S&P, MSCI, STOXX Limited and Nasdaq has any obligation to consider your interests in calculating or revising its Basket Index. See “The S&P 500^® Index”, “The MSCI United Kingdom Index^SM”, “The MSCI EM (Emerging Markets) Index”, “The Dow Jones EURO STOXX 50^® Index” and “The NASDAQ-100 Index^®.”

Neither Lehman Brothers Holdings Inc. nor any of its affiliates assumes any responsibility for the adequacy or accuracy of the information about the component indices or the publishers of such

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component indices contained in this underlying supplement or any public disclosure of information by such publishers. You, as an investor in the notes, should make your own investigation into the component indices and the publishers of such component indices.

We cannot control actions by the other companies whose stocks or other equity securities are represented in the Basket.

We are one of the companies that make up the S&P 500^® Index, but we are not affiliated with any of the other companies whose stock comprises the Basket Indices. As a result, we will have no ability to control the actions of such companies, including actions that could affect the value of the stocks underlying the Basket Indices or your notes. None of the money you pay us will go to any of the other companies represented in the Basket Indices and none of those companies will be involved in the offering of the notes in any way. Neither those companies nor we will have any obligation to consider your interests as a holder of the notes in taking any corporate actions that might affect the value of your notes.

The amount payable at maturity will not be adjusted, unless otherwise specified in the relevant terms supplement, for changes in exchange rates that might affect the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index or the Dow Jones EURO STOXX 50^® Index.

Although the stocks composing each of the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index or the Dow Jones EURO STOXX 50^® Index are traded in currencies other than U.S. dollars, and the notes, which are linked to the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index or the Dow Jones EURO STOXX 50^® Index, are denominated in U.S. dollars, the amount payable on the notes at maturity will not be adjusted, unless otherwise specified in the relevant terms supplement, for changes in the exchange rate between the U.S. dollar and each of the currencies in which the stocks composing the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index, or the Dow Jones EURO STOXX 50^® Index are denominated. Changes in exchange rates, however, may reflect changes in various non-U.S. economies that in turn may affect the amount payable on the notes at maturity. The amount we pay in respect of the notes on the maturity date, if any, will be determined solely in accordance with the procedures described in the relevant product supplement.

Notes linked to the MSCI EM (Emerging Markets) Index will have exposure to fluctuations in foreign exchange rates.

Because the MSCI EM (Emerging Markets) Index is denominated in U.S. dollars, but its components stocks are denominated in foreign currencies, you will have foreign currency exposure. The value of your notes will be affected by exchange rate fluctuations between the U.S. dollar and the currencies in which the stocks included in the MSCI EM (Emerging Markets) Index are based. Therefore, if the applicable currencies appreciate or depreciate relative to the U.S. dollar over the term of the notes, the value of your notes may increase or decrease at maturity.

You will have no shareholder rights in issuers of stocks underlying the Basket Indices.

Investing in the notes is not equivalent to investing in the securities underlying the Basket Indices. As a holder of the notes, you will not have voting rights or rights to receive dividends or other distributions or other rights that holders of the securities that make up any of the Basket Indices would have.

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Changes that affect the Basket Indices will affect the market value of the notes and the amount you will receive at maturity.

The Index Sponsors’ policies concerning (i) the calculation of the applicable Basket Index, (ii) additions, deletions or substitutions of the component stocks of the applicable Basket Index and (iii) the manner in which changes affecting the component stocks or their issuers, such as stock dividends, reorganizations or mergers, are reflected in the applicable Basket Index, could affect the Basket Indices and, therefore, could affect the amount payable on the notes at maturity, and the market value of the notes prior to maturity. The amount payable on the notes and their market value could also be affected if an Index Sponsor changes these policies, for example by changing the manner in which it calculates the applicable Basket Index, or if an Index Sponsor discontinues or suspends calculation or publication of the applicable Basket Index, in which case it may become difficult to determine the market value of the notes.

An investment in the notes is subject to risks associated with non-U.S. securities markets.

The stocks that constitute the MSCI United Kingdom Index^SM, the MSCI EM (Emerging Markets) Index and the Dow Jones EURO STOXX 50^® Index have been issued by non-U.S. companies. Investments in securities indexed to the value of such non-U.S. equity securities involve risks associated with the securities markets in those countries, including risks of volatility in those markets, governmental intervention in those markets and cross shareholdings in companies in certain countries. Also, there is generally less publicly available information about companies in some of these jurisdictions than about U.S. companies that are subject to the reporting requirements of the Securities and Exchange Commission, and generally non-U.S. companies are subject to accounting, auditing and financial reporting standards and requirements and securities trading rules different from those applicable to U.S. reporting companies.

The prices of securities in non-U.S. jurisdictions may be affected by political, economic, financial and social factors in such markets, including changes in a country’s government, economic and fiscal policies, currency exchange laws or other foreign laws or restrictions. Moreover, the economies in such countries may differ favorably or unfavorably from the economy of the United States in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources and self sufficiency. Such countries may be subjected to different and, in some cases, more adverse economic environments.

The securities markets on which the stocks of the companies included in the MSCI EM (Emerging Markets) Index are traded are not as large as the U.S. securities markets and have substantially less trading volume, which may result in a lack of liquidity and high price volatility relative to the U.S. securities markets. There is also a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of certain types of investors (including investment funds and other institutional investors) in these securities markets. As a result, the securities markets on which the stocks of the companies included in these indices are traded may be subject to significantly greater risk and price volatility than the U.S. securities markets.

There are risks in emerging markets.

The countries represented by the MSCI EM (Emerging Markets) Index include Argentina, Brazil, Chile, China, Columbia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand and Turkey, which are deemed emerging markets. Countries with emerging markets may have relatively unstable governments; may present risks of nationalization of businesses; may impose restrictions on foreign ownership, foreign currency exchange and the repatriation of assets; and may be less protective of property rights than more developed countries. The economies of countries with emerging markets may be based on only a few industries, may be highly vulnerable to changes in local, regional and global economic and trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates.

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Adverse changes in foreign currency exchange rates could negatively affect the value of the notes to the extent such adverse changes negatively impact the level of the Basket Indices.

To the extent that a stock included in a Basket Index is traded in a foreign currency and such stock’s price must be converted into a different currency in order to calculate the level of the Basket Index, an adverse change in the foreign exchange rate in which such stock is traded relative to the currency into which the stock’s price must be converted will negatively affect the level of that Basket index. Therefore, holders of the notes will be exposed to currency exchange risk with respect to each of the countries represented in such index or indices. Adverse changes in the level of a Basket Index will, in turn, negatively affect the amounts payable on the notes.

Of particular importance to potential currency exchange risks are:

• existing and expected rates of inflation;

• existing and expected interest rate levels;

• the balance of payments; and

• the extent of governmental surpluses or deficits between countries.

All of these factors are in turn sensitive to the monetary, fiscal and trade policies pursued by the governments of various component countries, the United States and other countries important to international trade and finance.

Many economic and market factors will impact the value of the notes; these factors interrelate in complex ways and the effect of any one factor may offset or magnify the effect of another factor.

In addition to the level of the Basket Indices on any day, the value of the notes will be affected by a number of economic and market factors that may either offset or magnify each other, including:

• the volatility or expected volatility of each of the Basket Indices or the securities underlying the indices;

• the time to maturity of the notes (and any associated “time premiums”)

• the dividend rate on the common stocks included in the Basket Indices;

• interest and yield rates in the market generally as well as in the markets of the stocks included in the Basket Indices;

• economic, financial, political, geographical, agricultural, meteorological, regulatory or judicial events that affect the securities underlying the Basket Indices or markets generally and which may affect the Basket Indices closing levels; and

• our creditworthiness, including actual or anticipated downgrades in our credit ratings.

Historical performance of the Basket Indices is not an indication of future performance.

You cannot predict the future performance of the Basket based on the historical performance of the Basket Indices. The level of the Basket may decrease such that you may not receive any return of your investment. If the Basket Return is negative, you will lose some or all of your investment at maturity.

Time differences between the cities where the component indices trade and New York City may create discrepancies in trading levels.

As a result of the time difference between the cities where the securities underlying the component indices trade and New York City (where the notes may trade), there may be discrepancies between the levels of the component indices and the trading prices of the notes. In addition, there may be periods when the foreign securities markets are closed for trading (for example during holidays in a foreign country), as a result of which the levels of the component indices remain unchanged for multiple trading days in New York City.

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THE BASKET

The Basket will consist of the five Basket Indices, which will be equally weighted unless otherwise specified in the relevant terms supplement. The level of the Basket will increase or decrease depending on the performance of the Basket Indices.

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THE S&P 500^® INDEX

We have derived all information contained in this underlying supplement no. 1220 regarding the S&P 500^® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, S&P. The S&P 500^® Index is offered and maintained by S&P. We have not independently verified such information. We make no representation or warranty as to the accuracy or completeness of such information.

You can obtain the level of the S&P 500^® Index at any time from the Bloomberg Financial Markets page “SPX <Index> <GO>” or from the S&P website at www.standardandpoors.com. Information from outside sources is not incorporated by reference in, and should not be considered part of, this underlying supplement no. 1220 or any terms supplement. We make no representation or warranty as to the accuracy or completeness of such information.

S&P 500^® Index Composition, Maintenance and Calculation

The S&P 500^® Index was developed by S&P and is calculated, maintained and published by S&P. The S&P 500^® Index is intended to provide a performance benchmark for the U.S. equity markets. The calculation of the level of the S&P 500^® Index (discussed below in further detail) is based on the relative value of the aggregate Market Value (as defined below) of the common stocks of 500 companies (the “Component Stocks”) as of a particular time as compared to the aggregate average Market Value of the common stocks of 500 similar companies during the base period of the years 1941 through 1943. Historically, the “Market Value” of any Component Stock was calculated as the product of the market price per share and the number of the then-outstanding shares of such Component Stock. As discussed below, on March 21, 2005, S&P began to use a new methodology to calculate the Market Value of the Component Stocks and on September 16, 2005, S&P completed its transition to the new calculation methodology. The 500 companies are not the 500 largest companies listed on the NYSE and not all 500 companies are listed on such exchange. S&P chooses companies for inclusion in the S&P 500^® Index with the objective of achieving a distribution by broad industry groupings that approximates the distribution of these groupings in the common stock population of the U.S. equity market. S&P may from time to time, in its sole discretion, add companies to, or delete companies from, the S&P 500^® Index to achieve the objectives stated above. Relevant criteria employed by S&P include the viability of the particular company, the extent to which that company represents the industry group to which it is assigned, the extent to which the company’s common stock is widely-held and the Market Value and trading activity of the common stock of that company.

On March 21, 2005, S&P began to calculate the S&P 500^® Index based on a half float-adjusted formula, and on September 16, 2005, the S&P 500^® Index became fully float-adjusted. S&P’s criteria for selecting stocks for the S&P 500^® Index will not be changed by the shift to float adjustment. However, the adjustment affects each company’s weight in the S&P 500^® Index (i.e., its Market Value).

