10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2006

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               

Commission file number 1-9466

Lehman Brothers Holdings Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-3216325
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
745 Seventh Avenue, New York, New York	10019
(Address of principal executive offices)	(Zip Code)

(212) 526-7000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

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

As of September 30, 2006, 530,057,747 shares of the Registrant’s Common Stock, par value $0.10 per share, were outstanding.

[This page intentionally left blank.]

LEHMAN BROTHERS HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED AUGUST 31, 2006

Contents

	Page
	Number
Available Information	2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements—(unaudited)
Consolidated Statement of Income— Three and Nine months ended August 31, 2006 and 2005	3
Consolidated Statement of Financial Condition— August 31, 2006 and November 30, 2005	4
Consolidated Statement of Cash Flows— Nine months ended August 31, 2006 and 2005	6
Notes to Consolidated Financial Statements	7
Report of Independent Registered Public Accounting Firm	41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3. Quantitative and Qualitative Disclosures About Market Risk	77
Item 4. Controls and Procedures	77
Part II. OTHER INFORMATION
Item 1. Legal Proceedings	78
Item 1A. Risk Factors	78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 5. Other Information	80
Item 6. Exhibits	81
Signature	82
Exhibit Index	83
Exhibits

LEHMAN BROTHERS HOLDINGS INC.

AVAILABLE INFORMATION

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

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

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

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

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

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

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LEHMAN BROTHERS HOLDINGS INC.

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

LEHMAN BROTHERS HOLDINGS INC.

CONSOLIDATED STATEMENT of INCOME

(Unaudited)

	Three Months				Nine Months
	Ended August 31,				Ended August 31,
In millions, except per share data	2006		2005		2006		2005
Revenues
Principal transactions	$	2,204	$	2,085	$	7,183	$	5,924
Investment banking	726		815		2,302		2,077
Commissions	564		420		1,623		1,252
Interest and dividends	7,867		5,078		21,386		13,416
Asset management and other	366		241		1,055		696
Total revenues	11,727		8,639		33,549		23,365
Interest expense	7,549		4,787		20,499		12,425
Net revenues	4,178		3,852		13,050		10,940
Non-Interest Expenses
Compensation and benefits	2,060		1,906		6,434		5,415
Technology and communications	247		217		713		612
Brokerage, clearance and distribution fees	164		138		463		408
Occupancy	128		122		408		364
Professional fees	90		72		245		203
Business development	77		56		211		170
Other	45		48		160		156
Total non-personnel expenses	751		653		2,200		1,913
Total non-interest expenses	2,811		2,559		8,634		7,328
Income before taxes and cumulative effect of accounting change	1,367		1,293		4,416		3,612
Provision for income taxes	451		414		1,460		1,175
Income before cumulative effect of accounting change	916		879		2,956		2,437
Cumulative effect of accounting change	—		—		47		—
Net income	$	916	$	879	$	3,003	$	2,437
Net income applicable to common stock	$	899	$	864	$	2,954	$	2,383
Earnings per basic share:
Before cumulative effect of accounting change	$	1.66	$	1.55	$	5.34	$	4.27
Cumulative effect of accounting change	—		—		.09		—
Earnings per basic share	$	1.66	$	1.55	$	5.43	$	4.27
Earnings per diluted share:
Before cumulative effect of accounting change	$	1.57	$	1.47	$	5.01	$	4.05
Cumulative effect of accounting change	—		—		.08		—
Earnings per diluted share	$	1.57	$	1.47	$	5.09	$	4.05
Dividends paid per common share	$	0.12	$	0.10	$	0.36	$	0.30

See Notes to Consolidated Financial Statements.

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LEHMAN BROTHERS HOLDINGS INC.

CONSOLIDATED STATEMENT of FINANCIAL CONDITION

(Unaudited)

	August 31,		November 30,
In millions	2006		2005
Assets
Cash and cash equivalents	$	4,167	$	4,900
Cash and securities segregated and on deposit for regulatory and other purposes	5,736		5,744
Financial instruments and other inventory positions owned (including $36,777 in 2006 and $36,369 in 2005 pledged as collateral)	204,492		177,438
Securities received as collateral	5,046		4,975
Collateralized agreements:
Securities purchased under agreements to resell	116,427		106,209
Securities borrowed	103,740		78,455
Receivables:
Brokers, dealers and clearing organizations	5,081		7,454
Customers	16,226		12,887
Others	1,774		1,302
Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $1,817 in 2006 and $1,448 in 2005)	3,150		2,885
Other assets	4,534		4,558
Identifiable intangible assets and goodwill (net of accumulated amortization of $281 in 2006 and $257 in 2005)	3,364		3,256
Total assets	$	473,737	$	410,063

See Notes to Consolidated Financial Statements.

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	August 31,			November 30,
In millions, except share data	2006			2005
Liabilities and Stockholders’ Equity
Short-term borrowings and current portion of long-term borrowings (including $4,988 in 2006 and $0 in 2005 at fair value)	$	18,238		$	11,351
Financial instruments and other inventory positions sold but not yet purchased	120,871			110,577
Obligation to return securities received as collateral	5,046			4,975
Collateralized financings:
Securities sold under agreements to repurchase	130,276			116,155
Securities loaned	16,632			13,154
Other secured borrowings	17,809			23,116
Payables:
Brokers, dealers and clearing organizations	3,277			1,870
Customers	57,312			47,210
Accrued liabilities and other payables	11,846			10,962
Long-term borrowings (including $8,404 in 2006 and $0 in 2005 at fair value)	74,034			53,899
Total liabilities	455,341			393,269
Commitments and contingencies (see Note 7)
Stockholders’ Equity
Preferred stock	1,095			1,095
Common stock, $0.10 par value (1);
Shares authorized: 1,200,000,000 in 2006 and 2005;
Shares issued: 608,845,822 in 2006 and 605,337,946 in 2005;
Shares outstanding: 530,296,514 in 2006 and 542,874,206 in 2005	61			61
Additional paid-in capital (1)	8,941			6,283
Accumulated other comprehensive income (loss), net of tax	(17		)	(16		)
Retained earnings	14,938			12,198
Common stock held in RSU trust	(1,743		)	(1,510		)
Other stockholders’ equity, net	—			2,275
Common stock in treasury, at cost (1): 78,549,308 shares in 2006 and 62,463,740 shares in 2005	(4,879		)	(3,592		)
Total common stockholders’ equity	17,301			15,699
Total stockholders’ equity	18,396			16,794
Total liabilities and stockholders’ equity	$	473,737		$	410,063

(1)Balances and share amounts have been retroactively adjusted to give effect for the 2-for-1 common stock split, effected in the form of a 100% stock dividend, which became effective April 28, 2006.

See Notes to Consolidated Financial Statements.

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LEHMAN BROTHERS HOLDINGS INC.

CONSOLIDATED STATEMENT of CASH FLOWS

(Unaudited)

	Nine Months
	Ended August 31,
In millions	2006			2005
Cash Flows From Operating Activities
Net income	$	3,003		$	2,437
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	380			318
Tax benefit from the issuance of stock-based awards	—			393
Amortization of deferred stock compensation	747			514
Cumulative effect of accounting change	(47		)	—
Other adjustments	15			23
Net change in:
Cash and securities segregated and on deposit for regulatory and other purposes	8			(446		)
Financial instruments and other inventory positions owned	(24,885		)	(24,105		)
Resale agreements, net of repurchase agreements	3,903			4,900
Securities borrowed, net of securities loaned	(21,807		)	(5,138		)
Other secured borrowings	(5,307		)	4,856
Receivables from brokers, dealers and clearing organizations	2,373			(416		)
Receivables from customers	(3,339		)	1,567
Financial instruments and other inventory positions sold but not yet purchased	10,094			578
Payables to brokers, dealers and clearing organizations	1,407			771
Payables to customers	10,102			5,258
Accrued liabilities and other payables	620			(1,141		)
Other operating assets and liabilities, net	(448		)	1,022
Net cash used in operating activities	(23,181		)	(8,609		)
Cash Flows From Investing Activities
Purchase of property, equipment and leasehold improvements, net	(404		)	(294		)
Business acquisitions, net of cash acquired	(206		)	—
Net cash used in investing activities	(610		)	(294		)
Cash Flows From Financing Activities
Derivative contracts with a financing element	200			312
Tax benefit from the issuance of stock-based awards	376			—
Issuance of short-term borrowings, net	2,472			770
Issuance of long-term borrowings	37,614			18,037
Principal payments of long-term borrowings, including the current portion of long-term borrowings	(15,533		)	(9,815		)
Issuance of common stock	111			215
Issuance of treasury stock	358			788
Purchase of treasury stock	(2,282		)	(2,072		)
Purchase and retirement of preferred stock	—			(250		)
Dividends paid	(258		)	(229		)
Net cash provided by financing activities	23,058			7,756
Net change in cash and cash equivalents	(733		)	(1,147		)
Cash and cash equivalents, beginning of period	4,900			5,440
Cash and cash equivalents, end of period	$	4,167		$	4,293
Supplemental Disclosure of Cash Flow Information (in millions):
Interest paid totaled $20,209 and $12,631 in 2006 and 2005, respectively.
Income taxes paid totaled $585 and $511 in 2006 and 2005, respectively.

See Notes to Consolidated Financial Statements.

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LEHMAN BROTHERS HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)

Contents

		Page
		Number
Note 1	Summary of Significant Accounting Policies	8
Note 2	Financial Instruments	16
Note 3	Securitizations and Other Off-Balance-Sheet Arrangements	18
Note 4	Securities Received and Pledged as Collateral	21
Note 5	Short-Term Borrowings	22
Note 6	Long-Term Borrowings	22
Note 7	Commitments, Contingencies and Guarantees	23
Note 8	Earnings per Share and Stockholders’ Equity	27
Note 9	Regulatory Requirements	27
Note 10	Share-Based Employee Incentive Plans	28
Note 11	Employee Benefit Plans	32
Note 12	Business Segments and Geographic Information	32
Note 13	Condensed Consolidating Financial Statement Schedules	35

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LEHMAN BROTHERS HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include the accounts of Lehman Brothers Holdings Inc. (“Holdings”) and subsidiaries (collectively, the “Company,” “Lehman Brothers,” “we,” “us” or “our”). We are one of the leading global investment banks serving institutional, corporate, government and high-net-worth individual clients. Our worldwide headquarters in New York and regional headquarters in London and Tokyo are complemented by offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific region. We are engaged primarily in providing financial services. The principal U.S., European, and Asian subsidiaries of Holdings are Lehman Brothers Inc. (“LBI”), a U.S. registered broker-dealer, Lehman Brothers International (Europe) (“LBIE”) and Lehman Brothers Europe Limited, authorized investment firms in the United Kingdom, and Lehman Brothers Japan (“LBJ”), a registered securities company in Japan, respectively.

These Consolidated Financial Statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain footnote disclosures that normally are required under generally accepted accounting principles are omitted. These Consolidated Financial Statements and notes should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto (the “2005 Consolidated Financial Statements”) included in Holdings’ Annual Report on Form 10-K for the fiscal year ended November 30, 2005 (the “Form 10-K”). The Consolidated Statement of Financial Condition at November 30, 2005 included in this Form 10-Q for the quarter ended August 31, 2006 was derived from the 2005 Consolidated Financial Statements.

The Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles. All material intercompany accounts and transactions have been eliminated in consolidation. Certain prior-period amounts reflect reclassifications to conform to the current period’s presentation.

The nature of our business is such that the results of any interim period may vary significantly from quarter to quarter and may not be indicative of the results to be expected for the fiscal year.

On April 5, 2006, the stockholders of Holdings approved an increase in the Company’s authorized shares of common stock to 1.2 billion from 600 million, and our Board of Directors approved a 2-for-1 common stock split, in the form of a stock dividend, that was effected on April 28, 2006. All share and per share amounts have been retroactively adjusted for the increase in authorized shares and the stock split. See Note 8, “Earnings per Share and Stockholders’ Equity,” and Note 10, “Share-Based Employee Incentive Plans,” to the Consolidated Financial Statements for additional information about the stock split.

Use of Estimates

Generally accepted accounting principles require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management estimates are required in determining the valuation of inventory positions, particularly over-the-counter (“OTC”) derivatives, certain commercial mortgage loans and investments in real estate, certain high-yield positions, private equity and other principal investments, and non-investment-grade interests in securitizations. Additionally, significant management estimates are required in assessing the realizability of deferred tax assets, the fair value of assets and liabilities acquired in a business acquisition, the accounting treatment of qualifying special purpose entities (“QSPEs”) and variable interest entities (“VIEs”), the outcome of litigation, the fair value of equity-based compensation awards and determining the allocation of the cost of acquired businesses to identifiable intangible assets and goodwill. Management believes the estimates used in preparing the consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

Consolidation Accounting Policies

Operating companies. Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities—an interpretation of ARB No. 51 (“FIN 46(R)”), defines the criteria necessary to be considered an operating company (i.e., a voting-interest entity) for which the consolidation accounting guidance of Statement of Financial Accounting Standards (“SFAS”) No. 94, Consolidation of All

8

Majority-Owned Subsidiaries (“SFAS 94”) should be applied. As required by SFAS 94, we consolidate operating companies in which we have a controlling financial interest. The usual condition for a controlling financial interest is ownership of a majority of the voting interest. FIN 46(R) defines operating companies as businesses that have sufficient legal equity to absorb the entities’ expected losses (presumed to require minimum 10% equity) and, in each case, for which the equity holders have substantive voting rights and participate substantively in the gains and losses of such entities. Operating companies in which we exercise significant influence but do not control are accounted for under the equity method. Significant influence generally is deemed to exist when we own 20% to 50% of the voting equity of a corporation, or when we hold at least 3% of a limited partnership interest.

Special purpose entities. Special Purpose Entities (“SPEs”) are corporations, trusts or partnerships that are established for a limited purpose. SPEs by their nature generally do not provide equity owners with significant voting powers because the SPE documents govern all material decisions. There are two types of SPEs: QSPEs and VIEs.

A QSPE generally can be described as an entity whose permitted activities are limited to passively holding financial assets and distributing cash flows to investors based on pre-set terms. Our primary involvement with SPEs relates to securitization transactions in which transferred assets, including mortgages, loans, receivables and other assets, are sold to an SPE that qualifies as a QSPE under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”). In accordance with SFAS 140 we do not consolidate QSPEs. Rather, we recognize only the interests in the QSPEs we continue to hold, if any. We account for such interests at fair value.

Certain SPEs do not meet the QSPE criteria because their permitted activities are not sufficiently limited or because the assets are not deemed qualifying financial instruments (e.g., real estate). Such SPEs are referred to as VIEs and we typically use them to create securities with a unique risk profile desired by investors, as a means of intermediating financial risk or to make an investment in real estate. In the normal course of business we may establish VIEs, sell assets to VIEs, underwrite, distribute, and make a market in securities issued by VIEs, transact derivatives with VIEs, own interests in VIEs, and provide liquidity or other guarantees to VIEs. Under FIN 46(R), we are required to consolidate a VIE if we are deemed to be the primary beneficiary of such entity. The primary beneficiary is the party that has either a majority of the expected losses or a majority of the expected residual returns of such entity, as defined.

For a further discussion of our securitization activities and our involvement with VIEs see Note 3, “Securitizations and Other Off-Balance-Sheet Arrangements,” to the Consolidated Financial Statements.

Revenue Recognition Policies

Principal transactions.Financial instruments classified as Financial instruments and other inventory positions owned and Financial instruments and other inventory positions sold but not yet purchased (both of which are recorded on a trade-date basis) are valued at market or fair value, as appropriate, with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income.

Investment banking. Underwriting revenues, net of related underwriting expenses, and revenues for merger and acquisition advisory and other investment-banking-related services are recognized when services for the transactions are completed. Direct costs associated with advisory services are recorded as non-personnel expenses, net of client reimbursements.