Under float adjustment, the share counts used in calculating the S&P 500^® Index reflect only those shares that are available to investors, not all of a company’s outstanding shares. S&P defines three groups of shareholders whose holdings are subject to float adjustment:

• holdings by other publicly traded corporations, venture capital firms, private equity firms, strategic partners, or leveraged buyout groups;

• holdings by government entities, including all levels of government in the United States or foreign countries; and

• holdings by current or former officers and directors of the company, founders of the company, or family trusts of officers, directors, or founders, as well as holdings of trusts, foundations, pension funds, employee stock ownership plans, or other investment vehicles associated with and controlled by the company.

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However, treasury stock, stock options, restricted shares, equity participation units, warrants, preferred stock, convertible stock, and rights are not part of the float. In cases where holdings in a group exceed 10% of the outstanding shares of a company, the holdings of that group will be excluded from the float-adjusted count of shares to be used in the S&P 500^® Index calculation. Mutual funds, investment advisory firms, pension funds, or foundations not associated with the company and investment funds in insurance companies, shares of a United States company traded in Canada as “exchangeable shares,” shares that trust beneficiaries may buy or sell without difficulty or significant additional expense beyond typical brokerage fees, and, if a company has multiple classes of stock outstanding, shares in an unlisted or non-traded class if such shares are convertible by shareholders without undue delay and cost, are also part of the float.

For each stock, an investable weight factor (“IWF”) is calculated by dividing the available float shares, defined as the total shares outstanding less shares held in one or more of the three groups listed above where the group holdings exceed 10% of the outstanding shares, by the total shares outstanding. (On March 21, 2005, the S&P 500^® Index moved halfway to float adjustment, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P 500^® Index between March 21, 2005 and September 16, 2005 was 0.90. On September 16, 2005, S&P began to calculate the S&P 500^® Index on a fully float-adjusted basis, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P 500^® Index on and after September 16, 2005 is 0.80.) The float-adjusted S&P 500^® Index is calculated by dividing the sum of the IWF multiplied by both the price and the total shares outstanding for each stock by the index divisor. For companies with multiple classes of stock, S&P calculates the weighted average IWF for each stock using the proportion of the total company market capitalization of each share class as weights.

As of the date of this underlying supplement, the S&P 500^® Index is calculated using a base-weighted aggregate methodology: the level of the S&P 500^® Index reflects the total Market Value of all 500 Component Stocks relative to the S&P 500^® Index’s base period of 1941-43 (the “Base Period”).

An indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time.

The actual total Market Value of the Component Stocks during the Base Period has been set equal to an indexed value of 10. This is often indicated by the notation 1941-43=10. In practice, the daily calculation of the S&P 500^® Index is computed by dividing the total Market Value of the Component Stocks by a number called the Index Divisor. By itself, the Index Divisor is an arbitrary number. However, in the context of the calculation of the S&P 500^® Index, it is the only link to the original Base Period level of the S&P 500^® Index. The Index Divisor keeps the S&P 500^® Index comparable over time and is the manipulation point for all adjustments to the S&P 500^® Index (“Index Maintenance”).

Index Maintenance includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price adjustments due to company restructurings or spinoffs.

To prevent the level of the S&P 500^® Index from changing due to corporate actions, all corporate actions which affect the total Market Value of the S&P 500^® Index require an Index Divisor adjustment. By adjusting the Index Divisor for the change in total Market Value, the level of the S&P 500^® Index remains constant. This helps maintain the level of the S&P 500^® Index as an accurate barometer of stock market performance and ensures that the movement of the S&P 500^® Index does not reflect the corporate actions of individual companies in the S&P 500^® Index. All Index Divisor adjustments are made after the close of trading and after the calculation of the S&P 500^® Index closing level.

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The table below summarizes the types of Index maintenance adjustments and indicates whether or not an Index Divisor adjustment is required.

Type of Corporate Action	Comments	Divisor Adjustment
Company added/ deleted	Net change in market value determines divisor adjustment.	Yes
Change in shares outstanding	Any combination of secondary issuance, share repurchase or buy back — share counts revised to reflect change.	Yes
Stock split	Share count revised to reflect new count. Divisor adjustment is not required since the share count and price changes are offsetting.	No
Spin-off	If spun-off company is not being added to the index, the divisor adjustment reflects the decline in index market value (i.e., the value of the spun-off unit).	Yes
Spin-off	Spun-off company added to the index, no company removed from the index.	No
Spin-off	Spun-off company added to the index, another company removed to keep number of names fixed. Divisor adjustment reflects deletion.	Yes
Change in IWF due to a corporate action or a purchase or sale by an inside holder.	Increasing (decreasing) the IWF increases (decreases) the total market value of the index. The divisor change reflects the change in market value caused by the change to an IWF.	Yes
Special Dividend	When a company pays a special dividend the share price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in index market value.	Yes
Rights offering	Each shareholder receives the right to buy a proportional number of additional shares at a set (often discounted) price. The calculation assumes that the offering is fully subscribed. Divisor adjustment reflects increase in market cap measured as the shares issued multiplied by the price paid.	Yes

Stock splits and stock dividends do not affect the Index Divisor of the S&P 500^® Index, because following a split or dividend, both the stock price and number of shares outstanding are adjusted by S&P so that there is no change in the Market Value of the Component Stock. All stock split and dividend adjustments are made after the close of trading on the day before the ex-date.

Each of the corporate events exemplified in the table requiring an adjustment to the Index Divisor has the effect of altering the Market Value of the Component Stock and consequently of altering the aggregate Market Value of the Component Stocks (the “Post-Event Market Value”). In order that the level of the S&P 500^® Index not be affected by the altered Market Value (whether increase or decrease) of the affected Component Stock, a new Index Divisor (“New Divisor”) is derived as follows, where “Old Divisor” is the Index Divisor before the corporate event and “Pre-Event Market Value” is the market value of the component stocks before the corporate event:

New Divisor	=	Old Divisor	x	Post-Event Market Value
				Pre-Event Market Value

Changes in a company’s shares outstanding of 5% or more due to mergers, acquisitions, public offerings, private placements, tender offers, Dutch auctions or exchange offers are made as soon as

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reasonably possible. All other changes of 5% or more (due to, for example, company stock repurchases, redemptions, exercise of options, warrants, subscription rights, conversion of preferred stock, notes, debt, equity participation units or other recapitalizations) are made weekly and are announced on Tuesdays for implementation after the close of trading on Wednesday. Changes of less than 5% are accumulated and made quarterly on the third Friday of March, June, September and December, and are usually announced two days prior.

IWFs are reviewed annually based on the most recently available data filed with various regulators and exchanges. Revised IWFs are applied on the third Friday of September. Changes in IWFs resulting from corporate actions which exceed 10 percentage points will be implemented as soon as possible; changes of less than 10 percentage points are implemented at the next annual review.

Discontinuation of the S&P 500^® Index; Alteration of Method of Calculation

S&P has no obligation to continue to publish the S&P 500^® Index, and may discontinue publication of the S&P 500^® Index at any time in its sole discretion. If S&P discontinues publication of the S&P 500^® Index and S&P or another entity publishes a successor or substitute index that the calculation agent determines, in its sole discretion, to be comparable to the discontinued Index (such index being referred to herein as a “S&P 500^® successor index”), then any Index closing level will be determined by reference to the level of such S&P 500^® successor index at the close of trading on the NYSE, the AMEX, the NASDAQ National Market or the relevant exchange or market for the S&P 500^® successor index on each relevant Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date or dates as set forth in the relevant terms supplement.

Upon any selection by the calculation agent of an S&P 500^® successor index, the calculation agent will cause written notice thereof to be promptly furnished to the trustee, to us and to the holders of the notes.

If S&P discontinues publication of the S&P 500^® Index prior to, and such discontinuation is continuing on, a Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date as set forth in the relevant terms supplement, and the calculation agent determines, in its sole discretion, that no S&P 500^® successor index is available at such time, or the calculation agent has previously selected an S&P 500^® successor index and publication of such S&P 500^® successor index is discontinued prior to, and such discontinuation is continuing on, such Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date, or if S&P (or the publisher of any S&P 500^® successor index) fails to calculate and publish a closing level for the S&P 500^® Index (or any S&P 500^® successor index) on any date when it would ordinarily do so in accordance with its customary practice, then the calculation agent will determine the Index closing level for such date. The Index closing level will be computed by the calculation agent in accordance with the formula for and method of calculating the S&P 500^® Index or S&P 500^® successor index, as applicable, last in effect prior to such discontinuation, or failure to calculate or publish a closing level for the index, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently composing the S&P 500^® Index or S&P 500^® successor index, as applicable. Notwithstanding these alternative arrangements, discontinuation of the publication or failure to calculate or publish the closing level of the S&P 500^® Index may adversely affect the value of the notes.

As used herein, “closing price” of a security, on any particular day, means the last reported sales price for that security on the relevant exchange at the scheduled weekday closing time of the regular trading session of the relevant exchange. If, however, the security is not listed or traded on a bulletin board, then the closing price of the security will be determined using the average execution price per share that an affiliate of Lehman Brothers Holdings Inc. pays or receives upon the purchase or sale of the security used to hedge Lehman Brothers Holdings Inc.’s obligations under the notes. The “relevant exchange” for any security (or any combination thereof then underlying the S&P 500^® Index or any successor index) means the primary exchange, quotation system (which includes bulletin board services) or other market of trading for such security.

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If at any time the method of calculating the S&P 500^® Index or an S&P 500^® successor index, or the level thereof, is changed in a material respect, or if the S&P 500^® Index or an S&P 500^® successor index is in any other way modified so that the S&P 500^® Index or such S&P 500^® successor index does not, in the opinion of the calculation agent, fairly represent the level of the S&P 500^® Index or such S&P 500^® successor index had such changes or modifications not been made, then the calculation agent will, at the close of business in New York City on each date on which the S&P 500^® Index closing level is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a level of a stock index comparable to the S&P 500^® Index or such S&P 500^® successor index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the Index closing level with reference to the S&P 500^® Index or such S&P 500^® successor index, as adjusted. Accordingly, if the method of calculating the S&P 500^® Index or a S&P 500^® successor index is modified so that the level of the S&P 500^® Index or such S&P 500^® successor index is a fraction of what it would have been if there had been no such modification (e.g., due to a split in the S&P 500^® Index), then the calculation agent will adjust its calculation of the S&P 500^® Index or such S&P 500^® successor index in order to arrive at a level of the S&P 500^® Index or such S&P 500^® successor index as if there had been no such modification (e.g., as if such split had not occurred).

License Agreement with S&P

Lehman Brothers Holdings Inc. is expected to enter into a non-exclusive license agreement with S&P, which grants Lehman Brothers Holdings Inc. and certain of its affiliated or subsidiary companies a license, in exchange for a fee, to use the S&P 500^® Index in connection with certain securities, including the notes.

The notes are not sponsored, endorsed, sold or promoted by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., which we refer to as S&P. S&P makes no representation or warranty, express or implied, to the owners of the notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly, or the ability of the S&P 500^® Index to track general stock market performance. S&P’s only relationship to Lehman Brothers Holdings Inc. is the licensing of certain trademarks and trade names of S&P without regard to Lehman Brothers Holdings Inc. or the notes. S&P has no obligation to take the needs of Lehman Brothers Holdings Inc. or the holders of the notes into consideration in determining, composing or calculating the S&P 500^® Index. S&P is not responsible for and has not participated in the determination of the timing, price or quantity of the notes to be issued or in the determination or calculation of the amount due at maturity of the notes. S&P has no obligation or liability in connection with the administration, marketing or trading of the notes.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500^® INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LEHMAN BROTHERS HOLDINGS INC., HOLDERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500^® INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500^® INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

“STANDARD & POOR’S^®”, “S&P^®”, AND “S&P 500^®” ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. AND ARE EXPECTED TO BE LICENSED FOR USE BY LEHMAN BROTHERS INC. AND SUB-LICENSED FOR USE BY LEHMAN BROTHERS HOLDINGS INC. THIS TRANSACTION IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P AND S&P MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF PURCHASING ANY OF THE NOTES.

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THE MSCI UNITED KINGDOM INDEX^SM

We have derived all information regarding the MSCI United Kingdom Index^SM contained in this underlying supplement no. 1220 including, without limitation, its make-up, method of calculation, and changes in its components, from the MSCI Global Investable Market Indices Methodology Book published by MSCI and other publicly available information. Such information reflects the policies of, and is subject to change by, MSCI. We have not independently verified such information. We make no representation or warranty as to the accuracy or completeness of such information.

You can obtain the level of MSCI United Kingdom Index^SM at any time from the Bloomberg Financial Markets page “MXGB <Index> <Go>” or from the MSCI web site at www.mscibarra.com. Information from outside sources is not incorporated by reference in, and should not be considered part of, this underlying supplement no. 1220 or any terms supplement. We make no representation or warranty as to the accuracy or completeness of such information.

MSCI United Kingdom Index^SM Composition and Calculation

The MSCI United Kingdom Index^SM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the United Kingdom. It has a base date of December 31, 1969. The MSCI United Kingdom Index^SM is calculated in Pounds Sterling on a real time basis and disseminated every 15 seconds during market trading hours. As of April 1, 2008 the five largest sector weights were: Financials (23.903%), Energy (18.062%), Consumer Staples (13.298%), Materials (12.165%) and Telecommunication Services (7.681%).

The Index is part of the MSCI Equity Indices series. MSCI aims to include in its indices 85% of the free float-adjusted market capitalization in each industry sector of the United Kingdom.

MSCI recently announced changes to the methodology used in its MSCI International Equity Indices. The current MSCI Standard and MSCI Small Cap Indices, along with the other MSCI equity indices based on them, are transitioning to the Global Investable Market Indices methodology described below. The first phase of the transition of the MSCI Standard Indices, which include the MSCI United Kingdom Index^SM, was completed on November 30, 2007. At the end of the transition period (May 30, 2008), the current MSCI Standard Indices will be composed of the MSCI Large Cap and Mid Cap Indices. The current MSCI Small Cap Index will transition to the MSCI Small Cap Index resulting from the new methodology. Together, the relevant MSCI Large Cap, Mid Cap and Small Cap Indices will make up the MSCI Investable Market Index for each country, composite, sector, and style index that MSCI offers.

Constructing the MSCI Global Investable Market Indices

MSCI undertakes an index construction process, which involves: (i) defining the Equity Universe; (ii) determining the Market Investable Equity Universe for each market; (iii) determining market capitalization size segments for each market; (iv) applying Index Continuity Rules for the MSCI Standard Index; (v) creating style segments within each size segment within each market; and (vi) classifying securities under the Global Industry Classification Standard (the “GICS”).

Defining the Equity Universe

(i) Identifying Eligible Equity Securities: The Equity Universe initially looks at securities listed in any of the countries in the MSCI Global Index Series, which will be classified as either Developed Markets (“DM”) or Emerging Markets (“EM”). All listed equity securities, or listed securities that exhibit characteristics of equity securities, except mutual funds, ETFs, equity derivatives, limited partnerships, and most investment trusts, are eligible for inclusion in the Equity Universe. Real Estate Investment Trusts (“REITs”) in some countries and certain income trusts in Canada are also eligible for inclusion.

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(ii) Country Classification of Eligible Securities: Each company and its securities (i.e., share classes) are classified in one and only one country, which allows for a distinctive sorting of each company by its respective country.

Determining the Market Investable Equity Universes

A Market Investable Equity Universe for a market is derived by applying investability screens to individual companies and securities in the Equity Universe that are classified in that market. A market is equivalent to a single country, except in DM Europe, where all DM countries in Europe are aggregated into a single market for index construction purposes. Subsequently, individual DM Europe country indices within the MSCI Europe Index are derived from the constituents of the MSCI Europe Index under the Global Investable Market Indices methodology.

The investability screens used to determine the Investable Equity Universe in each market are as follows:

(i) Equity Universe Minimum Size Requirement: This investability screen is applied at the company level. In order to be included in a Market Investable Equity Universe, a company must have the required minimum full market capitalization.

(ii) Equity Universe Minimum Float-Adjusted Market Capitalization Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have a free float-adjusted market capitalization equal to or higher than 50% of the Equity Universe Minimum Size Requirement.

(iii) DM and EM Minimum Liquidity Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have adequate liquidity. The Annualized Traded Value Ratio (“ATVR”), a measure that offers the advantage of screening out extreme daily trading volumes and taking into account the free float-adjusted market capitalization size of securities, is used to measure liquidity. In the calculation of the ATVR, the trading volumes in depository receipts associated with that security, such as ADRs or GDRs, are also considered. A minimum liquidity level of 20% ATVR is required for inclusion of a security in a Market Investable Equity Universe of a Developed Market, and a minimum liquidity level of 15% ATVR is required for inclusion of a security in a Market Investable Equity Universe of an Emerging Market.

(iv) Global Minimum Foreign Inclusion Factor Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security’s Foreign Inclusion Factor (“FIF”) must reach a certain threshold. The FIF of a security is defined as the proportion of shares outstanding that is available for purchase in the public equity markets by international investors. This proportion accounts for the available free float of and/or the foreign ownership limits applicable to a specific security (or company). In general, a security must have an FIF equal to or larger than 0.15 to be eligible for inclusion in a Market Investable Equity Universe.

(v) Minimum Length of Trading Requirement: This investability screen is applied at the individual security level. For an initial public offering (“IPO”) to be eligible for inclusion in a Market Investable Equity Universe, the new issue must have started trading at least four months before the implementation of the initial construction of the index or at least three months before the implementation of a Semi-Annual Index Review. This requirement is applicable to small new issues in all markets. Large IPOs are not subject to the Minimum Length of Trading Requirement and may be included in a Market Investable Equity Universe and the Standard Index outside of a Quarterly or Semi-Annual Index Review.

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Defining Market Capitalization Size Segments for Each Market

Once a Market Investable Equity Universe is defined, it is segmented into the following size-based indices:

• Investable Market Index (Large + Mid + Small)

• Standard Index (Large + Mid)

• Large Cap Index

• Mid Cap Index

• Small Cap Index

Creating the Size Segment Indices in each market involves the following steps: (i) defining the Market Coverage Target Range for each size segment; (ii) determining the Global Minimum Size Range for each size segment; (iii) determining the Market Size-Segment Cutoffs and associated Segment Number of Companies; (iv) assigning companies to the size segments; and (v) applying final size-segment investability requirements.

Index Continuity Rules for the Standard Indices

In order to achieve index continuity, as well as provide some basic level of diversification within a market index, notwithstanding the effect of other index construction rules contained herein, a minimum number of five constituents will be maintained for a DM Standard Index and a minimum number of three constituents will be maintained for an EM Standard Index.

Creating Style Indices within Each Size Segment

All securities in the investable equity universe are classified into Value or Growth segments using the MSCI Global Value and Growth methodology.

Classifying Securities under the Global Industry Classification Standard

All securities in the Global Investable Equity Universe are assigned to the industry that best describes their business activities. To this end, MSCI has designed, in conjunction with Standard & Poor’s, the Global Industry Classification Standard. Under the GICS, each company is assigned uniquely to one sub-industry according to its principal business activity. Therefore, a company can belong to only one industry grouping at each of the four levels of the GICS.

MSCI United Kingdom Index^SM Maintenance

The MSCI Global Investable Market Indices are maintained with the objective of reflecting the evolution of the underlying equity markets and segments on a timely basis, while seeking to achieve index continuity, continuous investability of constituents and replicability of the indices, and index stability and low index turnover.

In particular, index maintenance involves:

(i) Semi-Annual Index Reviews (“SAIRs”) in May and November of the Size Segment and Global Value and Growth Indices which include:

• Updating the indices on the basis of a fully refreshed Equity Universe.

• Taking buffer rules into consideration for migration of securities across size and style segments.

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• Updating FIFs and Number of Shares (“NOS”).

(ii) Quarterly Index Reviews (“QIRs”) in February and August of the Size Segment Indices aimed at:

• Including significant new eligible securities (such as IPOs that were not eligible for earlier inclusion) in the index.

• Allowing for significant moves of companies within the Size Segment Indices, using wider buffers than in the SAIR.

• Reflecting the impact of significant market events on FIFs and updating NOS.

(iii) Ongoing event-related changes. Changes of this type are generally implemented in the indices as they occur. Significantly large IPOs are included in the indices after the close of the company’s tenth day of trading.

Transition

MSCI will transition the current MSCI Standard Index, the Small Cap Index and all indices derived from the MSCI Standard Index to the Global Investable Market Indices methodology described above.

All indices that are constructed with the Standard Indices as their basis, such as the GDP-weighted indices, 10/40 Indices and other custom indices, High Dividend Yield Indices, the MSCI Global Value and Growth Indices, etc., will continue to be derived from the Standard Indices throughout the transition.

The second phase of the transition of the MSCI Standard and the MSCI Small Cap Indices to the MSCI Global Investable Market Indices methodology will take place on May 30, 2008 (the first phase having been completed on November 30, 2007). The final additions and deletions of constituents for the second phase will be announced at least four weeks in advance of their implementation in the Standard and Small Cap Indices. All indices derived from the MSCI Standard Indices will follow the two-phase transition, except for the MSCI Euro and Pan Euro Indices which were transitioned in one phase on November 30, 2007. The transition will be synchronized for all markets and composites.

During the transition period, MSCI will be producing the MSCI Provisional Standard and Provisional Small Cap Indices to assist investors in understanding the changes that would occur if the Global Investable Market Indices methodology were immediately implemented in the current MSCI Standard and Small Cap Indices. The Provisional Indices also provide increased flexibility to current investors who wish to transition to the Global Investable Market Indices methodology on their own schedule.