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

Interest and dividends revenue and interest expense. We recognize contractual interest on Financial instruments and other inventory positions owned and Financial instruments and other inventory positions sold but not yet purchased on an accrual basis as a component of Interest and dividends revenue and Interest expense, respectively. Interest flows on derivative transactions are included as part of the mark-to-market valuation of these contracts in Principal transactions in the Consolidated Statement of Income and are not recognized as a component of interest revenue or expense. We account for our secured financing activities and short- and long-term borrowings on an accrual basis with related interest recorded as interest revenue or interest expense, as applicable.

9

Asset management and other. Investment advisory fees are recorded as earned. Generally, high-net-worth and institutional clients are charged or billed quarterly based on the account’s net asset value at the end of a quarter. Investment advisory and administrative fees earned from our mutual fund business (the “Funds”) are charged monthly to the Funds based on average daily net assets under management. In certain circumstances, we receive asset management incentive fees when the return on assets under management exceeds specified benchmarks. Such incentive fees generally are based on investment performance over a twelve-month period and are not subject to adjustment after the measurement period ends. Accordingly, such incentive fees are recognized when the measurement period ends. We receive private equity incentive fees when the return on certain private equity funds’ investments exceeds specified threshold returns. Such incentive fees typically are based on investment periods in excess of one year, and future investment underperformance could require amounts previously distributed to us to be returned to the funds. Accordingly, these incentive fees are recognized when all material contingencies have been substantially resolved.

Financial Instruments and Other Inventory Positions

Financial instruments classified as Financial instruments and other inventory positions owned, including loans, and Financial instruments and other inventory positions sold but not yet purchased are recognized on a trade-date basis and are carried at market or fair value, or amounts that approximate fair value, with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income. Lending commitments also are recorded at fair value, with unrealized gains or losses recognized in Principal transactions in the Consolidated Statement of Income.

We follow the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide, Brokers and Dealers in Securities (the “Guide”) when determining market or fair value for financial instruments. Market value generally is determined based on listed prices or broker quotes. In certain instances, such price quotations may be deemed unreliable when the instruments are thinly traded or when we hold a substantial block of a particular security and the listed price is not deemed to be readily realizable. In accordance with the Guide, in these instances we determine fair value based on management’s best estimate, giving appropriate consideration to reported prices and the extent of public trading in similar securities, the discount from the listed price associated with the cost at the date of acquisition, and the size of the position held in relation to the liquidity in the market, among other factors. When listed prices or broker quotes are not available, we determine fair value based on pricing models or other valuation techniques, including the use of implied pricing from similar instruments. We typically use pricing models to derive fair value based on the net present value of estimated future cash flows including adjustments, when appropriate, for liquidity, credit and/or other factors. We account for real estate positions held for sale at the lower of cost or fair value with gains or losses recognized in Principal transactions in the Consolidated Statement of Income.

All firm-owned securities pledged to counterparties that have the right, by contract or custom, to sell or repledge the securities are classified as Financial instruments and other inventory positions owned, and are disclosed as pledged as collateral, as required by SFAS 140.

Derivative financial instruments. Derivatives are financial instruments whose value is based on an underlying asset (e.g., Treasury bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR), and include futures, forwards, swaps, option contracts, or other financial instruments with similar characteristics. A derivative contract generally represents a future commitment to exchange interest payment streams or currencies based on the contract or notional amount or to purchase or sell other financial instruments at specified terms on a specified date. OTC derivative products are privately-negotiated contractual agreements that can be tailored to meet individual client needs and include forwards, swaps and certain options including caps, collars and floors. Exchange-traded derivative products are standardized contracts transacted through regulated exchanges and include futures and certain option contracts.

Derivatives are recorded at market or fair value in the Consolidated Statement of Financial Condition on a net-by-counterparty basis when a legal right of offset exists, and are netted across products when such provisions are stated in the master netting agreement. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists. Derivatives often are referred to as off-balance-sheet instruments because neither their notional amounts nor the underlying instruments are reflected as our assets or liabilities. Instead, the market or fair values related to the derivative transactions are reported in the Consolidated Statement of Financial Condition as assets or liabilities, in Derivatives and other contractual agreements, as applicable. Margin on futures contracts is included in receivables and payables from/to brokers, dealers and clearing organizations, as applicable. Changes in fair values of

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derivatives are recorded in Principal transactions in the Consolidated Statement of Income. Market or fair value generally is determined either by quoted market prices (for exchange-traded futures and options) or pricing models (for swaps, forwards and options). Pricing models use a series of market inputs to determine the present value of future cash flows with adjustments, as required, for credit risk and liquidity risk. Credit-related valuation adjustments incorporate historical experience and estimates of expected losses. Additional valuation adjustments may be recorded, as deemed appropriate, for new or complex products or for positions with significant concentrations. These adjustments are integral components of the mark-to-market process.

We follow Emerging Issues Task Force (“EITF”) Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved In Energy Trading and Risk Management Activities (“EITF 02-3”) when marking to market our derivative contracts. Under EITF 02-3, recognition of a trading profit at inception of a derivative transaction is prohibited unless the fair value of that derivative is obtained from a quoted market price, supported by comparison to other observable market transactions or based on a valuation technique incorporating observable market data. Subsequent to the transaction date, we recognize trading profits deferred at inception of the derivative transaction in the period in which the valuation of an instrument becomes observable.

As an end user, we primarily use derivatives to modify the interest rate characteristics of our long-term debt and certain secured financing activities. We also use equity derivatives to hedge our exposure to equity price risk embedded in certain of our debt obligations and foreign exchange contracts to manage the currency exposure related to our net investment in non-U.S.-dollar functional currency operations (collectively, “End-User Derivative Activities”). In many hedging relationships, the derivative and the hedged item are separately marked to market through earnings (“fair value hedge”). In these instances, the hedge relationship is highly effective and the mark to market on the derivative and the hedged item generally offset. Certain derivatives embedded in long-term debt are bifurcated from the debt and marked to market through earnings.

We use fair value hedges primarily to convert a substantial portion of our fixed-rate debt and certain long-term secured financing activities to floating interest rates. Any hedge ineffectiveness in these relationships is recorded in Interest expense in the Consolidated Statement of Income. Gains or losses from revaluing foreign exchange contracts associated with hedging our net investments in non-U.S.-dollar functional currency operations are reported within Accumulated other comprehensive income in Stockholders’ equity. Unrealized receivables/payables resulting from the mark to market of end-user derivatives are included in Financial instruments and other inventory positions owned or Financial instruments and other inventory positions sold but not yet purchased.

Private equity investments. We carry our private equity investments, including our partnership interests, at fair value. Certain of our private equity positions are less liquid and often contain trading restrictions. Fair value is determined based upon our assessment of the underlying investments incorporating valuations that consider expected cash flows, earnings multiples and/or comparisons to similar market transactions. Valuation adjustments reflecting consideration of credit quality, concentration risk, sales restrictions and other liquidity factors are an integral part of pricing these instruments.

Securitization activities. In accordance with SFAS 140, we recognize transfers of financial assets as sales, provided control has been relinquished. Control is deemed to be relinquished only when all of the following conditions have been met: (i) the assets have been isolated from the transferor, even in bankruptcy or other receivership (true-sale opinions are required); (ii) the transferee has the right to pledge or exchange the assets received and (iii) the transferor has not maintained effective control over the transferred assets (e.g., a unilateral ability to repurchase a unique or specific asset).

Securities Received as Collateral and Obligation to Return Securities Received as Collateral

When we act as the lender of securities in a securities-lending agreement and we receive securities that can be pledged or sold as collateral, we recognize in the Consolidated Statement of Financial Condition an asset, representing the securities received (Securities received as collateral) and a liability, representing the obligation to return those securities (Obligation to return securities received as collateral).

Secured Financing Activities

Repurchase and resale agreements. Securities purchased under agreements to resell and Securities sold under agreements to repurchase, which are treated as financing transactions for financial reporting purposes, are

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collateralized primarily by government and government agency securities and are carried net by counterparty, when permitted, at the amounts at which the securities subsequently will be resold or repurchased plus accrued interest. It is our policy to take possession of securities purchased under agreements to resell. We monitor the market value of the underlying positions on a daily basis compared with the related receivable or payable balances, including accrued interest. We require counterparties to deposit additional collateral or return collateral pledged, as necessary, to ensure the market value of the underlying collateral remains sufficient. Financial instruments and other inventory positions owned that are financed under repurchase agreements are carried at market value, with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income.

We use interest rate swaps as an end-user to modify the interest rate exposure associated with certain fixed-rate resale and repurchase agreements. We adjust the carrying value of these secured financing transactions that have been designated as the hedged item.

Securities borrowed and loaned. Securities borrowed and securities loaned are carried at the amount of cash collateral advanced or received plus accrued interest. It is our policy to value the securities borrowed and loaned on a daily basis and to obtain additional cash as necessary to ensure such transactions are adequately collateralized.

Other secured borrowings. Other secured borrowings principally reflects non-recourse financing, and is recorded at contractual amounts plus accrued interest.

Long-Lived Assets

Property, equipment and leasehold improvements are recorded at historical cost, net of accumulated depreciation and amortization. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets. Buildings are depreciated up to a maximum of 40 years. Leasehold improvements are amortized over the lesser of their useful lives or the terms of the underlying leases, which range up to 30 years. Equipment, furniture and fixtures are depreciated over periods of up to 10 years. Internal-use software that qualifies for capitalization under AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, is capitalized and subsequently amortized over the estimated useful life of the software, generally three years, with a maximum of seven years. We review long-lived assets for impairment periodically and whenever events or changes in circumstances indicate the carrying amounts of the assets may be impaired. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized to the extent the carrying value of such asset exceeds its fair value.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets with finite lives are amortized over their expected useful lives. Identifiable intangible assets with indefinite lives and goodwill are not amortized. Instead, these assets are evaluated at least annually for impairment. Goodwill is reduced upon the recognition of certain acquired net operating loss carryforward benefits.

Share-Based Compensation

In 2004, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation–Transition and Disclosure, an amendment of FASB Statement No. 123 (“SFAS 123”) using the prospective adoption method. Under this method of adoption, compensation expense was recognized over the related service periods based on the fair value of stock options and restricted stock units (“RSUs”) granted for 2004 and future years. Under SFAS 123, stock options granted in periods prior to fiscal 2004 continued to be accounted for under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Accordingly, under SFAS 123 no compensation expense was recognized for stock option awards granted prior to fiscal 2004 because the exercise price equaled or exceeded the market value of our common stock on the grant date.

On December 1, 2005 we adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”) using the modified-prospective transition method. Under this transition method, compensation cost recognized during the three and nine months ended August 31, 2006 includes: (a) compensation cost for all share-based awards granted prior to, but not yet vested as of, December 1, 2005, (including pre-2004 options) based on the grant-date fair value and related service period estimates in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based awards granted subsequent to December 1, 2005, based on the grant-date fair value and

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related service periods estimated in accordance with the provisions of SFAS 123(R). Under the provisions of the modified-prospective transition method, results for the three and nine months ended August 31, 2005 have not been restated.

SFAS 123(R) clarifies and expands the guidance in SFAS 123 in several areas, including how to measure fair value and how to attribute compensation cost to reporting periods. Changes to SFAS 123 fair value measurement and service-period provisions prescribed by SFAS 123(R) include requirements to: (a) estimate forfeitures of share-based awards at the date of grant, rather than recognizing forfeitures as incurred as was permitted by SFAS 123; (b) expense share-based awards granted to retirement-eligible employees and those employees with non-substantive non-compete agreements immediately, while our accounting practice under SFAS 123 was to recognize such costs over the stated service periods, (c) attribute compensation costs of share-based awards to the future vesting periods, while our accounting practice under SFAS 123 included a partial attribution of compensation costs of share-based awards to services performed during the year of grant and (d) recognize compensation cost of all share-based awards (including amortizing pre-2004 options) based upon the grant-date fair value, rather than our accounting methodology under SFAS 123, which recognized pre-2004 option awards based upon their intrinsic value. See “Accounting Changes and Other Accounting Developments” below for a further discussion of SFAS 123(R) and the cumulative effect of an accounting change recognized in the first quarter of 2006.

Earnings per Share

We compute earnings per share (“EPS”) in accordance with SFAS No. 128, Earnings per Share. Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding, which includes RSUs for which service has been provided. Diluted EPS includes the components of basic EPS and also includes the dilutive effects of RSUs for which service has not yet been provided and employee stock options. See Note 8, “Earnings per Share and Stockholders’ Equity,” and Note 10, “Share-Based Employee Incentive Plans,” to the Consolidated Financial Statements for additional information about EPS.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). We recognize the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years and for tax loss carry-forwards. We record a valuation allowance to reduce deferred tax assets to an amount that more likely than not will be realized. Deferred tax liabilities are recognized for temporary differences that will result in taxable income in future years. Contingent liabilities related to income taxes are recorded when probable and reasonably estimable in accordance with SFAS No. 5, Accounting for Contingencies.

Cash Equivalents

Cash equivalents include highly liquid investments not held for resale with maturities of three months or less when we acquire them.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries having non-U.S.-dollar functional currencies are translated at exchange rates at the Consolidated Statement of Financial Condition date. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, are included in Accumulated other comprehensive income, a component of Stockholders’ equity. Gains or losses resulting from foreign currency transactions are included in the Consolidated Statement of Income.

Accounting Changes and Other Accounting Developments

SFAS 158. In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”). SFAS 158 requires recognition in the Consolidated Statement of Financial Condition of the over or underfunded status of postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. For pension plans, the benefit obligation is the projected benefit obligation, for other postretirement plans, the benefit obligation is the accumulated postretirement obligation.

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Upon adoption, SFAS 158 requires the recognition of previously unrecognized actuarial gains and losses and prior service costs within Accumulated other comprehensive income, net of tax (a component of Stockholders’ equity).

SFAS 158 is effective for our fiscal year ending November 30, 2007, with early adoption permitted for our fiscal year ending November 30, 2006.

Based on information available at November 30, 2005, we would have reduced Accumulated other comprehensive income (net of tax) by approximately $300 million. The actual impact of adopting SFAS 158 will be dependent upon the then current fair value of plan assets and the amount of projected benefit obligation measured as of the adoption date.

SFAS 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 nullifies the guidance in EITF 02-3 which precluded the recognition of a trading profit at the inception of a derivative contract, unless the fair value of such derivative is obtained from a quoted market price, or other valuation technique incorporating observable market data. SFAS 157 also precludes the use of a liquidity or block discount, when measuring instruments traded in an active market at fair value. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value.

SFAS 157 is effective for our fiscal year beginning December 1, 2007, with earlier application permitted for our fiscal year beginning December 1, 2006. SFAS 157 must be applied prospectively, except that the provisions related to block discounts and the guidance in EITF 02-3 are to be applied as a one time cumulative effect adjustment to opening retained earnings in the first interim period for the fiscal year in which SFAS 157 is initially applied.

We are evaluating the provisions of SFAS 157 and its potential effect on our consolidated financial statements.

SFAS 156. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”). SFAS 156 amends SFAS 140 with respect to the accounting for separately-recognized servicing assets and liabilities. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value basis.

We elected to early adopt SFAS 156 as of December 1, 2005 and to measure all classes of servicing assets and liabilities at fair value. Servicing assets and liabilities at November 30, 2005 were accounted for at the lower of amortized cost or market value basis. As a result of adopting SFAS 156, we recognized an $18 million after-tax ($33 million pre-tax) increase to opening retained earnings as of December 1, 2005, representing the effect of remeasuring all servicing assets and liabilities that existed at November 30, 2005 from a lower of amortized cost or market value basis to a fair value basis. This change in accounting principle did not have a material effect on our 2006 consolidated financial statements.

See Note 3, “Securitizations and Other Off-Balance-Sheet Arrangements,” for additional information.

SFAS 155. We issue structured notes (also referred to as hybrid instruments) for which the interest rates and/or principal payments are linked to the performance of an underlying measure (including single securities, baskets of securities, commodities, currencies, or credit events). Through November 30, 2005, we assessed the payment components of these instruments to determine if the embedded derivative required separate accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (“SFAS 133”) and, if so, the embedded derivative was bifurcated from the host debt instrument and accounted for at fair value and reported in long-term borrowings along with the related host debt instrument, which was accounted for on an amortized cost basis.