The Provisional Standard and Provisional Small Cap Indices and the new Size Segment and Style Indices that will be created based on this methodology are official MSCI indices and, as such, can be used for a variety of purposes, including as the basis for new investment mandates and for investment vehicles such as passive mutual funds, exchange traded funds and listed and over-the-counter derivative contracts.

Reflecting Constituent Changes in the Standard Indices at the Transition Points

In the first phase of the transition, which was completed on November 30, 2007:

• After rebalancing the Provisional Standard Indices as per the SAIR, they were compared with the relevant Standard Indices.

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• All companies that were in the Provisional Standard Index but not in the corresponding Standard Index were added to the Standard Index at half of their free float-adjusted market capitalization, and all companies that were not in the Provisional Standard Index but were in the corresponding Standard Index were retained in the Standard Index but at only half of their free float-adjusted market capitalization.

In the second and final phase in May 2008:

• The Provisional Standard Indices will be rebalanced.

• Any and all differences between the rebalanced Provisional Standard Index and the Standard Index will be fully implemented in the Standard Indices.

The transition of the Small Cap Indices will be synchronized with the transition of the Standard Indices, following the same timeline and approach.

Discontinuation of the MSCI United Kingdom Index^SM; Alteration of Method of Calculation

MSCI has no obligation to continue to publish the MSCI United Kingdom Index^SM, and may discontinue publication of the MSCI United Kingdom Index ^SM at any time in its sole discretion. If MSCI discontinues publication of the MSCI United Kingdom Index^SM and MSCI or another entity publishes a successor or substitute index that the calculation agent determines, in its sole discretion, to be comparable to the discontinued Index (such index being referred to herein as a “MSCI United Kingdom Index^SM successor index”), then any Index closing level will be determined by reference to the level of such MSCI United Kingdom Index ^SM successor index at the close of trading on the relevant exchange or market for the MSCI United Kingdom Index^SM successor index on each relevant Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date or dates as set forth in the relevant terms supplement.

Upon any selection by the calculation agent of a MSCI United Kingdom Index^SM successor index, the calculation agent will cause written notice thereof to be promptly furnished to the trustee, to us and to the holders of the notes.

If MSCI discontinues publication of the MSCI United Kingdom Index^SM prior to, and such discontinuation is continuing on, a Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date as set forth in the relevant terms supplement, and the calculation agent determines, in its sole discretion, that no MSCI United Kingdom Index^SM successor index is available at such time, or the calculation agent has previously selected a MSCI United Kingdom Index^SM successor index and publication of such MSCI United Kingdom Index^SM successor index is discontinued prior to, and such discontinuation is continuing on, such Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date, or if MSCI (or the publisher of any MSCI United Kingdom Index^SM successor index) fails to calculate and publish a closing level for the MSCI United Kingdom Index^SM (or any MSCI United Kingdom Index^SM successor index) on any date when it would ordinarily do so in accordance with its customary practice, then the calculation agent will determine the Index closing level for such date. The Index closing level will be computed by the calculation agent in accordance with the formula for and method of calculating the MSCI United Kingdom Index^SM or MSCI United Kingdom Index^SM successor index, as applicable, last in effect prior to such discontinuation, or failure to calculate or publish a closing level for the index, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently composing the MSCI United Kingdom Index ^SM or MSCI United Kingdom Index^SM successor index, as applicable. Notwithstanding these alternative arrangements, discontinuation of the publication or failure to calculate or publish the closing level of the MSCI United Kingdom Index^SM may adversely affect the value of the notes.

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As used herein, “closing price” of a security, on any particular day, means the last reported sales price for that security on the relevant exchange at the scheduled weekday closing time of the regular trading session of the relevant exchange. If, however, the security is not listed or traded on a bulletin board, then the closing price of the security will be determined using the average execution price per share that an affiliate of Lehman Brothers Holdings Inc. pays or receives upon the purchase or sale of the security used to hedge Lehman Brothers Holdings Inc.’ obligations under the notes. The “relevant exchange” for any security (or any combination thereof then underlying the MSCI United Kingdom Index^SM or any successor index) means the primary exchange, quotation system (which includes bulletin board services) or other market of trading for such security.

If at any time the method of calculating the MSCI United Kingdom Index^SM or a MSCI United Kingdom Index^SM successor index, or the level thereof, is changed in a material respect, or if the MSCI United Kingdom Index^SM or a MSCI United Kingdom Index^SM successor index is in any other way modified so that the MSCI United Kingdom Index^SM or such MSCI United Kingdom Index^SM successor index does not, in the opinion of the calculation agent, fairly represent the level of the MSCI United Kingdom Index^SM or such MSCI United Kingdom Index^SM successor index had such changes or modifications not been made, then the calculation agent will, at the close of business in New York City on each date on which the MSCI United Kingdom Index^SM closing level is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a level of a stock index comparable to the MSCI United Kingdom Index^SM or such MSCI United Kingdom Index^SM successor index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the Index closing level with reference to the MSCI United Kingdom Index^SM or such MSCI United Kingdom Index^SM successor index, as adjusted. Accordingly, if the method of calculating the MSCI United Kingdom Index^SM or a MSCI United Kingdom Index^SM successor index is modified so that the level of the MSCI United Kingdom Index^SM or such MSCI United Kingdom Index^SM successor index is a fraction of what it would have been if there had been no such modification (e.g., due to a split in the MSCI United Kingdom Index ^SM), then the calculation agent will adjust its calculation of the MSCI United Kingdom Index^SM or such MSCI United Kingdom Index^SM successor index in order to arrive at a level of the MSCI United Kingdom Index^SM or such MSCI United Kingdom Index^SM successor index as if there had been no such modification (e.g., as if such split had not occurred).

License Agreement with MSCI

Lehman Brothers Holdings Inc. is expected to enter into a non-exclusive license agreement with MSCI, providing for the license to Lehman Brothers Holdings Inc. and certain of its affiliated or subsidiary companies, in exchange for a fee, of the right to use the MSCI United Kingdom Index^SM in connection with certain products, including the notes.

The notes are not sponsored, endorsed, sold or promoted by MSCI, any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI index (collectively, the “MSCI Parties”). The MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names are service marks of MSCI or its affiliates and have been licensed for use for certain purposes by Lehman Brothers Holdings. Neither MSCI nor any other party makes any representation or warranty, express or implied to the owners of the notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly, or the ability of the MSCI United Kingdom Index^SM to track general stock market performance. MSCI is the licensor of certain trademarks, service marks and trade names of MSCI and of MSCI United Kingdom Index^SM which index is determined, composed and calculated by MSCI without regard to the issuer of these notes. MSCI has no obligation to take the needs of the issuer of these notes or the owners of these notes into consideration in determining, composing or calculating the MSCI United Kingdom Index^SM. MSCI is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of the notes to be issued or in the determination or calculation of the equation by which the notes are to be converted into cash. Neither MSCI nor any other party has an obligation or liability to owners of these notes in connection with the administration, marketing or trading of the notes.

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ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NEITHER MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE’S CUSTOMERS AND COUNTERPARTIES, OWNERS OF OR THE PRODUCTS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEXES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MSCI OR ANY OTHER PARTY HAVE LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

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THE MSCI EM (EMERGING MARKETS) INDEX

We have derived all information regarding the MSCI EM (Emerging Markets) Index (formerly, the MSCI Emerging Markets Index^SM) contained in this underlying supplement no. 1220 including, without limitation, its make-up, method of calculation, and changes in its components, from the MSCI Global Investable Market Indices Methodology Book published by MSCI and other publicly available information. Such information reflects the policies of, and is subject to change by, MSCI. We have not independently verified such information. We make no representation or warranty as to the accuracy or completeness of such information.

You can obtain the level of the MSCI EM (Emerging Markets) Index at any time from the Bloomberg Financial Markets page “MXEF <Index> <GO>” or from the MSCI website at www.mscibarra.com. Information from outside sources is not incorporated by reference in, and should not be considered a part of, this underlying supplement no. 1220 or any terms supplement. We make no representation or warranty as to the accuracy or completeness of such information.

MSCI EM (Emerging Markets) Index Composition and Calculation

The MSCI EM (Emerging Markets) Index (the “Index”) is a free float-adjusted market capitalization index that is designed to measure the performance of certain equity market performance of emerging markets. It has a base date of December 31, 1987 and had on that date an initial value of 100. The MSCI EM (Emerging Markets) Index is calculated in U.S. dollars on a real time basis and disseminated every 60 seconds during market trading hours.

As of April 1, 2008, the Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand and Turkey. As of April 1, 2008 the five largest sector weights were: Financials (20.815%), Energy (17.463%), Materials (16.117%), Telecommunication Services (11.577%) and Information Technology (10.789%). The Index contained 938 constituents with a total market capitalization of US$3,295,058 million.

The Index is part of the MSCI Equity Indices series. MSCI aims to include in its indices 85% of the free float-adjusted market capitalization in each industry sector, within each country included in an index.

MSCI recently announced changes to the methodology used in its MSCI International Equity Indices. The current MSCI Standard and MSCI Small Cap Indices, along with the other MSCI equity indices based on them, are transitioning to the Global Investable Market Indices methodology described below. The first phase of the transition of the MSCI Standard Indices, which include the MSCI EM (Emerging Markets) Index, was completed on November 30, 2007. At the end of the transition period (May 30, 2008), the current MSCI Standard Indices will be composed of the MSCI Large Cap and Mid Cap Indices. The current MSCI Small Cap Index will transition to the MSCI Small Cap Index resulting from the new methodology. Together, the relevant MSCI Large Cap, Mid Cap and Small Cap Indices will make up the MSCI Investable Market Index for each country, composite, sector, and style index that MSCI offers.

Constructing the MSCI Global Investable Market Indices

MSCI undertakes an index construction process, which involves: (i) defining the Equity Universe; (ii) determining the Market Investable Equity Universe for each market; (iii) determining market capitalization size segments for each market; (iv) applying Index Continuity Rules for the MSCI Standard Index; (v) creating style segments within each size segment within each market; and (vi) classifying securities under the Global Industry Classification Standard (the “GICS”).

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Defining the Equity Universe

(i) Identifying Eligible Equity Securities: The Equity Universe initially looks at securities listed in any of the countries in the MSCI Global Index Series, which will be classified as either Developed Markets (“DM”) or Emerging Markets (“EM”). All listed equity securities, or listed securities that exhibit characteristics of equity securities, except mutual funds, ETFs, equity derivatives, limited partnerships, and most investment trusts, are eligible for inclusion in the Equity Universe. Real Estate Investment Trusts (“REITs”) in some countries and certain income trusts in Canada are also eligible for inclusion.

(ii) Country Classification of Eligible Securities: Each company and its securities (i.e., share classes) are classified in one and only one country, which allows for a distinctive sorting of each company by its respective country.

Determining the Market Investable Equity Universes

A Market Investable Equity Universe for a market is derived by applying investability screens to individual companies and securities in the Equity Universe that are classified in that market. A market is equivalent to a single country, except in DM Europe, where all DM countries in Europe are aggregated into a single market for index construction purposes. Subsequently, individual DM Europe country indices within the MSCI Europe Index are derived from the constituents of the MSCI Europe Index under the Global Investable Market Indices methodology.

The investability screens used to determine the Investable Equity Universe in each market are as follows:

(i) Equity Universe Minimum Size Requirement: This investability screen is applied at the company level. In order to be included in a Market Investable Equity Universe, a company must have the required minimum full market capitalization.

(ii) Equity Universe Minimum Float-Adjusted Market Capitalization Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have a free float-adjusted market capitalization equal to or higher than 50% of the Equity Universe Minimum Size Requirement.

(iii) DM and EM Minimum Liquidity Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have adequate liquidity. The Annualized Traded Value Ratio (“ATVR”), a measure that offers the advantage of screening out extreme daily trading volumes and taking into account the free float-adjusted market capitalization size of securities, is used to measure liquidity. In the calculation of the ATVR, the trading volumes in depository receipts associated with that security, such as ADRs or GDRs, are also considered. A minimum liquidity level of 20% ATVR is required for inclusion of a security in a Market Investable Equity Universe of a Developed Market, and a minimum liquidity level of 15% ATVR is required for inclusion of a security in a Market Investable Equity Universe of an Emerging Market.

(iv) Global Minimum Foreign Inclusion Factor Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security’s Foreign Inclusion Factor (“FIF”) must reach a certain threshold. The FIF of a security is defined as the proportion of shares outstanding that is available for purchase in the public equity markets by international investors. This proportion accounts for the available free float of and/or the foreign ownership limits applicable to a specific security (or company). In general, a security must have an FIF equal to or larger than 0.15 to be eligible for inclusion in a Market Investable Equity Universe.

(v) Minimum Length of Trading Requirement: This investability screen is applied at the individual security level. For an initial public offering (“IPO”) to be eligible for inclusion in a Market Investable Equity Universe, the new issue must have started trading at least four months before the

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implementation of the initial construction of the index or at least three months before the implementation of a Semi-Annual Index Review. This requirement is applicable to small new issues in all markets. Large IPOs are not subject to the Minimum Length of Trading Requirement and may be included in a Market Investable Equity Universe and the Standard Index outside of a Quarterly or Semi-Annual Index Review.

Defining Market Capitalization Size Segments for Each Market

Once a Market Investable Equity Universe is defined, it is segmented into the following size-based indices:

• Investable Market Index (Large + Mid + Small)

• Standard Index (Large + Mid)

• Large Cap Index

• Mid Cap Index

• Small Cap Index

Creating the Size Segment Indices in each market involves the following steps: (i) defining the Market Coverage Target Range for each size segment; (ii) determining the Global Minimum Size Range for each size segment; (iii) determining the Market Size-Segment Cutoffs and associated Segment Number of Companies; (iv) assigning companies to the size segments; and (v) applying final size-segment investability requirements.

Index Continuity Rules for the Standard Indices

In order to achieve index continuity, as well as provide some basic level of diversification within a market index, notwithstanding the effect of other index construction rules contained herein, a minimum number of five constituents will be maintained for a DM Standard Index and a minimum number of three constituents will be maintained for an EM Standard Index.

Creating Style Indices within Each Size Segment

All securities in the investable equity universe are classified into Value or Growth segments using the MSCI Global Value and Growth methodology.

Classifying Securities under the Global Industry Classification Standard

All securities in the Global Investable Equity Universe are assigned to the industry that best describes their business activities. To this end, MSCI has designed, in conjunction with Standard & Poor’s, the Global Industry Classification Standard. Under the GICS, each company is assigned uniquely to one sub-industry according to its principal business activity. Therefore, a company can belong to only one industry grouping at each of the four levels of the GICS.

MSCI EM (Emerging Markets) Index Maintenance

The MSCI Global Investable Market Indices are maintained with the objective of reflecting the evolution of the underlying equity markets and segments on a timely basis, while seeking to achieve index continuity, continuous investability of constituents and replicability of the indices, and index stability and low index turnover.

In particular, index maintenance involves:

(i) Semi-Annual Index Reviews (“SAIRs”) in May and November of the Size Segment and Global Value and Growth Indices which include:

• Updating the indices on the basis of a fully refreshed Equity Universe.

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• Taking buffer rules into consideration for migration of securities across size and style segments.

• Updating FIFs and Number of Shares (“NOS”).

(ii) Quarterly Index Reviews (“QIRs”) in February and August of the Size Segment Indices aimed at:

• Including significant new eligible securities (such as IPOs that were not eligible for earlier inclusion) in the index.

• Allowing for significant moves of companies within the Size Segment Indices, using wider buffers than in the SAIR.

• Reflecting the impact of significant market events on FIFs and updating NOS.

(iii) Ongoing event-related changes. Changes of this type are generally implemented in the indices as they occur. Significantly large IPOs are included in the indices after the close of the company’s tenth day of trading.

Transition

MSCI will transition the current MSCI Standard Index, the Small Cap Index and all indices derived from the MSCI Standard Index to the Global Investable Market Indices methodology described above.

All indices that are constructed with the Standard Indices as their basis, such as the GDP-weighted indices, 10/40 Indices and other custom indices, High Dividend Yield Indices, the MSCI Global Value and Growth Indices, etc., will continue to be derived from the Standard Indices throughout the transition.

The second phase of the transition of the MSCI Standard and the MSCI Small Cap Indices to the MSCI Global Investable Market Indices methodology will take place on May 30, 2008 (the first phase having been completed on November 30, 2007). The final additions and deletions of constituents for the second phase will be announced at least four weeks in advance of their implementation in the Standard and Small Cap Indices. All indices derived from the MSCI Standard Indices will follow the two-phase transition, except for the MSCI Euro and Pan Euro Indices which were transitioned in one phase on November 30, 2007. The transition will be synchronized for all markets and composites.

During the transition period, MSCI will be producing the MSCI Provisional Standard and Provisional Small Cap Indices to assist investors in understanding the changes that would occur if the Global Investable Market Indices methodology were immediately implemented in the current MSCI Standard and Small Cap Indices. The Provisional Indices also provide increased flexibility to current investors who wish to transition to the Global Investable Market Indices methodology on their own schedule.

The Provisional Standard and Provisional Small Cap Indices and the new Size Segment and Style Indices that will be created based on this methodology are official MSCI indices and, as such, can be used for a variety of purposes, including as the basis for new investment mandates and for investment vehicles such as passive mutual funds, exchange traded funds and listed and over-the-counter derivative contracts.

Reflecting Constituent Changes in the Standard Indices at the Transition Points

In the first phase of the transition, which was completed on November 30, 2007:

• After rebalancing the Provisional Standard Indices as per the SAIR, they were compared with the relevant Standard Indices.

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• All companies that were in the Provisional Standard Index but not in the corresponding Standard Index were added to the Standard Index at half of their free float-adjusted market capitalization, and all companies that were not in the Provisional Standard Index but were in the corresponding Standard Index were retained in the Standard Index but at only half of their free float-adjusted market capitalization.

In the second and final phase in May 2008:

• The Provisional Standard Indices will be rebalanced.

• Any and all differences between the rebalanced Provisional Standard Index and the Standard Index will be fully implemented in the Standard Indices.

The transition of the Small Cap Indices will be synchronized with the transition of the Standard Indices, following the same timeline and approach.

Discontinuation of the MSCI EM (Emerging Markets) Index; Alteration of Method of Calculation

MSCI has no obligation to continue to publish the MSCI EM (Emerging Markets) Index, and may discontinue publication of the MSCI EM (Emerging Markets) Index at any time in its sole discretion. If MSCI discontinues publication of the MSCI EM (Emerging Markets) Index and MSCI or another entity publishes a successor or substitute index that the calculation agent determines, in its sole discretion, to be comparable to the discontinued Index (such index being referred to herein as a “MSCI EM (Emerging Markets) Index successor index”), then any Index closing level will be determined by reference to the level of such MSCI EM (Emerging Markets) Index successor index at the close of trading on the NYSE, the AMEX, the NASDAQ National Market or the relevant exchange or market for the MSCI EM (Emerging Markets) Index successor index on each relevant Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date or dates as set forth in the relevant terms supplement.

Upon any selection by the calculation agent of a MSCI EM (Emerging Markets) Index successor index, the calculation agent will cause written notice thereof to be promptly furnished to the trustee, to us and to the holders of the notes.

If MSCI discontinues publication of the MSCI EM (Emerging Markets) Index prior to, and such discontinuation is continuing on, a Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date as set forth in the relevant terms supplement, and the calculation agent determines, in its sole discretion, that no MSCI EM (Emerging Markets) Index successor index is available at such time, or the calculation agent has previously selected a MSCI EM (Emerging Markets) Index successor index and publication of such MSCI EM (Emerging Markets) Index successor index is discontinued prior to, and such discontinuation is continuing on, such Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date, or if MSCI (or the publisher of any MSCI EM (Emerging Markets) Index successor index) fails to calculate and publish a closing level for the MSCI EM (Emerging Markets) Index (or any MSCI EM (Emerging Markets) Index successor index) on any date when it would ordinarily do so in accordance with its customary practice, then the calculation agent will determine the Index closing level for such date. The Index closing level will be computed by the calculation agent in accordance with the formula for and method of calculating the MSCI EM (Emerging Markets) Index or MSCI EM (Emerging Markets) Index successor index, as applicable, last in effect prior to such discontinuation, or failure to calculate or publish a closing level for the index, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently composing the MSCI EM (Emerging Markets) Index or MSCI EM (Emerging Markets) Index successor index, as applicable. Notwithstanding these alternative arrangements, discontinuation of the publication or failure to calculate or publish the closing level of the MSCI EM (Emerging Markets) Index may adversely affect the value of the notes.

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As used herein, “closing price” of a security, on any particular day, means the last reported sales price for that security on the relevant exchange at the scheduled weekday closing time of the regular trading session of the relevant exchange. If, however, the security is not listed or traded on a bulletin board, then the closing price of the security will be determined using the average execution price per share that an affiliate of Lehman Brothers Holdings Inc. pays or receives upon the purchase or sale of the security used to hedge Lehman Brothers Holdings Inc.’s obligations under the notes. The “relevant exchange” for any security (or any combination thereof then underlying the MSCI EM (Emerging Markets) Index or any successor index) means the primary exchange, quotation system (which includes bulletin board services) or other market of trading for such security.