In February 2006 the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”). SFAS 155 permits fair value measurement of any structured note that contains an embedded derivative that would require bifurcation under SFAS 133. This fair value measurement election is permitted on an instrument-by-instrument basis.

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We elected to early adopt SFAS 155 as of December 1, 2005, and we have applied SFAS 155 fair value measurement to all structured notes issued after November 30, 2005 as well as to certain structured notes that existed at November 30, 2005. The effect of adoption resulted in a $24 million after-tax ($43 million pre-tax) decrease to opening retained earnings as of December 1, 2005, representing the difference between the fair value of these structured notes and the prior carrying value as of November 30, 2005. The net after-tax adjustment included structured notes with gains of $18 million ($32 million pre-tax) and losses of $42 million ($75 million pre-tax). This change in accounting principle did not have a material effect on our 2006 consolidated financial statements.

SFAS 123(R).On December 1, 2005, we adopted SFAS 123(R) using the modified-prospective transition method. As a result of adopting SFAS 123(R), we recognized an after-tax gain of $47 million ($84 million pre-tax) in the first quarter of 2006, as the cumulative effect of a change in accounting principle attributable to the requirement to estimate forfeitures at the grant date instead of recognizing them as incurred. The adoption of SFAS 123(R) did not otherwise have a material effect on our 2006 consolidated financial statements at or for the three and nine months ended August 31, 2006, and is not expected to otherwise have a material effect on our fiscal 2006 consolidated financial statements.

Prior to adopting SFAS 123(R) we presented the cash flows related to income tax deductions in excess of the compensation cost recognized on stock issued under RSUs and stock options exercised during the period (“excess tax benefits”) as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123(R) requires excess tax benefits to be classified as financing cash flows. The $376 million excess tax benefit classified as a financing cash inflow in the Consolidated Statement of Cash Flows for the nine months ended August 31, 2006 would have been classified as an operating cash inflow if we had not adopted SFAS 123(R).

In addition, as a result of adopting SFAS 123(R), certain amounts at November 30, 2005 associated with share-based compensation were reclassified within Stockholders’ equity in the Consolidated Statement of Financial Condition. This change in presentation had no net effect on our total stockholders’ equity. Effective December 1, 2005, Deferred stock compensation (representing unearned costs of RSU awards) and Common stock issuable were reclassified into Additional paid-in capital.

See “Share-Based Compensation” above and Note 10, “Share-Based Employee Incentive Plans,” for additional information.

EITF Issue No. 04-5. In June 2005, the FASB ratified the consensus reached in EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”), which requires general partners (or managing members in the case of limited liability companies) to consolidate their partnerships or to provide limited partners with substantive rights to remove the general partner or to terminate the partnership. As the general partner of numerous private equity, merchant banking and asset management partnerships, we adopted EITF 04-5 immediately for partnerships formed or modified after June 29, 2005. For partnerships formed on or before June 29, 2005 that have not been modified, we are required to adopt EITF 04-5 on December 1, 2006 in a manner similar to a cumulative-effect-type adjustment or by retrospective application.

We do not expect adoption of EITF 04-5 for partnerships formed on or before June 29, 2005 that have not been modified will have a material effect on our consolidated financial statements.

FSP FIN 46(R)-6. In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R) (“FSP FIN 46(R)-6”). FSP FIN 46(R)-6 addresses how variability should be considered when applying FIN 46(R). Variability affects the determination of whether an entity is a VIE, which interests are variable interests, and which party, if any, is the primary beneficiary of the VIE required to consolidate. FSP FIN 46(R)-6 clarifies that the design of the entity also should be considered when identifying which interests are variable interests.

We adopted FSP FIN 46(R)-6 effective September 1, 2006. FSP FIN 46(R)-6 must be applied prospectively to all entities in which we first become involved as of the date of adoption.

We do not expect that the adoption of FSP FIN 46(R)-6 will have a material effect on our consolidated financial statements.

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FIN 48. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We must adopt FIN 48 no later than December 1, 2007. Early application is permitted on December 1, 2006.

We are evaluating the effect the adoption of FIN 48 will have on our consolidated financial statements.

Note 2 Financial Instruments

Financial Instruments and Other Inventory Positions

Financial instruments and other inventory positions owned and Financial instruments and other inventory positions sold but not yet purchased were comprised of the following:

					Sold But Not
	Owned				Yet Purchased
	Aug. 31,		Nov. 30,		Aug. 31,		Nov. 30,
In millions	2006		2005		2006		2005
Mortgages, mortgage-backed and real estate inventory positions	$	71,622	$	62,216	$	95	$	63
Government and agencies	37,340		30,079		70,909		64,743
Corporate equities	36,507		33,426		26,293		21,018
Corporate debt and other	33,069		30,182		6,848		8,997
Derivatives and other contractual agreements	21,757		18,045		15,979		15,560
Certificates of deposit and other money market instruments	4,197		3,490		747		196
	$	204,492	$	177,438	$	120,871	$	110,577

Mortgages, Mortgage-backed and Real Estate Inventory Positions

Mortgages and mortgage-backed positions include mortgage loans (both residential and commercial), non-agency mortgage-backed securities and real estate investments held for sale. We originate residential and commercial mortgage loans as part of our mortgage trading and securitization activities and are a market leader in mortgage-backed securities trading. We securitized approximately $102 billion and $94 billion of residential mortgage loans for the nine months ended August 31, 2006 and 2005, respectively, including both originated loans and those we acquired in the secondary market. We originated approximately $45 billion and $65 billion of residential mortgage loans for the nine months ended August 31, 2006 and 2005, respectively. In addition, we originated approximately $27 billion and $18 billion of commercial mortgage loans for the nine months ended August 31, 2006 and 2005, respectively, the majority of which has been sold through securitization or syndication activities. See Note 3 to the Consolidated Financial Statements for additional information about our securitization activities. We record mortgage loans at fair value, with related mark-to-market gains and losses recognized in Principal transactions in the Consolidated Statement of Income.

At August 31, 2006 and November 30, 2005, we owned approximately $8.9 billion and $7.9 billion, respectively, of real estate held for sale. Our net investment position after giving effect to non-recourse financing was $6.2 billion and $4.8 billion at August 31, 2006 and November 30, 2005, respectively.

Derivative Financial Instruments

In the normal course of business, we enter into derivative transactions both in a trading capacity and as an end-user. Our derivative activities (both trading and end-user) are recorded at fair value in the Consolidated Statement of Financial Condition. Acting in a trading capacity, we enter into derivative transactions to satisfy the needs of our clients and to manage our own exposure to market and credit risks resulting from our trading activities (collectively, “Trading-Related Derivative Activities”). As an end-user, we primarily enter into interest rate swap and option contracts to adjust the interest rate nature of our funding sources from fixed to floating rates and to change the index on which floating interest rates are based (e.g., Prime to LIBOR).

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Derivatives are subject to various risks similar to other financial instruments, including market, credit and operational risk. In addition, we may be exposed to legal risks related to derivative activities, including the possibility a transaction may be unenforceable under applicable law. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with our other trading-related activities. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with proprietary trading and market-making activities in cash instruments, as part of our firmwide risk management policies.

We record derivative contracts at fair value with realized and unrealized gains and losses recognized in Principal transactions in the Consolidated Statement of Income. Unrealized gains and losses on derivative contracts are recorded on a net basis in the Consolidated Statement of Financial Condition for those transactions with counterparties executed under a legally enforceable master netting agreement and are netted across products when such provisions are stated in the master netting agreement. We offer equity, fixed income, commodity and foreign exchange derivative products to clients. Because of the integrated nature of the market for such products, each product area trades cash instruments as well as derivative products.

The following table presents the fair value of derivatives at August 31, 2006 and November 30, 2005. Assets included in the table represent unrealized gains, net of unrealized losses, for situations in which we have a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties. The fair value of assets/liabilities related to derivative contracts at August 31, 2006 and November 30, 2005 represents our net receivable/payable for derivative financial instruments before consideration of securities collateral.

Fair Value of Derivatives and Other Contractual Agreements

	August 31,				November 30,
	2006				2005
In millions	Assets		Liabilities		Assets		Liabilities
Interest rate, currency and credit default swaps and options (1)	$	8,531	$	5,721	$	8,273	$	7,128
Foreign exchange forward contracts and options	1,484		1,357		1,970		2,004
Other fixed income securities contracts (including TBAs and forwards)	3,896		1,895		2,241		896
Equity contracts (including equity swaps, warrants and options)	7,846		7,006		5,561		5,532
	$	21,757	$	15,979	$	18,045	$	15,560

(1) Includes commodity derivatives.

At August 31, 2006 and November 30, 2005, the fair value of derivative assets included $3.2 billion and $2.6 billion, respectively, related to exchange-traded option and warrant contracts. With respect to OTC contracts, we view our net credit exposure to be $14.7 billion at August 31, 2006 and $10.5 billion at November 30, 2005, representing the fair value of OTC contracts in a net receivable position, after consideration of collateral. Counterparties to our OTC derivative products primarily are U.S. and foreign banks, securities firms, corporations, governments and their agencies, finance companies, insurance companies, investment companies and pension funds. Collateral held related to OTC contracts generally includes U.S. government and federal agency securities.

Concentrations of Credit Risk

A substantial portion of our securities transactions are collateralized and are executed with, and on behalf of, commercial banks and other institutional investors, including other brokers and dealers. Our exposure to credit risk associated with the non-performance of these clients and counterparties in fulfilling their contractual obligations pursuant to securities transactions can be directly affected by volatile or illiquid trading markets, which may impair the ability of clients and counterparties to satisfy their obligations to us.

Financial instruments and other inventory positions owned include U.S. government and agency securities, and securities issued by non-U.S. governments, which in the aggregate represented 8% of total assets at August 31, 2006. In addition, collateral held for resale agreements represented approximately 25% of total assets at August 31, 2006, and primarily consisted of securities issued by the U.S. government, federal agencies or non-U.S. governments. Our most significant industry concentration is financial institutions, which includes other brokers and dealers, commercial banks and institutional clients. This concentration arises in the normal course of business.

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Note 3 Securitizations and Other Off-Balance-Sheet Arrangements

We are a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with our securitization activities, we use SPEs primarily for the securitization of commercial and residential mortgages, home equity loans, municipal and corporate bonds, and lease and trade receivables. The majority of our involvement with SPEs relates to securitization transactions meeting the SFAS 140 definition of a QSPE. Based on the guidance in SFAS 140, we do not consolidate such QSPEs. We derecognize financial assets transferred in securitizations, provided we have relinquished control over such assets. We may continue to hold an interest in the financial assets we securitize (“interests in securitizations”), which may include assets in the form of residual interests in the SPEs established to facilitate the securitization. Interests in securitizations are included in Financial instruments and other inventory positions owned (primarily Mortgages and mortgage-backed) in the Consolidated Statement of Financial Condition. For further information regarding the accounting for securitization transactions, refer to Note 1, “Summary of Significant Accounting Policies—Consolidation Accounting Policies.”

For the nine months ended August 31, 2006 and 2005, we securitized approximately $116 billion and $108 billion of financial assets, including approximately $102 billion and $94 billion of residential mortgages, $12 billion and $9 billion of commercial mortgages, and $2 billion and $5 billion of municipal and other asset-backed financial instruments, respectively. At August 31, 2006 and November 30, 2005, we had approximately $1.4 billion and $700 million, respectively, of non-investment grade interests from our securitization activities (primarily junior security interests in securitizations), comprised of $1.3 billion and $500 million of residential mortgages and $100 million and $200 million of municipal and other asset-backed financial instruments, respectively. We record inventory positions held prior to securitization, including residential and commercial loans, at fair value, as well as any interests held post-securitization. Mark-to-market gains or losses are recorded in Principal transactions in the Consolidated Statement of Income. Fair value is determined based on listed market prices, if available. When market prices are not available, fair value is determined based on valuation pricing models that take into account relevant factors such as discount, credit and prepayment assumptions, and also considers comparisons to similar market transactions.

The following table presents the fair value of our interests in securitizations at August 31, 2006 and November 30, 2005, the key economic assumptions used in measuring the fair value of such interests, and the sensitivity of the fair value of such interests to immediate 10% and 20% adverse changes in the valuation assumptions, as well as the cash flows received on such interests in the securitizations.

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Securitization Data

	August 31, 2006									November 30, 2005
	Residential Mortgages									Residential Mortgages
				Non-			Muni						Non-			Muni
	Investment			Investment			and			Investment			Investment			and
Dollars in millions	Grade			Grade			Other			Grade			Grade			Other
Interests in securitizations (in billions)	$	5.5		$	1.3		$	0.5		$	6.4		$	0.5		$	0.5
Weighted-average life (years)	5			6			8			6			5			14
Average CPR (1)	21.7			29.5			1.0			20.8			28.2			1.9
Effect of 10% adverse change	$	7		$	23		$	—		$	11		$	10		$	—
Effect of 20% adverse change	$	19		$	42		$	—		$	28		$	18		$	—
Weighted-average credit loss assumption	0.5		%	1.5		%	0.1		%	0.2		%	1.2		%	0.3		%
Effect of a 10% adverse change	$	22		$	69		$	5		$	2		$	23		$	5
Effect of a 20% adverse change	$	60		$	138		$	10		$	6		$	44		$	11
Weighted-average discount rate	6.4		%	17.6		%	6.0		%	6.6		%	15.2		%	6.2		%
Effect of a 10% adverse change	$	127		$	62		$	44		$	155		$	22		$	41
Effect of a 20% adverse change	$	247		$	112		$	79		$	307		$	41		$	74

In millions	Nine months ended August 31, 2006						Year ended November 30, 2005
Cash flows received on interests in securitizations	$	475	$	170	$	73	$	625	$	138	$	188

(1)Constant prepayment rate.

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

Mortgage servicing rights. Mortgage servicing rights (“MSRs”) represent the Company’s right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans and mortgage-backed securities. Our MSRs generally arise from the securitization of residential mortgage loans that we originate. MSRs are included in Financial instruments and other inventory positions owned on the Consolidated Statements of Financial Condition. At August 31, 2006 and November 30, 2005, the Company has MSRs of approximately $822 million and $561 million, respectively.

Effective with our early adoption of SFAS 156, beginning as of December 1, 2005 MSRs are carried at fair value, with changes in fair value reported in earnings in the period in which the change occurs. On or before November 30, 2005, MSRs were carried at the lower of amortized cost or market value. The effect of this change in accounting from lower of amortized cost or market value to fair value has been reported as a cumulative effect adjustment to December 1, 2005 retained earnings, resulting in an increase of $18 million after-tax ($33 million pre-tax). See Note 1, “Summary of Significant Accounting Policies—Accounting Changes and Other Accounting Developments,” for additional information.

The determination of fair value for MSRs requires valuation processes which combine the use of discounted cash flow models and extensive analysis of current market data to arrive at an estimate of fair value. The cash flow and prepayment assumptions used in our discounted cash flow model are based on empirical data drawn from the historical performance of our MSRs, which we believe are consistent with assumptions used by market participants

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valuing similar MSRs, and from data obtained on the performance of similar MSRs. These variables can, and generally will, change from quarter to quarter as market conditions and projected interest rates change.

MSR activities for the nine months ended August 31, 2006 are as follows:

	Nine months ended
In millions	August 31, 2006
Balance, November 30, 2005	$	561
Additions, net	393
Changes in fair value
Resulting from changes in valuation assumptions	(22		)
Paydowns/servicing fees	(143		)
Change due to SFAS 156 Adoption	33
Balance, August 31, 2006	$	822

The following table shows the main assumptions we used to determine the fair value of our MSRs at August 31, 2006 and the sensitivity of our MSRs to changes in these assumptions.