If at any time the method of calculating the MSCI EM (Emerging Markets) Index or a MSCI EM (Emerging Markets) Index successor index, or the level thereof, is changed in a material respect, or if the MSCI EM (Emerging Markets) Index or a MSCI EM (Emerging Markets) Index successor index is in any other way modified so that the MSCI EM (Emerging Markets) Index or such MSCI EM (Emerging Markets) Index successor index does not, in the opinion of the calculation agent, fairly represent the level of the MSCI EM (Emerging Markets) Index or such MSCI EM (Emerging Markets) Index successor index had such changes or modifications not been made, then the calculation agent will, at the close of business in New York City on each date on which the MSCI EM (Emerging Markets) Index closing level is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a level of a stock index comparable to the MSCI EM (Emerging Markets) Index or such MSCI EM (Emerging Markets) Index successor index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the Index closing level with reference to the MSCI EM (Emerging Markets) Index or such MSCI EM (Emerging Markets) Index successor index, as adjusted. Accordingly, if the method of calculating the MSCI EM (Emerging Markets) Index or a MSCI EM (Emerging Markets) Index successor index is modified so that the level of the MSCI EM (Emerging Markets) Index or such MSCI EM (Emerging Markets) Index successor index is a fraction of what it would have been if there had been no such modification (e.g., due to a split in the MSCI EM (Emerging Markets) Index), then the calculation agent will adjust its calculation of the MSCI EM (Emerging Markets) Index or such MSCI EM (Emerging Markets) Index successor index in order to arrive at a level of the MSCI EM (Emerging Markets) Index or such MSCI EM (Emerging Markets) Index successor index as if there had been no such modification (e.g., as if such split had not occurred).

License Agreement with MSCI

Lehman Brothers Holdings Inc. is expected to enter into a non-exclusive license agreement with MSCI, which would grant Lehman Brothers Holdings Inc. and certain of its affiliated or subsidiary companies a license, in exchange for a fee, to use the MSCI EM (Emerging Markets) Index in connection with certain products, including the notes.

ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE INDEX FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NEITHER MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE’S CUSTOMERS AND COUNTERPARTIES, OWNERS OF OR THE PRODUCTS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MSCI OR ANY OTHER PARTY HAVE LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

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THE DOW JONES EURO STOXX 50^® INDEX

We have derived all information contained in this underlying supplement no. 1220 regarding the Dow Jones EURO STOXX 50^® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, STOXX Limited. The Dow Jones EURO STOXX 50^® Index is offered and maintained by STOXX Limited. We have not independently verified such information. We make no representation or warranty as to the accuracy or completeness of such information.

You can obtain the level of the Dow Jones EURO STOXX 50^® Index at any time from the Bloomberg Financial Markets page “SX5E <Index> <GO>” or from the STOXX Limited website at www.stoxx.com. Information from outside sources is not incorporated by reference in, and should not be considered a part of, this underlying supplement no. 1220 or any terms supplement. We make no representation or warranty as to the accuracy or completeness of such information.

Dow Jones EURO STOXX 50^® Index Composition and Maintenance

The Dow Jones EURO STOXX 50^® Index was created by STOXX Limited, a joint venture between Deutsche Börse AG, Dow Jones & Company, Inc. and SWX Swiss Exchange AG. Publication of the Dow Jones EURO STOXX 50^® Index began on February 28, 1998, based on an initial Dow Jones EURO STOXX 50^® Index value of 1,000 at December 31, 1991.

The Dow Jones EURO STOXX 50^® Index is composed of 50 component stocks of market sector leaders from within the Dow Jones EURO STOXX Index, which includes stocks selected from the Eurozone. The component stocks have a high degree of liquidity and represent the largest companies across all market sectors defined by the Dow Jones Global Classification Standard.

The composition of the Dow Jones EURO STOXX 50^® Index is reviewed annually, based on the closing stock data on the last trading day in August. The component stocks are announced the first trading day in September. Changes to the component stocks are implemented on the third Friday in September and are effective the following trading day. Changes in the composition of the Dow Jones EURO STOXX 50^® Index are made to ensure that the Dow Jones EURO STOXX 50^® Index includes the 50 market sector leaders from within the Dow Jones EURO STOXX Index. A current list of the issuers that comprise the Dow Jones EURO STOXX 50^® Index is available on the STOXX Limited website at www.stoxx.com.

The free float factors and weighting cap factors for each component stock used to calculate the Dow Jones EURO STOXX 50^® Index, as described below, are reviewed, calculated and implemented on a quarterly basis and are fixed until the next quarterly review. The weighting of a component stock is capped at 10% of the Dow Jones EURO STOXX 50^® Index’s total free float market capitalization.

The Dow Jones EURO STOXX 50^® Index is also reviewed on an ongoing basis. Corporate actions (including initial public offerings, mergers and takeovers, spin-offs, delistings and bankruptcy) that affect the Dow Jones EURO STOXX 50^® Index composition are immediately reviewed. Any changes are announced, implemented and effective in line with the type of corporate action and the magnitude of the effect.

Dow Jones EURO STOXX 50^® Index Calculation

The Dow Jones EURO STOXX 50^® Index is calculated with the “Laspeyres formula,” which measures the aggregate price changes in the component stocks against a fixed base quantity weight. The formula for calculating the Dow Jones EURO STOXX 50^® Index value can be expressed as follows:

Index Level	=	free float market capitalization of the Dow Jones EURO STOXX 50® Index	x	1,000
adjusted base date market capitalization of the Dow Jones EURO STOXX 50® Index

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The “free float market capitalization of the Dow Jones EURO STOXX 50^® Index” is equal to the sum of the products of the closing price, number of shares, free float factor and weighting cap factor for each component stock as of the time the Dow Jones EURO STOXX 50^® Index is being calculated.

The Dow Jones EURO STOXX 50^® Index is also subject to a divisor, which is adjusted to maintain the continuity of Dow Jones EURO STOXX 50^® Index values despite changes due to corporate actions. The following is a summary of the adjustments to any component stock made for corporate actions and the effect of such adjustment on the divisor, where shareholders of the component stock will receive “B” number of shares for every “A” number of shares held (where applicable).

(1) Cash dividend: Adjusted price = closing price – dividend announced by the company × (1 – withholding tax) Divisor: decreases	(2) Special cash dividend: Adjusted price = closing price – dividend announced by the company × (1 – withholding tax) Divisor: decreases
(3) Split and reverse split: Adjusted price = closing price × A/B New number of shares = old number of shares × B/A Divisor: no change	(4) Rights offering: Adjusted price = (closing price × A + subscription price × B) / (A + B) New number of shares = old number of shares × (A + B) / A Divisor: increases
(5) Stock dividend: Adjusted price = closing price × A / (A + B) New number of shares = old number of shares × (A + B) / A Divisor: no change	(6) Stock dividend of another company: Adjusted price = (closing price × A – price of other company × B) / A Divisor: decreases
(7) Return of capital and share consideration: Adjusted price = (closing price – dividend announced by company × (1 – withholding tax)) × A/B New number of shares = old number of shares × B/A Divisor: decreases	(8) Repurchase shares / self tender: Adjusted price = ((price before tender × old number of shares ) – (tender price × number of tendered shares)) / (old number of shares - number of tendered shares) New number of shares = old number of shares -                                    number of tendered shares Divisor: decreases
(9) Spin-off: Adjusted price = ((closing price × A) – (price of spun-off shares × B)) / A Divisor: decreases
(10) Combination stock distribution (dividend or split) and rights offering: For this corporate action, the following additional assumptions apply: •    Shareholders receive B new shares from the distribution and C new shares from the rights offering for every A share held. •    If A is not equal to one share, all the following “new number of shares” formulae need to be divided by A:
– If rights are applicable after stock distribution (one action applicable to other): Adjusted price = (closing price × A + subscription price                        × C × (1 + B/A)) / ((A + B) × ( 1 + C/A)) New number of shares = old number of shares × ((A +                                    B) × (1 + C / A)) / A Divisor: increases	– If stock distribution is applicable after rights offering (one action applicable to other): Adjusted price = (closing price × A + subscription price × C) / ((A + C) × (1 + B / A)) New number of shares = old number of shares ×                                        ((A + C) × (1 + B / A)) Divisor: increases
– Stock distribution and rights (neither action is applicable to the other): Adjusted price = (closing price × A + subscription price × C) / (A + B + C) New number of shares = old number of shares × (A + B + C) / A Divisor: increases

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Discontinuation of the Dow Jones EURO STOXX 50^® Index; Alteration of Method of Calculation

STOXX Limited has no obligation to continue to publish the Dow Jones EURO STOXX 50^® Index, and may discontinue publication of the Dow Jones EURO STOXX 50^® Index at any time in its sole discretion. If STOXX Limited discontinues publication of the Dow Jones EURO STOXX 50^® Index and STOXX Limited or another entity publishes a successor or substitute index that the calculation agent determines, in its sole discretion, to be comparable to the discontinued Dow Jones EURO STOXX 50^® Index (such index being referred to herein as a “Dow Jones EURO STOXX 50^® Index successor index”), then any Index closing level will be determined by reference to the level of such Dow Jones EURO STOXX 50^® Index successor index at the close of trading on the relevant exchange or market for the Dow Jones EURO STOXX 50^® Index successor index on each relevant Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date or dates as set forth in the relevant terms supplement.

Upon any selection by the calculation agent of a Dow Jones EURO STOXX 50^® Index successor index, the calculation agent will cause written notice thereof to be promptly furnished to the trustee, to us and to the holders of the notes.

If STOXX Limited discontinues publication of the Dow Jones EURO STOXX 50^® Index prior to, and such discontinuance is continuing on, a Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date or dates as set forth in the relevant terms supplement and the calculation agent determines, in its sole discretion, that no Dow Jones EURO STOXX 50^® Index successor index is available at such time, or the calculation agent has previously selected a Dow Jones EURO STOXX 50^® Index successor index and publication of such Dow Jones EURO STOXX 50^® Index successor index is discontinued prior to, and such discontinuation is continuing on, such Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date, or if STOXX Limited (or the publisher of any Dow Jones EURO STOXX 50^® Index successor index) fails to calculate and publish a closing level for the Dow Jones EURO STOXX 50^® Index (or any Dow Jones EURO STOXX 50^® Index successor index) on any date when it would ordinarily do so in accordance with its customary practice, then the calculation agent will determine the Index closing level for such date. The Index closing level will be computed by the calculation agent in accordance with the formula for and method of calculating the Dow Jones EURO STOXX 50^® Index or Dow Jones EURO STOXX 50^® Index successor index, as applicable, last in effect prior to such discontinuation or failure to calculate or publish a closing level for the index, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently comprising the Dow Jones EURO STOXX 50^® Index or Dow Jones EURO STOXX 50^® Index successor index, as applicable. Notwithstanding these alternative arrangements, discontinuation of the publication or failure to calculate or publish the closing level of the Dow Jones EURO STOXX 50^® Index may adversely affect the value of the notes.

As used herein, “closing price” of a security, on any particular day, means the last reported sales price for that security on the relevant exchange at the scheduled weekday closing time of the regular trading session of the relevant exchange. If, however, the security is not listed or traded on a bulletin board, then the closing price of the security will be determined using the average execution price per share that an affiliate of Lehman Brothers Holdings Inc. pays or receives upon the purchase or sale of the security used to hedge Lehman Brothers Holdings Inc.’s obligations under the notes. The “relevant exchange” for any security (or any combination thereof then underlying the Dow Jones EURO STOXX 50^® Index or any successor index) means the primary exchange, quotation system (which includes bulletin board services) or other market of trading for such security.