Mortgage Servicing Rights

Dollars in millions	August 31, 2006
Weighted-average prepayment speed (CPR)	26
Effect of 10% adverse change	$	71
Effect of 20% adverse change	$	134
Discount rate	9		%
Effect of 10% adverse change	$	17
Effect of 20% adverse change	$	32

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

The key risks inherent with MSRs are prepayment speed and changes in interest rates. We mitigate the income statement effect of changes in fair value of our MSRs by entering into hedging transactions, which serve to reduce our actual risk.

Contractual servicing fees received in 2006 were approximately $269 million and are classified as Principal Transactions in the Consolidated Statement of Income.

Non-QSPE activities. Substantially all of our securitization activities are transacted through QSPEs, including residential and commercial mortgage securitizations. However, we also are actively involved with SPEs that do not meet the QSPE criteria due to their permitted activities not being sufficiently limited or because the assets are not deemed qualifying financial instruments (e.g., real estate). Our involvement with such SPEs includes credit-linked notes and other structured financing transactions designed to meet clients’ investing or financing needs.

We are a dealer in credit default swaps and, as such, we make a market in buying and selling credit protection on single issuers as well as on portfolios of credit exposures. One of the mechanisms we use to mitigate credit risk is to enter into default swaps with SPEs, in which we purchase default protection. In these transactions, the SPE issues credit-linked notes to investors and uses the proceeds to invest in high quality collateral. We pay a premium to the SPE for assuming credit risk under the default swap. Third-party investors in these SPEs are subject to default risk associated with the referenced obligations under the default swap as well as the credit risk of the assets held by the SPE. Our maximum loss associated with our involvement with such credit-linked note transactions is the fair value

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of our credit default swaps with such SPEs, which amounted to $212 million and $156 million at August 31, 2006 and November 30, 2005, respectively. In addition, our default swaps are secured by the value of the underlying investment-grade collateral held by the SPEs which was $7.3 billion and $5.7 billion at August 31, 2006 and November 30, 2005, respectively. Because the results of our expected loss calculations generally demonstrate the investors in the SPE bear a majority of the entity’s expected losses (because the investors assume default risk associated with both the reference portfolio and the SPE’s assets), we generally are not deemed to be the primary beneficiary of these transactions and therefore do not consolidate such SPEs. However, in certain credit default transactions, generally when we participate in the fixed interest rate risk associated with the underlying collateral through an interest rate swap, we are deemed to be the primary beneficiary of such transactions and therefore have consolidated the SPEs. At August 31, 2006 and November 30, 2005, we consolidated approximately $0.8 billion and $0.6 billion of these credit default transactions, respectively. We record the assets associated with these consolidated credit default transactions as a component of Financial instruments and other inventory positions owned for which principally all of such assets are financed on a non-recourse basis.

We also invest in real estate directly through controlled subsidiaries and through variable interest entities. We consolidate our investments in variable interest real estate entities when we are deemed to be the primary beneficiary. At August 31, 2006 and November 30, 2005, we consolidated approximately $4.2 billion and $4.6 billion, respectively, of real estate-related investments in VIEs for which we did not have a controlling financial interest. We record the assets associated with such consolidated real estate-related investments in VIEs as a component of Financial instruments and other inventory positions owned. After giving effect to non-recourse financing our net investment position in such consolidated VIEs was $2.8 billion and $2.9 billion at August 31, 2006 and November 30, 2005, respectively. See Note 2 to the Consolidated Financial Statements for a further discussion of our real estate held for sale.

In addition, we enter into other transactions with SPEs designed to meet clients’ investment and/or funding needs. See Note 7 to the Consolidated Financial Statements for additional information about these transactions and SPE-related commitments.

Note 4 Securities Received and Pledged as Collateral

We enter into secured borrowing and lending transactions to finance inventory positions, obtain securities for settlement and meet clients’ needs. We receive collateral in connection with resale agreements, securities borrowed transactions, borrow/pledge transactions, client margin loans and derivative transactions. We generally are permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, enter into securities lending transactions or deliver to counterparties to cover short positions. We carry secured financing agreements on a net basis when permitted under the provisions of FASB Interpretation No. 41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements (“FIN 41”).

At August 31, 2006 and November 30, 2005, the fair value of securities received as collateral and Financial instruments and other inventory positions owned that have not been sold, repledged or otherwise encumbered totaled approximately $125 billion and $87 billion, respectively. At August 31, 2006 and November 30, 2005, the gross fair value of securities received as collateral that we were permitted to sell or repledge was approximately $612 billion and $528 billion, respectively. Of this collateral, approximately $562 billion and $499 billion at August 31, 2006 and November 30, 2005, respectively, has been sold or repledged, generally as collateral under repurchase agreements or to cover Financial instruments and other inventory positions sold but not yet purchased.

We also pledge our own assets, primarily to collateralize certain financing arrangements. These pledged securities, where the counterparty has the right by contract or custom to rehypothecate the financial instruments, are classified as Financial instruments and other inventory positions owned, pledged as collateral, in the Consolidated Statement of Financial Condition as required by SFAS 140.

The carrying value of Financial instruments and other inventory positions owned that have been pledged or otherwise encumbered to counterparties where those counterparties do not have the right to sell or repledge was approximately $71 billion and $66 billion at August 31, 2006 and November 30, 2005, respectively.

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Note 5 Short-Term Borrowings

At August 31, 2006, the Company reclassed borrowings maturing within one year of the financial statement date from long-term to short-term borrowings. Prior period amounts have been reclassified to conform to the current period presentation. Short-term borrowings consist of the following:

	August 31,		November 30,
In millions	2006		2005
Current portion of long-term borrowings	$	12,825	$	8,410
Commercial paper	1,598		1,776
Other short-term debt	3,815		1,165
Short-term borrowings	$	18,238	$	11,351

Note 6 Long-Term Borrowings

Long-term borrowings (excluding borrowings with remaining maturities within one year of the financial statement date) increased to $74.0 billion at August 31, 2006 from $53.9 billion at November 30, 2005, due to growth in our assets and the pre-funding of 2007 maturities. The weighted-average maturity of long-term borrowings was 6.3 years and 6.7 years at August 31, 2006 and November 30, 2005, respectively. Senior notes increased to $70.3 billion at August 31, 2006 from $50.5 billion at November 30, 2005, subordinated notes decreased to $1.0 billion at August 31, 2006 from $1.4 billion at November 30, 2005 and junior subordinated notes increased to $2.7 billion at August 31, 2006 from $2.0 billion at November 30, 2005. For additional information about payments and maturities of Long-term borrowings, see the Consolidated Statement of Cash Flows.

Junior Subordinated Notes

Junior subordinated notes are notes issued to trusts or limited partnerships (collectively, the “Trusts”) which qualify as equity capital by leading rating agencies (subject to limitation). The Trusts were formed for the purposes of (a) issuing securities representing ownerships interests in the assets of the Trusts; (b) investing the proceeds of the Trusts in junior subordinated notes of Holdings; and (c) engaging in activities necessary and incidental thereto.

In February 2006, Lehman Brothers UK Capital Funding III LP, a UK limited partnership (the “UK LP”), issued in aggregate €500 million Fixed/Floating Rate Enhanced Capital Advantage Preferred Securities (the “ECAPS Securities”). A corresponding €500 million principal amount of junior subordinated notes were issued by Lehman Brothers Holdings Plc to the UK LP. Distributions will accrue on the ECAPS Securities at a rate of 3.875% per annum until February 22, 2011, and thereafter at a rate equal to the 3 month EURIBOR plus 1.60% per annum. The ECAPS Securities have no mandatory redemption date, but may be redeemed at our option on the distribution payment date falling on February 22, 2011, or any distribution payment date thereafter.

We accounted for this transaction in accordance with FIN 46(R) and, accordingly, did not consolidate the UK LP. For a more complete description of the terms and conditions of this transaction, see Holdings’ Current Report on Form 8-K filed with the SEC on February 20, 2006.

Credit Facilities

We maintain an unsecured revolving credit agreement with a syndicate of banks under which the banks have committed to provide up to $2.0 billion through February 22, 2009. We also maintain a $1.0 billion multi-currency unsecured, committed revolving credit facility with a syndicate of banks for Lehman Brothers Bankhaus AG (“LBBAG”), with a term of three and a half years expiring in April 2008. We draw upon both facilities on a regular basis (typically 25% to 50% of the time on a weighted-average basis) to provide us with additional sources of long-term funding on an as-needed basis. We have the ability to prepay and redraw any number of times and to retain the proceeds for any term up to the maturity date of the facilities. As a result, we see these facilities as having the same liquidity value as long-term borrowings with the same maturity dates, and we include the drawdowns on these facilities in our reported long-term borrowings to the extent that they are outstanding as of the reporting date.

As of August 31, 2006, there were no borrowings against Holdings’ and LBBAG’s credit facilities, although drawings have been made under these facilities and repaid from time to time during the year. Our ability to borrow

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under such facilities is conditioned on complying with customary lending conditions and covenants. We have maintained compliance with the material covenants under these credit agreements at all times.

Note 7 Commitments, Contingencies and Guarantees

In the normal course of business, we enter into various commitments and guarantees, including lending commitments to high grade and high yield borrowers, private equity investment commitments, liquidity commitments and other guarantees. In all instances, we mark to market these commitments and guarantees with changes in fair value recognized in Principal transactions in the Consolidated Statement of Income.

Lending–Related Commitments

The following table summarizes lending-related commitments at August 31, 2006 and November 30, 2005:

											Total
	Amount of Commitment Expiration per Period										Contractual Amount
					2008-		2010-		2012 and		August		November
In millions	2006		2007		2009		2011		Later		31, 2006		30, 2005
High grade (1)	$	666	$	3,351	$	2,758	$	9,877	$	892	$	17,544	$	14,039
High yield (2)	1,432		1,738		995		2,160		1,564		7,889		5,172
Mortgage commitments	10,682		149		789		239		46		11,905		9,417
Investment-grade contingent acquisition facilities	440		3,226		—		—		—		3,666		3,915
Non-investment-grade contingent acquisition facilities	5,333		8,211		—		—		817		14,361		4,738
Secured lending transactions, including forward starting resale and repurchase agreements	90,622		8,425		374		210		1,290		100,921		65,782

(1)We view our net credit exposure for high grade commitments, after consideration of hedges, to be $5.0 billion and $5.4 billion at August 31, 2006 and November 30, 2005, respectively.

(2)We view our net credit exposure for high yield commitments, after consideration of hedges, to be $6.7 billion and $4.4 billion at August 31, 2006 and November 30, 2005, respectively.

High grade and high yield. Through our high grade and high yield sales, trading and underwriting activities, we make commitments to extend credit in loan syndication transactions. We use various hedging and funding strategies to actively manage our market, credit and liquidity exposures on these commitments. We do not believe total commitments necessarily are indicative of actual risk or funding requirements because the commitments may not be drawn or fully used and such amounts are reported before consideration of hedges. These commitments and any related drawdowns of these facilities typically have fixed maturity dates and are contingent on certain representations, warranties and contractual conditions applicable to the borrower. We define high yield (non-investment grade) exposures as securities of or loans to companies rated BB+ or lower or equivalent ratings by recognized credit rating agencies, as well as non-rated securities or loans that, in management’s opinion, are non-investment grade. We had commitments to investment grade borrowers of $17.5 billion (net credit exposure of $5.0 billion, after consideration of hedges) and $14.0 billion (net credit exposure of $5.4 billion, after consideration of hedges) at August 31, 2006 and November 30, 2005, respectively. We had commitments to non-investment grade borrowers of $7.9 billion (net credit exposure of $6.7 billion, after consideration of hedges) and $5.2 billion (net credit exposure of $4.4 billion, after consideration of hedges) at August 31, 2006 and November 30, 2005, respectively.

Mortgage commitments. Through our mortgage origination platforms we make commitments to extend mortgage loans. We use various hedging and funding strategies to actively manage our market, credit and liquidity exposures on these commitments. We do not believe total commitments necessarily are indicative of actual risk or funding requirements because the commitments may not be drawn or fully used and such amounts are reported before consideration of hedges. At August 31, 2006 and November 30, 2005, we had outstanding mortgage commitments of approximately $11.9 billion and $9.4 billion, respectively, including $7.0 billion and $7.7 billion of residential mortgages and $4.9 billion and $1.7 billion of commercial mortgages. The residential mortgage loan commitments

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require us to originate mortgage loans at the option of a borrower generally within 90 days at fixed interest rates. We sell residential mortgage loans, once originated, primarily through securitizations.

See Note 3 to the Consolidated Financial Statements for additional information about our securitization activities.

Contingent acquisition facilities. From time to time we provide contingent commitments to investment and non-investment grade counterparties related to acquisition financing. Our expectation is, and our past practice has been, to distribute our obligations under these commitments to third parties through loan syndications if the transaction closes. We do not believe these commitments are necessarily indicative of our actual risk because the borrower may not complete a contemplated acquisition or, if the borrower completes the acquisition, it often will raise funds in the capital markets instead of drawing on our commitment. Additionally, in most cases, the borrower’s ability to draw is subject to there being no material adverse change in the borrower’s financial conditions, among other factors. These commitments also generally contain certain flexible pricing features to adjust for changing market conditions prior to closing. We provided contingent commitments to investment-grade counterparties related to acquisition financing of approximately $3.7 billion and $3.9 billion at August 31, 2006 and November 30, 2005, respectively. In addition, we provided contingent commitments to non-investment-grade counterparties related to acquisition financing of approximately $14.4 billion and $4.7 billion at August 31, 2006 and November 30, 2005, respectively.

Secured lending transactions. In connection with our financing activities, we had outstanding commitments under certain collateralized lending arrangements of approximately $6.5 billion and $5.7 billion at August 31, 2006 and November 30, 2005, respectively. These commitments require borrowers to provide acceptable collateral, as defined in the agreements, when amounts are drawn under the lending facilities. Advances made under these lending arrangements typically are at variable interest rates and generally provide for over-collateralization. In addition, at August 31, 2006, we had commitments to enter into forward starting secured resale and repurchase agreements, primarily secured by government and government agency collateral, of $61.3 billion and $33.1 billion, respectively, compared with $38.6 billion and $21.5 billion, respectively, at November 30, 2005.

Other Commitments and Guarantees

The following table summarizes other commitments and guarantees at August 31, 2006 and November 30, 2005:

											Notional/
	Amount of Commitment Expiration per Period										Maximum Amount
					2008-		2010-		2012 and		August		November
In millions	2006		2007		2009		2011		Later		31, 2006		30, 2005
Derivative contracts (1)	$	52,255	$	96,857	$	113,949	$	87,887	$	215,690	$	566,638	$	539,461
Municipal-securities-related commitments	563		681		716		145		2,373		4,478		4,105
Other commitments with special purpose entities	1,194		198		554		617		2,428		4,991		6,321
Standby letters of credit	1,686		548		—		—		—		2,234		2,608
Private equity and other principal investment commitments	125		333		537		116		—		1,111		927

(1)We believe the fair value of these derivative contracts is a more relevant measure of the obligations because we believe the notional amount overstates the expected payout. At August 31, 2006 and November 30, 2005, the fair value of these derivative contracts approximated $11.3 billion and $9.4 billion, respectively.

Derivative contracts. In accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), we disclose certain derivative contracts meeting the FIN 45 definition of a guarantee. Under FIN 45, derivative contracts are considered to be guarantees if such contracts require us to make payments to counterparties based on changes in an underlying instrument or index (e.g., security prices, interest rates, and currency rates) and include written credit default swaps, written put options, written foreign exchange and interest rate options. Derivative contracts are not considered guarantees if such contracts are cash settled and we have no basis to determine whether it is probable the derivative counterparty held the related underlying instrument at the inception of the contract. We have determined these conditions have been met for certain large financial institutions. Accordingly, when these conditions are met, we do not include such derivatives in our guarantee disclosures. At August 31, 2006 and November 30, 2005, the maximum payout value of derivative contracts deemed to meet the FIN 45 definition of a guarantee was

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approximately $567 billion and $539 billion, respectively. For purposes of determining maximum payout, notional values are used; however, we believe the fair value of these contracts is a more relevant measure of these obligations because we believe the notional amounts greatly overstate our expected payout. At August 31, 2006 and November 30, 2005, the fair value of such derivative contracts approximated $11.3 billion and $9.4 billion, respectively. In addition, all amounts included above are before consideration of hedging transactions. We substantially mitigate our risk on these contracts through hedges, using other derivative contracts and/or cash instruments. We manage risk associated with derivative guarantees consistent with our global risk management policies. We record derivative contracts, including those considered to be guarantees, at fair value with related gains and losses recognized in Principal transactions in the Consolidated Statement of Income.

Municipal-securities-related commitments. At August 31, 2006 and November 30, 2005, we had municipal-securities-related commitments of approximately $4.5 billion and $4.1 billion, respectively. Such commitments are principally comprised of liquidity commitments related to trust certificates issued to investors backed by investment grade municipal securities. We believe our liquidity commitments to these trusts involve a low level of risk because our obligations are supported by investment grade securities and generally cease if the underlying assets are downgraded below investment grade or default. In certain instances, we also provide credit default protection to investors in such QSPEs, which approximated $0.5 billion at both August 31, 2006 and November 30, 2005.

Other commitments with SPEs.In addition to the municipal-securities-related commitments, we make certain liquidity commitments and guarantees associated with VIEs. We provided liquidity of approximately $1.2 billion and $1.9 billion at August 31, 2006 and November 30, 2005, respectively, which represented our maximum exposure to loss, to commercial paper conduits in support of certain clients’ secured financing transactions. However, we believe our actual risk to be limited because such liquidity commitments are supported by over-collateralization with investment grade collateral.

In addition, we provide limited downside protection guarantees to investors in certain VIEs. In such instances, we provide investors a guaranteed return of their initial principal investment. Our maximum exposure to loss under such commitments was approximately $3.8 billion and $3.2 billion at August 31, 2006 and November 30, 2005, respectively. We believe our actual risk to be limited because our obligations are collateralized by the VIEs’ assets and contain significant constraints under which such downside protection will be available (e.g., the VIE is required to liquidate assets in the event certain loss levels are triggered).

We also provided a guarantee totaling $1.2 billion at November 30, 2005 of collateral in a multi-seller conduit backed by short-term commercial paper assets. This commitment provided us with access to contingent liquidity of $1.2 billion as of November 30, 2005 in the event we had greater than anticipated draws under our lending commitments. This commitment expired in June 2006.

Standby letters of credit. At August 31, 2006 and November 30, 2005, we were contingently liable for $2.2 billion and $2.6 billion, respectively, of letters of credit primarily used to provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodity exchanges.

Private equity and other principal investments. At August 31, 2006 and November 30, 2005, we had private equity and other principal investment commitments of approximately $1.1 billion and $0.9 billion, respectively.

Other. In the normal course of business, we provide guarantees to securities clearinghouses and exchanges. These guarantees generally are required under the standard membership agreements, such that members are required to guarantee the performance of other members. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral.

In connection with certain asset sales and securitization transactions, we often make customary representations and warranties about the assets. Violations of these representations and warranties, such as early payment defaults by borrowers, may require us to repurchase loans previously sold, or indemnify the purchaser against any losses. To mitigate these risks, to the extent the assets being securitized may have been originated by third parties, we generally obtain equivalent representations and warranties from these third parties when we acquire the assets. We have established reserves which we believe to be adequate in connection with such representations and warranties.

Financial instruments and other inventory positions sold but not yet purchased represent our obligations to purchase the securities at prevailing market prices. Therefore, the future satisfaction of such obligations may be for an amount

25

greater or less than the amount recorded. The ultimate gain or loss is dependent on the price at which the underlying financial instrument is purchased to settle our obligation under the sale commitment.

In the normal course of business, we are exposed to credit and market risk as a result of executing, financing and settling various client security and commodity transactions. These risks arise from the potential that clients or counterparties may fail to satisfy their obligations and the collateral obtained is insufficient. In such instances, we may be required to purchase or sell financial instruments at unfavorable market prices. We seek to control these risks by obtaining margin balances and other collateral in accordance with regulatory and internal guidelines.

Certain of our subsidiaries, as general partners, are contingently liable for the obligations of certain public and private limited partnerships. In our opinion, contingent liabilities, if any, for the obligations of such partnerships will not, in the aggregate, have a material adverse effect on our consolidated financial condition or results of operations.

Income Taxes

We are continuously under audit examination by the Internal Revenue Service (“IRS”) and other tax authorities in jurisdictions in which we conduct significant business activities, such as the United Kingdom, Japan and various U.S. states and localities. We regularly assess the likelihood of additional tax assessments in each of these tax jurisdictions and the related impact on our Consolidated Financial Statements. We have established tax reserves, which we believe to be adequate, in relation to the potential for additional tax assessments. Once established, tax reserves are adjusted only when additional information is obtained or an event occurs requiring a change to such tax reserves.

During the third quarter of 2006, the IRS completed its 1997 through 2000 US federal income tax examination, which resulted in unresolved issues asserted by the IRS that challenge certain of our tax positions (the “proposed adjustments”). We believe that our tax positions comply with the applicable tax law and intend to vigorously dispute the proposed adjustments through applicable IRS and judicial procedures, as appropriate. We believe that we have adequate tax reserves in relation to these unresolved issues. However, it is possible that amounts greater than our reserves could be incurred, which we estimate would not exceed $100 million.

Litigation

In the normal course of business we have been named as a defendant in a number of lawsuits and other legal and regulatory proceedings. Such proceedings include actions brought against us and others with respect to transactions in which we acted as an underwriter or financial advisor, actions arising out of our activities as a broker or dealer in securities and commodities and actions brought on behalf of various classes of claimants against many securities firms, including us. We provide for potential losses that may arise out of legal and regulatory proceedings to the extent such losses are probable and can be estimated. Although there can be no assurance as to the ultimate outcome, we generally have denied, or believe we have a meritorious defense and will deny, liability in all significant cases pending against us, and we intend to defend vigorously each such case. Based on information currently available, we believe the amount, or range, of reasonably possible losses in excess of established reserves not to be material to the Company’s consolidated financial condition or cash flows. However, losses may be material to our operating results for any particular future period, depending on the level of income for such period.

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Note 8 Earnings per Share and Stockholders’ Equity

Earnings per common share was calculated as follows:

	Three Months						Nine Months
	Ended August 31,						Ended August 31,
In millions, except per share data	2006			2005			2006			2005
Numerator:
Income before cumulative effect of accounting change	$	916		$	879		$	2,956		$	2,437
Cumulative effect of accounting change	—			—			47			—
Preferred stock dividends	(17		)	(15		)	(49		)	(54		)
Numerator for basic earnings per share—net income applicable to common stock	$	899		$	864		$	2,954		$	2,383
Denominator:
Denominator for basic earnings per share—weighted-average common shares	540.9			557.3			544.2			557.8
Effect of dilutive securities:
Employee stock options	27.7			24.7			29.4			24.8
Restricted stock units	4.7			5.4			6.6			5.2
Dilutive potential common shares	32.4			30.1			36.0			30.0
Denominator for diluted earnings per share—weighted average common and dilutive potential common shares (1)	573.3			587.4			580.2			587.8
Earnings per Basic Share
Before cumulative effect of accounting change	$	1.66		$	1.55		$	5.34		$	4.27
Cumulative effect of accounting change	—			—			.09			—
Earnings per basic share	$	1.66		$	1.55		$	5.43		$	4.27
Earnings per Diluted Share
Before cumulative effect of accounting change	$	1.57		$	1.47		$	5.01		$	4.05
Cumulative effect of accounting change	—			—			.08			—
Earnings per diluted share	$	1.57		$	1.47		$	5.09		$	4.05

(1)Anti-dilutive options and restricted stock units excluded from the calculations of diluted earnings per share 7.9 — 5.6 6.4

On April 5, 2006, our Board of Directors approved a 2-for-1 common stock split, in the form of a stock dividend that was effected on April 28, 2006. Prior period share and earnings per share amounts have been restated to reflect the split. The par value of the common stock remained at $0.10 per share. Accordingly, an adjustment from Additional paid-in capital to Common stock was required to preserve the par value of the post-split shares.

Note 9 Regulatory Requirements

Holdings is regulated by the Securities and Exchange Commission (“SEC”) as a consolidated supervised entity (“CSE”). As such, it is subject to group-wide supervision and examination by the SEC, and must comply with rules regarding the measurement, management and reporting of market, credit, liquidity, legal and operational risk. As of August 31, 2006, Holdings was in compliance with the CSE capital requirements and held allowable capital in excess of the minimum capital requirements on a consolidated basis.

In the United States, LBI and Neuberger Berman, LLC (“NBLLC”) are broker dealers that are subject to Rule 15c3-1 of the SEC and Rule 1.17 of the Commodity Futures Trading Commission, which specify minimum net capital requirements for their registrants.

LBI elected to and was approved by the SEC to use the alternative method of computing net capital under Rule 15c3-1. The alternative net capital method allows companies to calculate net capital charges for market and derivative-related credit risk using internal risk models. As of August 31, 2006, LBI’s net capital of $5.0 billion was substantially in excess of its minimum capital requirement. LBI also is required to hold tentative net capital in

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excess of $1 billion in accordance with the market and credit risk standards of Appendix E of Rule 15c3-1 and is required to notify the SEC in the event that its tentative net capital is less than $5 billion. As of August 31, 2006, LBI had tentative net capital well in excess of both the minimum and notification requirements.

NBLLC is required to maintain a minimum capital requirement of not less than the greater of 2% of aggregate debit items arising from client transactions, as defined, or 4% of funds required to be segregated for clients’ regulated commodity accounts, as defined. As of August 31, 2006, NBLLC had regulatory net capital, as defined, of $346 million, which exceeded the minimum net capital requirement by $331 million.

LBIE, a United Kingdom registered broker-dealer and subsidiary of Holdings, is subject to the capital requirements of the Financial Services Authority (“FSA”) of the United Kingdom. Financial resources, as defined, must exceed the total financial resources requirement of the FSA. At August 31, 2006, LBIE’s financial resources of approximately $7.6 billion exceeded the minimum requirement by approximately $1.9 billion. LBJ’s Tokyo branch, a regulated broker-dealer, is subject to the capital requirements of the Financial Services Agency and, at August 31, 2006, had net capital of approximately $708 million, which was approximately $283 million in excess of the specified levels required.

Lehman Brothers Bank, FSB (the “Bank”), our thrift subsidiary, is regulated by the Office of Thrift Supervision (“OTS”). Lehman Brothers Commercial Bank (the “Industrial Bank”), our Utah industrial bank subsidiary established during 2005, is regulated by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation. The Bank and the Industrial Bank exceed all regulatory capital requirements and are considered to be well capitalized as of August 31, 2006. Lehman Brothers Bankhaus AG (“Bankhaus”), a German commercial bank, is subject to the capital requirements of the Federal Financial Supervisory Authority of the German Federal Republic. At August 31, 2006, Bankhaus’ financial resources, as defined, exceed its minimum financial resources requirement. Overall, these bank institutions have raised $21.2 billion and $14.8 billion of customer deposit liabilities as of August 31, 2006 and November 30, 2005, respectively.

In addition, our “AAA” rated derivatives subsidiaries, Lehman Brothers Financial Products Inc. (“LBFP”) and Lehman Brothers Derivative Products Inc. (“LBDP”), have established certain capital and operating restrictions that are reviewed by various rating agencies. At August 31, 2006, LBFP and LBDP each had capital that exceeded the requirements of the rating agencies. Certain other subsidiaries are subject to various securities, commodities and banking regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. At August 31, 2006, these other subsidiaries were in compliance with their applicable local capital adequacy requirements.

Note 10 Share-Based Employee Incentive Plans

We adopted the fair value recognition provisions for share-based awards pursuant to SFAS 123(R) effective December 1, 2005. See Note 1 “Summary of Significant Accounting Policies – Accounting Changes and Other Accounting Developments” for a further discussion. The following disclosures are also being provided pursuant to the requirements of SFAS 123(R).

We sponsor several share-based employee incentive plans. Amortization of compensation costs for grants awarded under these plans was approximately $247 million and $152 million during the three months ended August 31, 2006 and 2005, respectively, and approximately $747 million and $514 million during the nine months ended August 31, 2006 and 2005, respectively. The total income tax benefit recognized in the Consolidated Statement of Income for these plans was $102 million and $66 million for the three months ended August 31, 2006 and 2005, respectively, and $309 million and $223 million for the nine months ended August 31, 2006 and 2005, respectively.

At August 31, 2006, unrecognized compensation cost related to nonvested stock option and RSU awards totaled $1.8 billion. The cost of these non-vested awards is expected to be recognized over a weighted-average period of approximately three years.

SFAS 123(R) generally requires share-based awards granted to retirement-eligible employees to be expensed immediately. For share-based awards granted prior to our adoption of SFAS 123(R), compensation cost related to awards made to retirement-eligible employees and those with non-substantive non-compete agreements was recognized over the service periods specified in the award; we accelerated the recognition of compensation cost if

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and when a retirement-eligible employee or an employee subject to a non-substantive non-compete agreement terminated employment.

The following table sets forth the pro forma compensation cost that would have been reported for the three and nine months ended August 31, 2006 and 2005 if share-based awards granted to retirement-eligible employees, and those with non-substantive non-compete agreements had been expensed immediately as required by SFAS 123(R):

Pro Forma Compensation Cost

	Three Months					Nine Months
	Ended August 31,					Ended August 31,
In millions	2006			2005		2006			2005
Compensation and benefits, as reported	$	2,060		$	1,906	$	6,434		$	5,415
Effect of immediately expensing share-based awards granted to retirement-eligible employees (1)	(156		)	129		(479		)	328
Pro forma compensation and benefits costs	$	1,904		$	2,035	$	5,955		$	5,743

(1)The 2006 pro forma impact represents the presumed benefit as if we immediately had amortized pre-2006 awards granted to retirement eligible employees and those with non-substantive non-compete agreements, as these awards would have been expensed as of the grant date. Compensation and benefits, as reported for 2006, includes the amortization of such pre-2006 awards. The adoption of SFAS 123(R) did not have a material effect on compensation and benefits expense for the three or nine months ended August 31, 2006, and is not expected to have a material impact on fiscal 2006 compensation and benefits expense. See Note 1, “Summary of Significant Accounting Policies—Accounting Changes and Other Accounting Developments.”

Share-Based Employee Incentive Plans

We sponsor several share-based employee incentive plans. The total number of shares of common stock remaining available for future awards under these plans at August 31, 2006, was 47.7 million (not including shares that may be returned to the Stock Incentive Plan as described below).

1994 and 1996 Management Ownership Plans and Employee Incentive Plan. The Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (the “1994 Plan”), the Lehman Brothers Holdings Inc. 1996 Management Ownership Plan (the “1996 Plan”), and the Lehman Brothers Holdings Inc. Employee Incentive Plan (the “EIP”) all expired following the completion of their various terms. These plans provided for the issuance of RSUs, performance stock units (“PSUs”), stock options and other share-based awards to eligible employees. At August 31, 2006, awards with respect to 607.9 million shares of common stock have been made under these plans, of which 188.0 million are outstanding and 419.9 million have been converted to freely transferable common stock. An additional 0.4 million shares authorized for issuance under the 1994 Plan have been reserved solely for issuance in respect of dividends on outstanding awards under the 1994 Plan.

Stock Incentive Plan.The Stock Incentive Plan (the “SIP”) has a 10-year term ending in May 2015, with provisions similar to the previous plans, and authorization to issue up to 20.0 million shares of common stock. The 34.3 million shares authorized for issuance under the 1996 Plan and the EIP that remained unawarded upon their expiration (including forfeitures, but less any shares that may be issued in respect of dividends on outstanding awards under those plans) are also available for awards under the SIP. In addition, shares subject to awards under the 1996 Plan, the EIP and the SIP, but which are not subsequently issued, will become available for new awards under the SIP. Awards with respect to 8.0 million shares of common stock have been made under the SIP as of August 31, 2006, most of which are outstanding.