If at any time the method of calculating the Dow Jones EURO STOXX 50^® Index or a Dow Jones EURO STOXX 50^® Index successor index, or the level thereof, is changed in a material respect, or if the Dow Jones EURO STOXX 50^® Index or a Dow Jones EURO STOXX 50^® Index successor index is in any other way modified so that the Dow Jones EURO STOXX 50^® Index or such Dow Jones EURO STOXX 50^® Index successor index does not, in the opinion of the calculation agent, fairly

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represent the level of the Dow Jones EURO STOXX 50^® Index or such Dow Jones EURO STOXX 50^® Index successor index had such changes or modifications not been made, then the calculation agent will, at the close of business in New York City on each date on which the Dow Jones EURO STOXX 50^® Index closing level is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a level of a stock index comparable to the Dow Jones EURO STOXX 50^® Index or such Dow Jones EURO STOXX 50^® Index successor index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the Index closing level with reference to the Dow Jones EURO STOXX 50^® Index or such Dow Jones EURO STOXX 50^® Index successor index, as adjusted. Accordingly, if the method of calculating the Dow Jones EURO STOXX 50^® Index or a Dow Jones EURO STOXX 50^® Index successor index is modified so that the level of the Dow Jones EURO STOXX 50^® Index or such Dow Jones EURO STOXX 50^® Index successor index is a fraction of what it would have been if there had been no such modification (e.g., due to a split in the Dow Jones EURO STOXX 50^® Index), then the calculation agent will adjust its calculation of the Dow Jones EURO STOXX 50^® Index or such Dow Jones EURO STOXX 50^® Index successor index in order to arrive at a level of the Dow Jones EURO STOXX 50^® Index or such Dow Jones EURO STOXX 50^® Index successor index as if there had been no such modification (e.g., as if such split had not occurred).

License Agreement with STOXX Limited

Lehman Brothers International Europe has entered into a non-transferable, non-exclusive license agreement with STOXX Limited, which grants Lehman Brothers Holdings Inc. and certain of its affiliates or subsidiaries a license, in exchange for a fee, to use the Dow Jones EURO STOXX 50^® Index in connection with certain securities, including the notes.

STOXX Limited has no relationship to Lehman Brothers Holdings Inc. other than the licensing of the Dow Jones EURO STOXX 50^® Index and the related trademarks for use in connection with the notes, which index is determined, composed and calculated by STOXX Limited without regard to Lehman Brothers Holdings Inc. or the notes. The notes are not sponsored, endorsed, sold or promoted by STOXX Limited (including its affiliates) (collectively referred to as “STOXX Limited”). STOXX Limited does not recommend that any person invest in the securities linked to the Dow Jones EURO STOXX 50^® Index or any other securities. STOXX Limited has not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to the notes. STOXX Limited makes no representation or warranty, express or implied to the owners of the notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly, or the ability of the EURO STOXX 50^® Index to track general stock market performance. STOXX Limited is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of the notes to be issued or in the determination or calculation of the equation by which the notes are to be converted into cash. STOXX Limited has no liability in connection with the administration, management, marketing or trading of the notes. STOXX Limited does not consider the needs of Lehman Brothers Holdings Inc. or the owners of the notes in determining, composing or calculating the Dow Jones EURO STOXX 50^® Index, not does STOXX Limited have any obligation to do so.

STOXX LIMITED AND DOW JONES WILL NOT HAVE ANY LIABILITY IN CONNECTION WITH THE SECURITIES. SPECIFICALLY, STOXX LIMITED AND DOW JONES DO NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED AND DISCLAIM ANY AND ALL WARRANTY ABOUT: THE RESULTS TO BE OBTAINED BY THE SECURITIES, THE OWNER OF THE SECURITIES OR ANY OTHER PERSON IN CONNECTION WITH THE USE OF THE INDEX AND THE DATA INCLUDED IN THE INDEX; THE ACCURACY OR COMPLETENESS OF THE INDEX AND ITS DATA; THE MERCHANTABILITY AND THE FITNESS FOR A PARTICULAR PURPOSE OF USE OF THE INDEX AND ITS DATA; STOXX LIMITED AND DOW JONES WILL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS IN THE INDEX OR ITS DATA; UNDER NO CIRCUMSTANCES WILL STOXX LIMITED OR DOW JONES BE LIABLE FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF STOXX LIMITED OR DOW JONES KNOWS THAT THEY MIGHT OCCUR. THE LICENSING

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AGREEMENT BETWEEN LEHMAN BROTHERS HOLDINGS INC. AND STOXX LIMITED IS SOLELY FOR THEIR BENEFIT AND NOT FOR THE BENEFIT OF THE OWNERS OF THE SECURITIES OR ANY OTHER THIRD PARTIES.

“DOW JONES EURO STOXX 50^®” AND “STOXX^®” ARE TRADEMARKS OF STOXX LIMITED AND ARE EXPECTED TO BE LICENSED FOR USE BY LEHMAN BROTHERS AND SUB-LICENSED FOR USE BY LEHMAN BROTHERS HOLDINGS INC. THE NOTES. LINKED TO THE PERFORMANCE OF THE DOW JONES EURO STOXX 50^® INDEX ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY STOXX LIMITED, AND STOXX LIMITED MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE NOTES.

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THE NASDAQ-100 INDEX^®

We have derived all information contained in this underlying supplement no. 1220 regarding the NASDAQ-100 Index^®, including, without limitation, its make-up, method of calculation, and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, Nasdaq. We have not independently verified such information. We make no representation or warranty as to the accuracy or completeness of such information.

You can obtain the level of the Index at any time from the Bloomberg^® service under the symbol “NDX,” or from the Nasdaq website at www.nasdaq.com. Information from outside sources is not incorporated by reference in, and should not be considered part of, this underlying supplement no. 1220 or any terms supplement. We make no representation or warranty as to the accuracy or completeness of such information.

NASDAQ-100 Index^® Composition

The NASDAQ-100 Index^® is a modified market capitalization-weighted index of 100 of the largest stocks of non-financial companies listed on the Nasdaq Global Market or the Nasdaq Global Select Market tiers of the Nasdaq. The Index was launched on January 31, 1985, with a base index value of 250.00. On January 1, 1994, the base index value was reset to 125.00. The Index includes companies across a variety of major industry groups. The major industry groups covered in the Index are as follows: technology, consumer services, health care, industrials, consumer goods, telecommunications, basic materials, and oil & gas. Current information regarding the market value of the Index is available from the Nasdaq as well as numerous market information services.

The NASDAQ-100 Index^® share weights of the component securities of the NASDAQ-100 Index^® at any time are based upon the total shares outstanding in each of those securities and are additionally subject, in certain cases, to rebalancing. Accordingly, each underlying stock’s influence on the level of the NASDAQ-100 Index^® is directly proportional to the value of its NASDAQ-100 Index^® share weight.

The Index is calculated and maintained by Nasdaq. To be eligible for initial inclusion in the Index, a security must meet the following criteria:

(1) All component stocks must be listed exclusively on the Nasdaq Global Select Market or the Nasdaq Global Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained that listing);

(2) the security must be of a non-financial company;

(3) the security may not be issued by an issuer currently in bankruptcy proceedings;

(4) the security must have an average daily trading volume on the Nasdaq of at least 200,000 shares;

(5) if the security is of a foreign issuer (a foreign issuer is determined based on its country of incorporation), it must have listed options on a recognized market in the United States or be eligible for listed-options trading on a recognized options market in the United States;

(6) only one class of security per issuer is allowed;

(7) the issuer of the security may not have entered into a definitive agreement or other arrangement that would result in the security’s no longer being NASDAQ-100 Index^® eligible;

(8) the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn;

(9) the security must have “seasoned” on the Nasdaq or another recognized market (generally, a company is considered to be seasoned if it has been listed on a market for at least two years; in the case of spin-offs, the operating history of the spin-off will be considered); and

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(10) if the security would otherwise qualify to be in the top 25% of the securities included in the Index by market capitalization for the six prior consecutive month-ends, then a one-year “seasoning” criterion would apply.

In addition, to be eligible for continued inclusion in the Index the following criteria apply:

(1) The security’s listing must be exclusively on the Nasdaq Global Select Market or the Nasdaq Global Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained that listing);

(2) the security must be of a non-financial company;

(3) the security may not be issued by an issuer currently in bankruptcy proceedings;

(4) the security must have an average daily trading volume on the Nasdaq of at least 200,000 shares;

(5) if the security is of a foreign issuer, it must have listed options or be eligible for listed- options trading on a recognized options market in the United States, as measured annually during the ranking review process;

(6) the security must have an adjusted market capitalization equal to or exceeding 0.10% of the aggregate adjusted market capitalization of the Index at each month-end. In the event a company does not meet this criterion for two consecutive month-ends, it will be removed from the Index effective after the close of trading on the third Friday of the following month; and

(7) the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn.

These NASDAQ-100 Index^® eligibility criteria may be revised from time to time by the Nasdaq without regard to any issue of notes.

Maintenance of the NASDAQ-100 Index^®

The NASDAQ-100 Index^® securities are evaluated on an annual basis, except under extraordinary circumstances which may result in an interim evaluation, as follows (this evaluation is referred to herein as the “Ranking Review”). Nasdaq-listed securities that meet the applicable eligibility criteria are ranked by market value. NASDAQ-100 Index^®-eligible securities that are already in the Index and that are ranked in the top 100 eligible securities (based on market capitalization) are retained in the Index. A security that is ranked 101 to 125 is also retained, provided that such security was ranked in the top 100 eligible securities as of the previous Ranking Review or was added to the Index subsequent to the previous Ranking Review. Securities not meeting such criteria are replaced. The replacement securities chosen are those NASDAQ-100 Index^® -eligible securities not currently in the Index that have the largest market capitalization. The data used in the ranking includes end-of-October Nasdaq market data and is updated for total shares outstanding submitted in a publicly filed SEC document via EDGAR through the end of November.

Generally, the list of annual additions and deletions is publicly announced via a press release in the early part of December, and replacements are made effective after the close of trading on the third Friday in December. Moreover, if at any time during the year, a NASDAQ-100 Index^® security is no longer traded on the Nasdaq, or is otherwise determined by the Nasdaq to become ineligible for continued inclusion in the Index, the security will be replaced with the largest market capitalization security not currently in the Index and meeting the Index eligibility criteria listed above.

In addition to the Ranking Review, the securities in the Index are monitored every day by the Nasdaq with respect to changes in total shares outstanding arising from secondary offerings, stock repurchases, conversions or other corporate actions. The Nasdaq has adopted the following quarterly scheduled weight adjustment procedures with respect to those changes. If the change in total shares

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outstanding arising from a corporate action is greater than or equal to 5.0%, that change is made to the Index as soon as practical. Otherwise, if the change in total shares outstanding is less than 5.0%, then all those changes are accumulated and made effective at one time on a quarterly basis after the close of trading on the third Friday in each of March, June, September and December. In either case, the NASDAQ-100 Index^® share weights for those underlying stocks are adjusted by the same percentage amount by which the total shares outstanding have changed in those NASDAQ-100 Index^® securities. Ordinarily, whenever there is a change in the NASDAQ-100 Index^® share weights or a change in a component security included in the Index, the Nasdaq adjusts the divisor to assure that there is no discontinuity in the level of the Index that might otherwise be caused by any of those changes.

NASDAQ-100 Index^® Calculation

The Index is calculated under a modified capitalization-weighted methodology. The value of the Index equals the aggregate value of the NASDAQ-100 Index^® share weights of each of the securities included in the NASDAQ-100 Index^® multiplied by each such security’s last sale price, divided by an adjusted base period market value, and multiplied by the base index value. The Index is ordinarily calculated without regard to cash dividends paid on the securities included in the Index.

The Index is calculated under a “modified capitalization-weighted” methodology, which is a hybrid between equal weighting and conventional capitalization weighting. This methodology is expected to: (1) retain in general the economic attributes of capitalization weighting; (2) promote portfolio weight diversification (thereby limiting domination of the Index by a few large stocks); (3) reduce NASDAQ-100 Index^® performance distortion by preserving the capitalization ranking of companies; and (4) reduce market impact on the smallest NASDAQ-100 Index^® securities from necessary weight rebalancings.

Under the methodology employed, on a quarterly basis coinciding with the Nasdaq’s quarterly scheduled weight adjustment procedures, the NASDAQ-100 Index^® securities are categorized as either “Large Stocks” or “Small Stocks”, depending on whether their current percentage weights (after taking into account scheduled weight adjustments due to stock repurchases, secondary offerings or other corporate actions) are greater than, or less than or equal to, the average percentage weight in the Index (i.e., as a 100-stock index, the average percentage weight in the NASDAQ-100 Index^® is 1.0%).

This quarterly examination will result in a NASDAQ-100 Index^® rebalancing if either one or both of the following two weight distribution requirements are not met: (1) the current weight of the single largest market capitalization NASDAQ-100 Index^® security must be less than or equal to 24.0% and (2) the “collective weight” of those NASDAQ-100 Index^® securities whose individual current weights are in excess of 4.5%, when added together, must be less than or equal to 48.0%. In addition, the Nasdaq may conduct a special rebalancing if it is determined necessary to maintain the integrity of the Index.

If either one or both of these weight distribution requirements are not met upon quarterly review, or if the Nasdaq determines that a special rebalancing is required, a weight rebalancing will be performed. First, relating to weight distribution requirement (1) above, if the current weight of the single largest NASDAQ-100 Index^® security exceeds 24.0%, then the weights of all Large Stocks will be scaled down proportionately towards 1.0% by enough for the adjusted weight of the single largest NASDAQ-100 Index^® security to be set to 20.0%. Second, relating to weight distribution requirement (2) above, for those NASDAQ-100 Index^® securities whose individual current weights or adjusted weights in accordance with the preceding step are in excess of 4.5%, if their “collective weight” exceeds 48.0%, then the weights of all Large Stocks will be scaled down proportionately towards 1.0% by just enough for the “collective weight”, so adjusted, to be set to 40.0%.

The aggregate weight reduction among the Large Stocks resulting from either or both of the above rescalings will then be redistributed to the Small Stocks in the following iterative manner. In the first iteration, the weight of the largest Small Stock will be scaled upwards by a factor that sets it equal

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to the average NASDAQ-100 Index weight of 1.0%. The weights of each of the smaller remaining Small Stocks will be scaled up by the same factor reduced in relation to each stock’s relative ranking among the Small Stocks such that the smaller the NASDAQ-100 Index^® security in the ranking, the less the scale-up of its weight. This is intended to reduce the market impact of the weight rebalancing on the smallest component securities in the Index.

In the second iteration, the weight of the second largest Small Stock, already adjusted in the first iteration, will be scaled upwards by a factor that sets it equal to the average index weight of 1.0%. The weights of each of the smaller remaining Small Stocks will be scaled up by this same factor, reduced in relation to each stock’s relative ranking among the Small Stocks such that, once again, the smaller the stock in the ranking, the less the scale-up of its weight.

Additional iterations will be performed until the accumulated increase in weight among the Small Stocks exactly equals the aggregate weight reduction among the Large Stocks from rebalancing in accordance with weight distribution requirement (1) and/or weight distribution requirement (2).

Then, to complete the rebalancing procedure, once the final percent weights of each of the NASDAQ-100 Index^® securities are set, the NASDAQ-100 Index^® share weights will be determined anew based upon the last sale prices and aggregate capitalization of the Index at the close of trading on the Tuesday in the week immediately preceding the week of the third Friday in March, June, September and December. Changes to the Index share weights will be made effective after the close of trading on the third Friday in March, June, September and December, and an adjustment to the Index divisor will be made to ensure continuity of the Index.

Ordinarily, new rebalanced weights will be determined by applying the above procedures to the current NASDAQ-100 Index^® share weights. However, the Nasdaq may from time to time determine rebalanced weights, if necessary, by instead applying the above procedure to the actual current market capitalization of the Index components. In those instances, the Nasdaq would announce the different basis for rebalancing prior to its implementation.

Discontinuation of The NASDAQ-100 Index^®; Alteration of Method of Calculation

Nasdaq has no obligation to continue to publish, and may discontinue publication of, the NASDAQ-100 Index^® at any time in its sole discretion. If Nasdaq discontinues publication of the Index and Nasdaq or another entity publishes a successor or substitute index that the calculation agent determines, in its sole discretion, to be comparable to the discontinued NASDAQ-100 Index^® (such index being referred to herein as an “NASDAQ-100 Index^® Successor Index”), then any Index closing level will be determined by reference to the level of such NASDAQ-100 Index^® Successor Index at the close of trading on the relevant exchange or market for the NASDAQ-100 Index^® Successor Index on each relevant Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date or dates as set forth in the relevant terms supplement.

Upon any selection by the calculation agent of an NASDAQ-100 Index^® Successor Index, the calculation agent will cause written notice thereof to be promptly furnished to the trustee, to us and to the holders of the notes.

If Nasdaq discontinues publication of the NASDAQ-100 Index^® prior to, and such discontinuation is continuing on, a Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date or dates as set forth in the relevant terms supplement and the calculation agent determines, in its sole discretion, that no NASDAQ-100 Index^® Successor Index is available at such time, or the calculation agent has previously selected an NASDAQ-100 Index^® Successor Index and publication of such NASDAQ-100 Index^® Successor Index is discontinued prior to, and such discontinuation is continuing on, such Basket Valuation Date, Observation Date, Averaging Date, Review Date or other relevant date, or if Nasdaq (or the publisher of any NASDAQ-100 Index^® Successor Index) fails to calculate and publish a closing level for The NASDAQ-100 Index^® (or any

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NASDAQ-100 Index^® Successor Index) on any date when it would ordinarily do so in accordance with its customary practice, then the calculation agent will determine the Index closing level on such date. The Index closing level will be computed by the calculation agent in accordance with the formula for and method of calculating the NASDAQ-100 Index^® or NASDAQ-100 Index^® Successor Index, as applicable, last in effect prior to such discontinuation or failure to calculate or publish a closing level for the Index, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently comprising the NASDAQ-100 Index^® or NASDAQ-100 Index^® Successor Index, as applicable. Notwithstanding these alternative arrangements, discontinuation of the publication or failure to calculate or publish the closing level of the NASDAQ-100 Index^® may adversely affect the value of the notes.

As used herein, “closing price” of a security, on any particular day, means the last reported sales price for that security on the relevant exchange at the scheduled weekday closing time of the regular trading session of the relevant exchange. If, however, the security is not listed or traded on a bulletin board, then the closing price of the security will be determined using the average execution price per share that an affiliate of Lehman Brothers Holdings Inc. pays or receives upon the purchase or sale of the security used to hedge Lehman Brothers Holdings Inc.’s obligations under the notes. The “relevant exchange” for any security (or any combination thereof then underlying the NASDAQ-100 Index^® or any Successor Index) means the primary exchange, quotation system (which includes bulletin board services) or other market of trading for such security.

If at any time the method of calculating the NASDAQ-100 Index^® or an NASDAQ-100 Index^® Successor Index, or the level thereof, is changed in a material respect, or if the NASDAQ-100 Index^® or an NASDAQ-100 Index^® Successor Index is in any other way modified so that the NASDAQ-100 Index^® or such NASDAQ-100 Index^® Successor Index does not, in the opinion of the calculation agent, fairly represent the level of the NASDAQ-100 Index or such NASDAQ-100 Index^® Successor Index had such changes or modifications not been made, then the calculation agent will, at the close of business in New York City on each date on which the NASDAQ-100 Index^® closing level is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a level of a stock index comparable to the NASDAQ-100 Index^® or such NASDAQ-100 Index^® Successor Index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the Index closing level with reference to the NASDAQ-100 Index^® or such NASDAQ-100 Index^® Successor Index, as adjusted. Accordingly, if the method of calculating the NASDAQ-100 Index^® or an NASDAQ-100 Index^® Successor Index is modified so that the level of the NASDAQ-100 Index^® or such NASDAQ-100 Index^® Successor Index is a fraction of what it would have been if there had been no such modification (e.g., due to a split in the NASDAQ-100 Index^®), then the calculation agent will adjust its calculation of the NASDAQ-100 Index^® or such NASDAQ-100 Index^® Successor Index in order to arrive at a level of the NASDAQ-100 Index^® or such NASDAQ-100 Index ^® Successor Index as if there had been no such modification (e.g., as if such split had not occurred).

License Agreement with the Nasdaq

Lehman Brothers Holdings Inc. has entered into a non-exclusive license agreement with The Nasdaq Stock Market, Inc., which grants Lehman Brothers Holdings Inc. and certain of its affiliates or subsidiaries a license, in exchange for a fee, to use The NASDAQ-100 Index^® in connection with certain products, including the notes.

The notes are not sponsored, endorsed, sold or promoted by The Nasdaq Stock Market, Inc. (“Nasdaq”) or any of its affiliates (Nasdaq and such affiliates, collectively, the “Corporations”). The Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to the notes. The Corporations make no representation or warranty, express or implied, to the owners of the notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly, or the ability of the

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NASDAQ-100 Index^® to track general stock market performance. The Corporations’ only relationship to Lehman Brothers Holdings Inc. (the “Licensee”) is in the licensing of the NASDAQ-100^®, NASDAQ-100 Index^® and NASDAQ^® trademarks or service marks, and certain trade names of the Corporations and the use of the NASDAQ-100 Index^®, which is determined, composed and calculated by Nasdaq without regard to the Licensee or the notes. Nasdaq has no obligation to take the needs of the Licensee or the owners of the notes into consideration in determining, composing or calculating the NASDAQ-100 Index^®. The Corporations are not responsible for and have not participated in the determination of the timing of, prices at, or quantities of the notes to be issued or in the determination or calculation of the equation by which the notes are to be converted into cash. The Corporations have no liability in connection with the administration, marketing or trading of the notes.

THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE NASDAQ-100 INDEX^® OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE LICENSEE, OWNERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE NASDAQ-100 INDEX^® OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ-100 INDEX^® OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

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