1999 Long-Term Incentive Plan. The 1999 Neuberger Berman Inc. Long-Term Incentive Plan (the “LTIP”) provides for the grant of restricted stock, restricted units, incentive stock, incentive units, deferred shares, supplemental units and stock options. The total number of shares of common stock that may be issued under the LTIP is 15.4 million. At August 31, 2006, awards with respect to approximately 14.0 million shares of common stock had been made under the LTIP, of which 6.1 million were outstanding.

Restricted Stock Units

Eligible employees receive RSUs, in lieu of cash, as a portion of their total compensation. There is no further cost to employees associated with RSU awards. RSU awards generally vest over two to five years and convert to unrestricted freely transferable common stock five years from the grant date. All or a portion of an award may be

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canceled if employment is terminated before the end of the relevant vesting period. We accrue dividend equivalents on outstanding RSUs (in the form of additional RSUs), based on dividends declared on our common stock.

For RSUs granted prior to 2004, we measured compensation cost based on the market value of our common stock at the grant date in accordance with APB 25 and, accordingly, a discount from the market price of an unrestricted share of common stock on the RSU grant date was not recognized for selling restrictions subsequent to the vesting date. For awards granted beginning in 2004, we measure compensation cost based on the market price of our common stock at the grant date less a discount for sale restrictions subsequent to the vesting date in accordance with SFAS 123 and SFAS 123(R). The fair value of RSUs subject to post-vesting date sale restrictions are generally discounted by five percent for each year of post-vesting restriction, based on market-based studies and academic research on securities with restrictive features. RSUs granted in each of the periods presented contain selling restrictions subsequent to the vesting date.

The following table summarizes RSU activity during the nine months ended August 31, 2006:

Restricted Stock Units

			Weighted Average
	Number		Grant Date
	of RSUs		Fair Value
Outstanding, November 30, 2005	120,417,674		$	38.35
Granted	1,775,636		65.54
Canceled	(1,831,221	)	42.99
Converted to common stock without restrictions	(6,719,847	)	30.51
Outstanding, August 31, 2006	113,642,242		$	39.16
Common stock held in RSU Trust	(72,996,258	)
Outstanding, net of common stock held in RSU trust	40,645,984

The fair value of RSUs converted to common stock without restrictions during the nine months ended August 31, 2006 was $441 million. Compensation costs previously recognized and tax benefits recognized in equity upon issuance of these awards were approximately $310 million.

Of the RSUs outstanding at August 31, 2006, approximately 80.6 million were amortized and included in basic earnings per share, approximately 4.6 million will be amortized during the remainder of 2006, and the remainder will be amortized subsequent to November 30, 2006.

Included in the previous table are PSUs awarded to certain senior officers prior to 2004. The number of PSUs that may be earned is dependent on achieving certain performance levels within predetermined performance periods. During the performance period, these PSUs are accounted for as variable awards. At the end of a performance period, any PSUs earned will convert one-for-one to RSUs that then vest in three or more years. At August 31, 2006, approximately 22.3 million PSUs had been awarded, of which 10.8 million remain outstanding (inclusive of dividends), subject to vesting and transfer restrictions. The compensation cost for the RSUs payable in satisfaction of PSUs is accrued over the combined performance and vesting periods.

Stock Options

Eligible employees receive stock options, in lieu of cash, as a portion of their total compensation. Such options generally become exercisable over a one- to five-year period and generally expire 10 years from the date of grant, subject to accelerated expiration upon termination of employment.

We use the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. Stock options granted have exercise prices equal to the market price of our common stock on the grant date. The principal assumptions utilized in valuing options and our methodology for estimating such model inputs include: 1) risk-free interest rate - estimate is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the option, 2) expected volatility - estimate is based on the historical volatility of our common stock for the three years preceding the award date, the implied volatility of market-traded options on our common stock on the grant date and other factors and 3) expected option life - estimate is based on internal studies of historical experience and projected exercise behavior based on different employee groups and specific option characteristics,

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including the effect of employee terminations. Based on the results of the model, the weighted-average fair value of stock options granted during the nine months ended August 31, 2006 was $17.55. The weighted-average assumptions used during the nine months ended August 31, 2006 were as follows:

Weighted Average Black-Scholes Assumptions

Risk-free interest rate	4.55		%
Expected volatility	23.07		%
Dividends per share	$	0.48
Expected life	4.6 years

The following table summarizes stock option activity during the nine months ended August 31, 2006:

Stock Option Activity

			Weighted-Average		Expiration
	Options		Exercise Price		Dates
Outstanding, November 30, 2005	101,750,326		$	31.36	12/05—11/15
Granted	2,670,400		66.14
Exercised	(16,376,690	)	28.70
Canceled	(348,810	)	31.41
Outstanding, August 31, 2006	87,695,226		$	32.92	09/06—05/16

The total intrinsic value of stock options exercised during the nine months ended August 31, 2006 was $669 million for which compensation costs previously recognized and tax benefits recognized in equity upon issuance totaled approximately $271 million. Cash received from the exercise of stock options during the nine months ended August 31, 2006 totaled $470 million.

The table below provides additional information related to stock options outstanding at August 31, 2006:

Stock Options

	Outstanding,
Dollars in millions, except per share data	Net of Expected		Options
August 31, 2006	Forfeitures		Exercisable
Number of options	86,206,967		37,748,350
Weighted-average exercise price	$	32.75	$	27.32
Aggregate intrinsic value	$	2,677	$	1,377
Weighted-average remaining contractual term, in years	4.9		4.1

At August 31, 2006, the intrinsic value of vested options was approximately $1.4 billion for which compensation cost previously recognized and tax benefits expected to be recognized in equity, upon issuance, are approximately $603 million.

Restricted Stock

At August 31, 2006 there were approximately 726,700 shares of restricted stock outstanding. The fair value of the 353,994 shares of restricted stock that became freely tradable during the nine months ended August 31, 2006 was $24 million.

Stock Repurchase Program

We maintain a stock repurchase program to manage our equity capital. Our stock repurchase program is effected through regular open-market purchases, as well as through employee transactions where employees tender shares of common stock to pay for the exercise price of stock options and the required tax withholding obligations upon option exercises and conversion of restricted stock units to freely-tradable common stock. For 2006, our Board of Directors has authorized the repurchase, subject to market conditions, of up to 80 million shares of Holdings’ common stock for the management of our equity capital, including approximately 55 million shares estimated for offsetting the 2006 dilution due to equity-based award plans. Our Board also authorized the repurchase in 2006, subject to market conditions, of up to an additional 30 million shares, for the possible acceleration of repurchases to

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offset a portion of 2007 dilution due to equity-based award plans. During the three and nine months ended August 31, 2006, we repurchased approximately 11.0 million and 33.6 million shares, respectively, of our common stock through open-market purchases at an aggregate cost of $705 million and $2.3 billion, respectively, or $64.09 per share and $67.91 per share, respectively. In addition, we withheld approximately 0.9 million and 5.5 million shares, respectively, of common stock from employees at an equivalent cost of $55 million and $381 million, respectively.

In connection with awards made under our share-based employee incentive plans, we are authorized to issue shares of common stock held in treasury or newly-issued shares.

Note 11 Employee Benefit Plans

We provide both funded and unfunded noncontributory defined benefit pension plans for the majority of our employees worldwide. In addition, we provide certain other postretirement benefits, primarily health care and life insurance, to eligible employees. The following table presents the components of net periodic cost related to these plans for the three and nine months ended August 31, 2006 and 2005:

Components of Net Periodic Cost

													Postretirement
	U.S. Pensions						Non-U.S. Pensions						Benefits
In millions	2006			2005			2006			2005			2006		2005
Three months ended August 31,
Service cost	$	11		$	10		$	2		$	2		$	1	$	—
Interest cost	15			13			5			4			1		1
Expected return on plan assets	(19		)	(18		)	(7		)	(6		)	—		—
Amortization of net actuarial loss	7			8			3			2			—		—
Amortization of prior service cost	1			1			—			—			—		—
Net periodic cost	$	15		$	14		$	3		$	2		$	2	$	1
Nine months ended August 31,
Service cost	$	32		$	30		$	6		$	6		$	1	$	1
Interest cost	45			41			15			14			3		3
Expected return on plan assets	(57		)	(56		)	(20		)	(18		)	—		—
Amortization of net actuarial loss	21			24			8			8			—		—
Amortization of prior service cost	3			3			—			—			—		—
Net periodic cost	$	44		$	42		$	9		$	10		$	4	$	4

Expected Contributions for the Fiscal Year Ending November 30, 2006

We do not expect it to be necessary to contribute to our U.S. pension plans in the fiscal year ending November 30, 2006. We expect to contribute approximately $30 million to our non-U.S. pension plans in the fiscal year ending November 30, 2006.

Note 12 Business Segments and Geographic Information

We operate in three business segments: Investment Banking, Capital Markets and Investment Management.

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

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The Capital Markets business segment includes institutional client-flow activities, prime brokerage, research, mortgage origination and securitization and secondary-trading and financing activities in fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments and investments. We are a leading global market-maker in numerous equity and fixed income products including U.S., European and Asian equities, government and agency securities, money market products, corporate high-grade, high-yield and emerging market securities, mortgage- and asset-backed securities, preferred stock, municipal securities, bank loans, foreign exchange, financing and derivative products. We are one of the largest investment banks in terms of U.S. and pan-European listed equities trading volume, and we maintain a major presence in OTC U.S. stocks, major Asian large capitalization stocks, warrants, convertible debentures and preferred issues. In addition, the secured financing business manages our equity and fixed income matched book activities, supplies secured financing to institutional clients and provides secured funding for our inventory of equity and fixed income products. The Capital Markets segment also includes proprietary activities as well as principal investing in real estate and private equity.

The Investment Management business segment consists of the Asset Management and Private Investment Management businesses. Asset Management generates fee-based revenues from customized investment management services for high-net-worth clients, as well as fees from mutual fund and other institutional investors. Asset Management also generates management and incentive fees from our role as general partner for private equity and other alternative investment partnerships. Private Investment Management provides comprehensive investment, wealth advisory and capital markets execution services to high-net-worth and middle market clients.

Our business segment information for the three and nine months ended August 31, 2006 and 2005 is prepared using the following methodologies:

•Revenues and expenses directly associated with each business segment are included in determining income before taxes.

•Revenues and expenses not directly associated with specific business segments are allocated based on the most relevant measures applicable, including each segment’s revenues, headcount and other factors.

•Net revenues include allocations of interest revenue and interest expense to securities and other positions in relation to the cash generated by, or funding requirements of, the underlying positions.

•Business segment assets include an allocation of indirect corporate assets that have been fully allocated to our segments, generally based on each segment’s respective headcount figures.

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Business Segments

	Investment		Capital		Investment
In millions	Banking		Markets		Management		Total
Three months ended August 31, 2006
Gross revenues	$	726	$	10,378	$	623	$	11,727
Interest expense	—		7,531		18		7,549
Net revenues	726		2,847		605		4,178
Depreciation and amortization expense	11		98		21		130
Other expenses	584		1,635		462		2,681
Income before taxes	$	131	$	1,114	$	122	$	1,367
Segment assets (billions)	$	1.1	$	464.9	$	7.7	$	473.7
Three months ended August 31, 2005
Gross revenues	$	815	$	7,299	$	525	$	8,639
Interest expense	—		4,773		14		4,787
Net revenues	815		2,526		511		3,852
Depreciation and amortization expense	9		77		20		106
Other expenses	502		1,586		365		2,453
Income before taxes	$	304	$	863	$	126	$	1,293
Segment assets (billions)	$	1.1	$	377.0	$	6.2	$	384.3
Nine months ended August 31, 2006
Gross revenues	$	2,302	$	29,432	$	1,815	$	33,549
Interest expense	—		20,461		38		20,499
Net revenues	2,302		8,971		1,777		13,050
Depreciation and amortization expense	31		284		65		380
Other expenses	1,746		5,158		1,350		8,254
Income before taxes and cumulative effect of accounting change	$	525	$	3,529	$	362	$	4,416
Segment assets (billions)	$	1.1	$	464.9	$	7.7	$	473.7
Nine months ended August 31, 2005
Gross revenues	$	2,077	$	19,822	$	1,466	$	23,365
Interest expense	—		12,379		46		12,425
Net revenues	2,077		7,443		1,420		10,940
Depreciation and amortization expense	27		230		61		318
Other expenses	1,381		4,583		1,046		7,010
Income before taxes	$	669	$	2,630	$	313	$	3,612
Segment assets (billions)	$	1.1	$	377.0	$	6.2	$	384.3

Net Revenues by Geographic Region

Net revenues are recorded in the geographic region of the location of the senior coverage banker or investment advisor in the case of Investment Banking or Asset Management, respectively, or where the position was risk managed within Capital Markets and Private Investment Management. In addition, certain revenues associated with domestic products and services that result from relationships with international clients have been classified as international revenues using an allocation consistent with our internal reporting.

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Net Revenues by Geographic Region

	Three Months				Nine Months
	Ended August 31,				Ended August 31,
In millions	2006		2005		2006		2005
Europe	$	1,161	$	855	$	3,370	$	2,687
Asia Pacific and other	429		427		1,550		1,226
Total Non-U.S.	1,590		1,282		4,920		3,913
U.S.	2,588		2,570		8,130		7,027
Net revenues	$	4,178	$	3,852	$	13,050	$	10,940

Note 13 Condensed Consolidating Financial Statement Schedules

LBI, a wholly-owned subsidiary of Holdings, had approximately $1.1 billion of debt securities outstanding at August 31, 2006 that were issued in registered public offerings and were therefore subject to the reporting requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934. Holdings has fully and unconditionally guaranteed these outstanding debt securities of LBI (and any debt securities of LBI that may be issued in the future under these registration statements), which, together with the information presented in this Note 13, allows LBI to avail itself of an exemption provided by SEC rules from the requirement to file separate LBI reports under the Exchange Act. See Note 12 to the 2005 Consolidated Financial Statements included in the Form 10-K for a discussion of restrictions on the ability of Holdings to obtain funds from its subsidiaries by dividend or loan.

The following schedules set forth our condensed consolidating statements of income for the three and nine months ended August 31, 2006 and 2005, our condensed consolidating balance sheets at August 31, 2006 and November 30, 2005, and our condensed consolidating statements of cash flows for the nine months ended August 31, 2006 and 2005. In the following schedules, “Holdings” refers to the unconsolidated balances of Holdings, “LBI” refers to the unconsolidated balances of Lehman Brothers Inc. and “Other Subsidiaries” refers to the combined balances of all other subsidiaries of Holdings. “Eliminations” represents the adjustments necessary to (a) eliminate intercompany transactions and (b) eliminate our investments in subsidiaries.

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Condensed Consolidating Statement of Income

						Other
In millions	Holdings			LBI		Subsidiaries		Eliminations			Total
Three months ended August 31, 2006
Net revenues	$	153		$	1,376	$	2,649	$	—		$	4,178
Equity in net income of subsidiaries	1,002			111		—		(1,113		)	—
Total non-interest expenses	230			942		1,639		—			2,811
Income before taxes	925			545		1,010		(1,113		)	1,367
Provision for income taxes	9			169		273		—			451
Net income	$	916		$	376	$	737	$	(1,113	)	$	916
Three months ended August 31, 2005
Net revenues	$	41		$	1,139	$	2,672	$	—		$	3,852
Equity in net income of subsidiaries	1,145			123		—		(1,268		)	—
Total non-interest expenses	508			813		1,238		—			2,559
Income before taxes	678			449		1,434		(1,268		)	1,293
Provision (benefit) for income taxes	(201		)	124		491		—			414
Net income	$	879		$	325	$	943	$	(1,268	)	$	879
Nine months ended August 31, 2006
Net revenues	$	(317	)	$	4,930	$	8,437	$	—		$	13,050
Equity in net income of subsidiaries	3,487			385		—		(3,872		)	—
Total non-interest expenses	643			3,209		4,782		—			8,634
Income before taxes and cumulative effect of accounting change	2,527			2,106		3,655		(3,872		)	4,416
Provision (benefit) for income taxes	(451		)	668		1,243		—			1,460
Income before cumulative effect of accounting change	2,978			1,438		2,412		(3,872		)	2,956
Cumulative effect of accounting change	25			22		—		—			47
Net income	$	3,003		$	1,460	$	2,412	$	(3,872	)	$	3,003
Nine months ended August 31, 2005
Net revenues	$	(183	)	$	3,171	$	7,952	$	—		$	10,940
Equity in net income of subsidiaries	3,105			486		—		(3,591		)	—
Total non-interest expenses	1,173			2,268		3,887		—			7,328
Income before taxes	1,749			1,389		4,065		(3,591		)	3,612
Provision (benefit) for income taxes	(688		)	329		1,534		—			1,175
Net income	$	2,437		$	1,060	$	2,531	$	(3,591	)	$	2,437

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Condensed Consolidating Balance Sheet at August 31, 2006

					Other
In millions	Holdings		LBI		Subsidiaries		Eliminations			Total
Assets
Cash and cash equivalents	$	1,191	$	609	$	6,811	$	(4,444	)	$	4,167
Cash and securities segregated and on deposit for regulatory and other purposes	51		2,716		2,969		—			5,736
Financial instruments and other inventory positions owned and Securities received as collateral	19,228		65,864		168,276		(43,830		)	209,538
Collateralized agreements	—		146,412		73,755		—			220,167
Receivables and other assets	5,480		9,468		27,721		(8,540		)	34,129
Due from subsidiaries	85,827		61,286		403,775		(550,888		)	—
Equity in net assets of subsidiaries	18,628		1,414		43,125		(63,167		)	—
Total assets	$	130,405	$	287,769	$	726,432	$	(670,869	)	$	473,737
Liabilities and stockholders’ equity
Short-term borrowings	$	9,680	$	421	$	8,194	$	(57	)	$	18,238
Financial instruments and other inventory positions sold but not yet purchased and Obligation to return securities received as collateral	421		48,013		119,641		(42,158		)	125,917
Collateralized financing	7,445		84,497		72,775		—			164,717
Accrued liabilities and other payables	1,799		19,667		61,620		(10,651		)	72,435
Due to subsidiaries	40,438		125,166		349,409		(515,013		)	—
Long-term borrowings	52,226		5,836		55,795		(39,823		)	74,034
Total liabilities	112,009		283,600		667,434		(607,702		)	455,341
Commitments and contingencies
Total stockholders’ equity	18,396		4,169		58,998		(63,167		)	18,396
Total liabilities and stockholders’ equity	$	130,405	$	287,769	$	726,432	$	(670,869	)	$	473,737

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Condensed Consolidating Balance Sheet at November 30, 2005

					Other
In millions	Holdings		LBI		Subsidiaries		Eliminations			Total
Assets
Cash and cash equivalents	$	4,053	$	447	$	2,434	$	(2,034	)	$	4,900
Cash and securities segregated and on deposit for regulatory and other purposes	48		2,806		2,890		—			5,744
Financial instruments and other inventory positions owned and Securities received as collateral	22,087		56,936		154,023		(50,633		)	182,413
Collateralized agreements	—		126,399		58,265		—			184,664
Receivables and other assets	4,382		10,268		25,869		(8,177		)	32,342
Due from subsidiaries	56,195		37,768		289,590		(383,553		)	—
Equity in net assets of subsidiaries	16,062		1,221		35,625		(52,908		)	—
Total assets	$	102,827	$	235,845	$	568,696	$	(497,305	)	$	410,063
Liabilities and stockholders’ equity
Short-term borrowings	$	6,118	$	418	$	4,815	$	—		$	11,351
Financial instruments and other inventory positions sold but not yet purchased and Obligation to return securities received as collateral	238		55,224		109,685		(49,595		)	115,552
Collateralized financing	13,158		70,739		68,528		—			152,425
Accrued liabilities and other payables	1,570		19,050		48,202		(8,780		)	60,042
Due to subsidiaries	27,486		81,007		247,235		(355,728		)	—
Long-term borrowings	37,463		5,619		41,111		(30,294		)	53,899
Total liabilities	86,033		232,057		519,576		(444,397		)	393,269
Commitments and contingencies
Total stockholders’ equity	16,794		3,788		49,120		(52,908		)	16,794
Total liabilities and stockholders’ equity	$	102,827	$	235,845	$	568,696	$	(497,305	)	$	410,063

38

Condensed Consolidating Statement of Cash Flows for the Nine months ended August 31, 2006

							Other
In millions	Holdings			LBI			Subsidiaries			Eliminations			Total
Cash Flows from Operating Activities
Net income	$	3,003		$	1,460		$	2,412		$	(3,872	)	$	3,003
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in income of subsidiaries	(3,487		)	(385		)	—			3,872			—
Depreciation and amortization	109			21			250			—			380
Amortization of deferred stock compensation	747			—			—			—			747
Cumulative effect of accounting change	(25		)	(22		)	—			—			(47		)
Other adjustments	15			—			—			—			15
Net change in:
Cash and securities segregated and on deposit for regulatory and other purposes	(3		)	90			(79		)	—			8
Financial instruments and other inventory positions owned	3,628			(8,932		)	(12,841		)	(6,740		)	(24,885		)
Financial instruments and other inventory positions sold but not yet purchased	183			(7,211		)	9,756			7,366			10,094
Collateralized agreements and collateralized financing, net	(5,713		)	(6,255		)	(11,243		)	—			(23,211		)
Other assets and payables, net	(1,141		)	1,470			12,925			(2,539		)	10,715
Due to/from affiliates, net	(16,680		)	20,641			(12,011		)	8,050			—
Net cash (used in) provided by operating activities	(19,364		)	877			(10,831		)	6,137			(23,181		)
Cash Flows from Investing Activities
Dividends received/(paid)	1,752			(800		)	(952		)	—			—
Purchase of property, equipment and leasehold improvements, net	(256		)	(27		)	(121		)	—			(404		)
Business acquisitions, net of cash acquired	—			—			(206		)	—			(206		)
Capital contributions from/to subsidiaries, net	(614		)	(100		)	714			—			—
Net cash provided by (used in) investing activities	882			(927		)	(565		)	—			(610		)
Cash Flows from Financing Activities
Derivative contracts with a financing element	—			—			200			—			200
Tax benefit from the issuance of stock-based awards	376			—			—			—			376
Issuance (payments) of short-term borrowings, net	19			5			2,505			(57		)	2,472
Issuance of long-term borrowings	24,418			516			22,366			(9,686		)	37,614
Principal payments of long-term borrowings, including the current portion of long-term borrowings	(7,122		)	(309		)	(9,298		)	1,196			(15,533		)
Issuance of common stock	111			—			—			—			111
Issuance of treasury stock	358			—			—			—			358
Purchase of treasury stock	(2,282		)	—			—			—			(2,282		)
Dividends paid	(258		)	—			—			—			(258		)
Net cash provided by (used in) financing activities	15,620			212			15,773			(8,547		)	23,058
Net change in cash and cash equivalents	(2,862		)	162			4,377			(2,410		)	(733		)
Cash and cash equivalents, beginning of period	4,053			447			2,434			(2,034		)	4,900
Cash and cash equivalents, end of period	$	1,191		$	609		$	6,811		$	(4,444	)	$	4,167

39

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended August 31, 2005

							Other
In millions	Holdings			LBI			Subsidiaries			Eliminations			Total
Cash Flows from Operating Activities
Net income	$	2,437		$	1,060		$	2,531		$	(3,591	)	$	2,437
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in income of subsidiaries	(3,105		)	(486		)	—			3,591			—
Depreciation and amortization	87			22			209			—			318
Tax benefit from issuance of stock-based awards	393			—			—			—			393
Amortization of deferred stock compensation	514			—			—			—			514
Other adjustments	16			—			7			—			23
Net change in:
Cash and securities segregated and on deposit	—			(512		)	66			—			(446		)
Financial instruments and other inventory positions owned	(9,696		)	(1,572		)	(16,622		)	3,785			(24,105		)
Financial instruments and other inventory positions sold but not yet purchased	(36		)	9,208			(4,496		)	(4,098		)	578
Collateralized agreements and collateralized financing, net	6,926			(21,483		)	19,175			—			4,618
Other assets and payables, net	312			4,383			2,795			(429		)	7,061
Due to/from affiliates, net	(1,117		)	8,879			(13,308		)	5,546			—
Net cash (used in) provided by operating activities	(3,269		)	(501		)	(9,643		)	4,804			(8,609		)
Cash Flows from Investing Activities
Dividends received / (paid)	1,473			(500		)	(973		)	—			—
Purchase of property, equipment and leasehold improvements, net	(146		)	(32		)	(116		)	—			(294		)
Capital contributions from/to subsidiaries, net	(974		)	—			974			—			—
Net cash provided by (used in) investing activities	353			(532		)	(115		)	—			(294		)
Cash Flows from Financing Activities
Derivative contracts with a financing element	—			—			312			—			312
Issuance (payments) of short-term borrowings, net	220			324			226			—			770
Issuance of long-term borrowings	9,813			500			12,744			(5,020		)	18,037
Principal payments of long-term borrowings, including the current portion of long-term borrowings	(6,143		)	(95		)	(3,783		)	206			(9,815		)
Issuance of common stock	215			—			—			—			215
Issuance of treasury stock	788			—			—			—			788
Purchase of treasury stock	(2,072		)	—			—			—			(2,072		)
Purchase and retirement of preferred stock	(250		)	—			—			—			(250		)
Dividends paid	(229		)	—			—			—			(229		)
Net cash provided by (used in) financing activities	2,342			729			9,499			(4,814		)	7,756
Net change in cash and cash equivalents	(574		)	(304		)	(259		)	(10		)	(1,147		)
Cash and cash equivalents, beginning of period	1,940			557			2,943			—			5,440
Cash and cash equivalents, end of period	$	1,366		$	253		$	2,684		$	(10	)	$	4,293

40

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Lehman Brothers Holdings Inc.

We have reviewed the consolidated statement of financial condition of Lehman Brothers Holdings Inc. and Subsidiaries (the “Company”) as of August 31, 2006, and the related consolidated statement of income for the three-month and nine-month periods ended August 31, 2006 and 2005 and the consolidated statement of cash flows for the nine-month periods ended August 31, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of the Company as of November 30, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended and in our report dated February 13, 2006, we expressed an unqualified opinion on those consolidated financial statements.

New York, New York

October 10, 2006

41

LEHMAN BROTHERS HOLDINGS INC.

PART I—FINANCIAL INFORMATION

ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
   OPERATIONS

Contents

	Page
	Number
Introduction	43
Forward-Looking Statements	43
Executive Overview	44
Consolidated Results of Operations	46
Business Segments	49
Geographic Revenues	54
Liquidity, Funding and Capital Resources	54
Summary of Contractual Obligations and Commitments	61
Off-Balance-Sheet Arrangements	62
Risk Management	64
Critical Accounting Policies and Estimates	68
2-for-1 Stock Split	73
Accounting and Regulatory Developments	73
Effects of Inflation	76

42

LEHMAN BROTHERS HOLDINGS INC.

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

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included in Holdings’ Annual Report on Form 10-K for the fiscal year ended November 30, 2005 (the “Form 10-K”).

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

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

All references in this MD&A to the 2006 and 2005 three and nine months refer to our three- and nine-month fiscal periods ended August 31, 2006 and 2005, or the last day of such fiscal periods, as the context requires, and all references to quarters are to our fiscal quarters, unless specifically stated otherwise. All share and per share amounts have been retroactively adjusted for the two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective April 28, 2006. See Note 8 to the Consolidated Financial Statements and “2-for-1 Stock Split” in this MD&A for more information.

Forward-Looking Statements

Some of the statements contained in this MD&A, including those relating to our strategy and other statements that are predictive in nature, that depend on or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are not historical facts but instead represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include, but are not limited to, market risk, the competitive environment, investor sentiment, liquidity risk, credit ratings changes, credit exposure, operational risk and legal and regulatory changes and proceedings. For further discussion of these risks, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of OperationsCertain Factors Affecting Results of Operations” in the Form 10-K.

As a global investment bank, our results of operations have varied significantly in response to global economic and market trends and geopolitical events. The nature of our business makes predicting the future trends of net revenues difficult. Caution should be used when extrapolating historical results to future periods. Our actual results and

43

financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview(1)

Summary of Results

We achieved our third best quarterly results ever, trailing only the first two quarters of 2006. For the first nine months of 2006, we reported record net revenues, net income and diluted earnings per share, driven by record net revenues in each of our three business segments and in each of our three geographic regions.

Net income totaled $916 million and $3.0 billion in the 2006 three and nine months, respectively, up 4% and 23% from the corresponding 2005 periods. Diluted earnings per share were $1.57 and $5.09 in the 2006 three and nine months, respectively, up 7% and 26% from the corresponding 2005 periods. The 2006 nine months results included an after-tax gain of $47 million ($0.08 per diluted common share) from the cumulative effect of an accounting change for equity-based compensation resulting from the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No.123 (revised) Share-Based Payment (“SFAS 123(R)”). See Note 10 to the Consolidated Financial Statements for additional information. Net revenues rose to $4.2 billion and $13.1 billion in the 2006 three and nine months, respectively, up 8% and 19% from the corresponding 2005 periods. Annualized return on average common stockholders’ equity(2) was 21.0% and 23.8% in the 2006 three and nine months, respectively, compared with 23.0% and 21.9% in the corresponding 2005 periods. Annualized return on average tangible common stockholders’ equity(2) was 26.1% and 29.7% in the 2006 three and nine months, respectively, compared with 29.4% and 28.3% in the corresponding 2005 periods.

Business Environment

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

The global market environment during most of the first six months of fiscal 2006 was favorable for our businesses due to a combination of factors—positive economic growth, strong corporate profitability, deep pools of global liquidity, and tightening credit spreads. However, the third quarter of 2006 saw market conditions become more challenging, with concerns about slowing economies in the U.S. and Japan, the slowdown in the U.S. housing market, higher oil prices and elevated geopolitical risk. In addition, fears over inflation led to the tightening of interest rates by the major central banks. These factors resulted in the flattening of yield curves globally and the widening of credit spreads. As the third quarter ended, capital markets staged a recovery and credit spreads narrowed from the higher levels seen earlier in the quarter.

Equity markets Global equity markets had a strong first quarter in 2006, due primarily to positive economic data and strong earnings reports. In spite of the strong start to the second quarter, concerns over further interest rate

(1)Volume statistics in this MD&A were obtained from Thomson Financial.

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

	Three Months						Nine Months
	Ended August 31,						Ended August 31,
In millions	2006			2005			2006			2005
Average common stockholders’ equity	$	17,094		$	15,011		$	16,571		$	14,502
Average identifiable intangible assets and goodwill	(3,331		)	(3,274		)	(3,300		)	(3,277		)
Average tangible common stockholders’ equity	$	13,763		$	11,737		$	13,271		$	11,225

44

hikes, high oil prices and other geopolitical concerns led to a decline in the global equity markets during that quarter. In the third quarter, there was increased volatility in the U.S. equity markets due to continued concerns about geopolitical risks and uncertainty about the Federal Reserve Bank’s (the “Fed”) monetary policy. However, at the meeting on August 8^th, the Fed paused in raising interest rates for the first time in over two years. Global equity markets rose by 3% during the third quarter of 2006 and most major global indices increased from second quarter 2006 levels. Trading volumes for most major global indices increased for both the 2006 three and nine month periods compared with their corresponding 2005 periods.

Fixed income markets In the first half of 2006, interest rates continued to remain low in absolute terms in spite of the Fed raising short term interest rates in the U.S. by 100 basis points, and credit and swap spreads generally remained tight. The third quarter saw interest rate hikes by the major central banks which resulted in a flattened yield curve globally, and inverted yield curves in the U.S. and U.K. for much of the period. In addition, credit spreads widened as investors repositioned their portfolios into more defensive asset classes. Total global debt origination increased 10% in the 2006 nine month period compared with the corresponding 2005 period, on higher issuances in virtually all products, but declined 4% in the 2006 three month period compared with the corresponding 2005 period.

Mergers and acquisitions Completed M&A volumes declined 25% in the 2006 three months compared with the corresponding 2005 period. However, completed M&A volumes remained strong for the 2006 nine months, increasing 21% compared with the corresponding 2005 period. Likewise, announced M&A volumes increased 25% for the 2006 three months compared to the prior year period, while increasing 36% for the 2006 nine months over the comparable period in 2005.

Economic Outlook

The financial services industry is significantly influenced by worldwide economic conditions in both banking and capital markets. We expect global GDP growth of 3.5% for 2006, a level that continues to provide a favorable underpinning for this industry. We expect the Fed to continue raising interest rates to 5.5% by January 2007, but we believe that we are near the end of the tightening cycle in the U.S. and Europe. We expect that global corporate profitability will remain resilient, with corporate earnings growing by 14% in 2006. We also continue to believe that the pace of growth in the capital markets will exceed the growth of the overall economy.

Equity markets We expect global equity indices to gain 9% for the full year, as corporate profitability remains robust. The equity offering calendar also is expected to pick up for the remainder of 2006, as clients are looking to continue to raise capital when markets stabilize.

Fixed income markets Fixed income origination is expected to remain strong, which should have a positive impact on secondary market flows. We expect approximately $9.0 trillion of global fixed income origination in calendar 2006, which would represent a record. We expect both fixed-income-related products and the fixed income investor base to continue to grow with a continuing global trend of more companies’ debt financing requirements being sourced from the debt capital markets.

Fixed income activity is driven in part by the absolute level of interest rates, but also is highly correlated with the degree of volatility, the shape of the yield curve and credit quality, which in the aggregate impact the overall business environment. The fixed income investor base has changed dramatically from long-only investors of a few years ago to a rapidly growing hedge fund base and an expanding international investor base. Investors now employ far more developed risk mitigation tools to manage their portfolios. In addition, the size and diversity of the global fixed income marketplace has become significantly larger and broader over the last several years as capital markets continue to represent a deeper and more viable source of liquidity.

Mergers and acquisitions M&A announced activity is up 36% in the nine months of 2006 over the prior year, while completed activity is up 21% over the same period. Companies still are looking to grow, and strategic M&A is a viable option to achieve this objective, particularly for companies with liquid and strong balance sheets and stronger stock valuations. In addition to the activity from strategic buyers, we continue to expect financial sponsor-led M&A to also drive the future increases in activity.

Asset management and high net worth Even though the third quarter of 2006 presented challenges, capital markets continued to be strong in 2006 with global indices rising 4% year to date, and growing economies leading to wealth creation. We aspire to be a provider of choice among the high-net-worth client base, given our growing product breadth and strong performance. Our outlook for asset management and services to high-net-worth individuals is positive, given favorable demographics, higher savings rates globally and intergenerational wealth transfer. The high-net-worth client increasingly seeks multiple providers and greater asset diversification along with a high

45

service component. We believe the significant expansion of our asset management business and the strong investment-return performance of our asset managers, coupled with our cross-selling initiatives, position us well for continued growth throughout 2006.

Consolidated Results of Operations

Overview

Net revenues for the third quarter of fiscal 2006 increased to $4.2 billion, up 8% from $3.9 billion in the corresponding 2005 period. For the 2006 third quarter, net income totaled $916 million or $1.57 per diluted common share, representing an increase of 4% and 7%, respectively, from net income of $879 million, or $1.47 per diluted common share in the 2005 third quarter. For the first nine months of 2006, we reported record net revenues, net income and diluted earnings per share driven by record net revenues in each of our three business segments and in each of our three geographic regions. For the 2006 nine months, net income totaled $3.0 billion or $5.09 per diluted common share, up 23% and 26%, respectively, from net income of $2.4 billion or $4.05 per diluted common share in the comparable 2005 period. The 2006 nine months results included an after-tax gain of $47 million, or $0.08 per diluted common share, as a cumulative effect of an accounting change associated with our adoption of SFAS 123(R) on December 1, 2005.

Annualized return on average common stockholders’ equity was 21.0% and 23.8% in the 2006 three and nine months, respectively, compared with 23.0% and 21.9% in the corresponding 2005 periods. Annualized return on average tangible common stockholders’ equity was 26.1% and 29.7% in the 2006 three and nine months, respectively, compared with 29.4% and 28.3% in the corresponding 2005 periods.

Net Revenues

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Principal transactions	$	2,204	$	2,085	6	%	$	7,183	$	5,924	21	%
Investment banking	726		815		(11	)	2,302		2,077		11
Commissions	564		420		34		1,623		1,252		30
Interest and dividends	7,867		5,078		55		21,386		13,416		59
Asset management and other	366		241		52		1,055		696		52
Total revenues	11,727		8,639		36		33,549		23,365		44
Interest expense	7,549		4,787		58		20,499		12,425		65
Net revenues	$	4,178	$	3,852	8	%	$	13,050	$	10,940	19	%
Principal transactions, commissions and net interest revenue	$	3,086	$	2,796	10	%	$	9,693	$	8,167	19	%
Net interest revenue	$	318	$	291	9	%	$	887	$	991	(10	)%

Net revenues grew 8% and 19% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. Net revenues for the third quarter of 2006 reflect record quarterly net revenues from our Investment Management business segment and continued strong net revenues from our Capital Markets business segment, partially offset by lower Investment Banking revenues. Capital Markets business segment net revenues increased 13% and 21% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. Equity Capital Markets net revenues rose 31% and 53% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, driven by strong results in financing products coupled with solid customer flow activity in the cash and prime brokerage businesses. Fixed Income Capital Markets net revenues increased 6% and 11% in the 2006 three and nine months, respectively, reflecting record results in real estate and strong results in foreign exchange, partially offset by lower performances within residential mortgages and high yield products. Interest rate products also decreased in the third quarter of 2006 as compared to the corresponding prior year period. Investment Management segment net revenues increased 18% and 25% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, reflecting record Private Investment Management net revenues in both 2006 periods and strong Asset Management net revenues in the 2006 three months and record Asset Management net revenues in the 2006 nine months. Investment Banking revenues decreased 11% in the 2006 three months compared with the corresponding 2005 period, reflecting a decrease in completed M&A transactions and Global Finance–Equity origination volumes. Investment Banking revenues increased 11% in the 2006 nine

46

months compared with the corresponding 2005 period, reflecting strong Global Finance–Debt origination and completed M&A transaction volumes. Non-U.S. net revenues increased to 38% of total net revenues for both the 2006 three and nine month periods up from 33% and 36% in the corresponding 2005 periods, resulting from Europe achieving record Capital Markets revenues. See “Business Segments” and “Geographic Revenues” in this MD&A for a detailed discussion of net revenues by business segment and geographic region.

Principal Transactions, Commissions and Net Interest Revenues

In both the Capital Markets and Investment Management business segments, we evaluate net revenue performance based on the aggregate of Principal transactions, Commissions and Interest and dividends revenue net of Interest expense (“Net interest revenue”). These revenue categories include realized and unrealized gains and losses, commissions associated with client transactions and the interest and dividend revenue or interest expense associated with financing or hedging positions. Caution should be used when analyzing these revenue categories individually because they are closely related but individually may not be indicative of the overall performance of the Capital Markets and Investment Management business segments. Principal transactions, Commissions and Net interest revenue in the aggregate rose 10% and 19% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, driven by strong Capital Markets product revenues.

Principal transactions revenue increased 6% and 21% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, driven by improvements across both Fixed Income and Equity Capital Markets products, including a higher contribution from non-U.S. regions.

Commission revenues rose 34% and 30% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. The improvement in 2006 reflects growth in institutional and investment management commissions and record retail commissions attributable to higher client activity and U.S. trading volumes.

Interest and dividends revenue and Interest expense are a function of the level and mix of total assets and liabilities (primarily financial instruments owned and sold but not yet purchased, and collateralized borrowing and lending activities), the prevailing level of interest rates and the term structure of our financings. Interest and dividends revenue and Interest expense are integral components of our evaluation of our overall Capital Markets activities. Net interest revenue in the 2006 three months increased 9% compared with the corresponding 2005 period as a result of higher levels of interest earning assets as well as a change in the mix of asset composition. For the 2006 nine months, net interest revenues declined 10% compared with the corresponding 2005 period as a result of the change in the mix of asset composition and an increase in short-term U.S financing rates. Interest and dividends revenue rose 55% and 59% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, and interest expense rose 58% and 65% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, attributable to higher short-term interest rates coupled with higher levels of interest- and dividend-earning assets and interest-bearing liabilities.

Investment Banking

Investment banking revenues result from fees received for underwriting public and private offerings of fixed income and equity securities, fees and other revenues associated with advising clients on M&A activities, as well as other corporate financing activities. Investment banking revenues decreased 11% and increased 11% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. For the 2006 three months, Advisory Services and Global Finance—Equity net revenues decreased 13% and 28%, respectively, compared with the corresponding 2005 period, reflecting a decrease in completed M&A transactions and equity origination volumes, respectively. For the 2006 nine months, Global Finance—Debt and Advisory net revenues increased 8% and 36%, respectively, compared with the corresponding 2005 period, reflecting increased revenues on leveraged finance transactions and higher completed and announced M&A transaction volumes. See “Business Segments—Investment Banking Business Segment” in this MD&A for a discussion and analysis of our Investment Banking business segment.

Asset Management and Other

Asset management and other revenues primarily result from advisory activities in the Investment Management business segment. Asset management and other revenues rose 52% for both the 2006 three and nine months, compared with the corresponding 2005 periods, reflecting higher asset management fees attributable to the growth in assets under management, coupled with higher private equity management and incentive fees.

Non-Interest Expenses

The following table presents non-interest expenses as reported in our Consolidated Statement of Income:

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	Three Months								Nine Months
	Ended August 31,						Percent		Ended August 31,						Percent
In millions	2006			2005			Change		2006			2005			Change
Compensation and benefits	$	2,060		$	1,906		8	%	$	6,434		$	5,415		19	%
Non-personnel expenses:
Technology and communications	247			217			14		713			612			17
Brokerage, clearance and distribution fees	164			138			19		463			408			13
Occupancy	128			122			5		408			364			12
Professional fees	90			72			25		245			203			21
Business development	77			56			38		211			170			24
Other	45			48			(6	)	160			156			3
Total non-personnel expenses	751			653			15		2,200			1,913			15
Total non-interest expenses	$	2,811		$	2,559		10	%	$	8,634		$	7,328		18	%
Compensation and benefits/Net revenues	49.3		%	49.5		%			49.3		%	49.5		%
Non-personnel expenses/Net revenues	18.0		%	17.0		%			16.9		%	17.5		%

Non-interest expenses rose 10% and 18% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. Significant portions of certain expense categories are variable, including compensation and benefits, brokerage, clearance and distribution fees, and business development. We expect these variable expenses as a percentage of net revenues to remain in approximately the same proportions for the remainder of 2006. We continue to maintain a strict discipline in managing expenses.

Compensation and benefits Compensation and benefits rose 8% and 19% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, commensurate with the 8% and 19% increase in net revenues in these respective periods. Compensation and benefits expense as a percentage of net revenues was 49.3% for both the 2006 three and nine months, a decrease from the 49.5% in each of the comparable 2005 periods. Employees totaled 24,775 at August 31, 2006, up 8% from 22,919 at November 30, 2005, and up 12% from 22,047 at August 31, 2005. Compensation and benefits expense includes both fixed and variable components. Fixed compensation, consisting primarily of salaries, benefits and amortization of previously granted deferred equity awards, totaled $941 million and $2.9 billion in the 2006 three and nine months, respectively, up 24% and 21% compared with the corresponding 2005 periods. The growth of fixed compensation was due primarily to the increase in salaries as a result of higher headcount, as well as an increase in the amortization of deferred equity awards in the current year.

Variable compensation, consisting primarily of incentive compensation, commissions and severance, totaled $1.1 billion in the 2006 three months, down 3% compared with the corresponding 2005 period as the increase in fixed compensation exceeded the increase in total compensation. For the 2006 nine months, variable compensation totaled $3.5 billion, a 17% increase compared with the corresponding 2005 period, as growth in net revenues resulted in higher incentive compensation. Amortization of deferred equity awards previously granted totaled $247 million and $747 million in the 2006 three and nine months, respectively, compared with $152 million and $514 million in the corresponding 2005 periods.

Non-personnel expenses Non-personnel expenses totaled $751 million and $2.2 billion in the 2006 three and nine months, respectively, up 15% versus both comparable 2005 periods. Non-personnel expenses as a percentage of net revenues increased to 18.0% in the 2006 three months compared with 17.0% in the 2005 three month period. However, non-personnel expenses as a percentage of net revenues decreased to 16.9% in the 2006 nine months from 17.5% in the corresponding 2005 period. The increase in non-personnel expenses in the 2006 three and nine month periods is primarily attributable to increased technology and communication expenses, brokerage, clearance and distribution fees, and business development expenses as we continue to build out and grow the Company.

Technology and communications expenses rose 14% and 17% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, reflecting increased costs associated with the continued expansion and development of our Capital Markets platforms and infrastructure. Occupancy expenses increased 5% and 12% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods due in part to increased space requirements from the increased number of employees. Brokerage, clearance and distribution fees rose 19% and 13% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, due primarily to higher transaction volumes in certain Capital Markets and Investment Management products. Professional fees and business development expenses increased in the 2006 three and nine months, respectively,

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compared with the corresponding 2005 periods primarily attributed to higher recruiting fees from employee growth as well as higher levels of business activity.

Income Taxes

The provisions for income taxes totaled $451 million and $1.5 billion in the 2006 three and nine months, respectively, up from $414 million and $1.2 billion in the corresponding 2005 periods. The effective tax rate increased to 33.0% and 33.1% in the 2006 three and nine months, respectively, compared to 32.0% and 32.5% in the corresponding 2005 periods. The higher effective tax rates in 2006 reflect the higher levels of pretax earnings compared with 2005, which reduced the benefits of permanent differences, partially offset by the effects of a more favorable geographic earnings mix.

Business Segments

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

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

Business Segments

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Net revenues:
Investment Banking	$	726	$	815	(11	)%	$	2,302	$	2,077	11	%
Capital Markets	2,847		2,526		13		8,971		7,443		21
Investment Management	605		511		18		1,777		1,420		25
Total net revenues	4,178		3,852		8		13,050		10,940		19
Compensation and benefits	2,060		1,906		8		6,434		5,415		19
Non-personnel expenses	751		653		15		2,200		1,913		15
Income before taxes and cumulative effect of accounting change	$	1,367	$	1,293	6	%	$	4,416	$	3,612	22	%

Investment Banking Business Segment

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Investment banking revenues	$	726	$	815	(11	)%	$	2,302	$	2,077	11	%
Non-interest expenses	595		511		16		1,777		1,408		26
Income before taxes	$	131	$	304	(57	)%	$	525	$	669	(22	)%

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

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Investment Banking Revenues(1)

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Global Finance—Debt	$	348	$	336	4	%	$	1,047	$	972	8	%
Global Finance—Equity	183		255		(28	)	590		615		(4	)
Advisory Services	195		224		(13	)	665		490		36
	$	726	$	815	(11	)%	$	2,302	$	2,077	11	%

Investment Banking revenues declined 11% in the 2006 three months compared with the 2005 three month period, while Investment Banking revenues rose 11% in the 2006 nine months compared with the corresponding 2005 period. Investment banking revenues for the third quarter of 2006 reflect a decrease in Advisory Services and Global Finance—Equity revenues, partially offset by higher Global Finance—Debt revenues. For the 2006 nine months, Investment Banking revenues were a record $2.3 billion, up 11% from 2005.

Global Finance—Debt revenues grew 4% and 8% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. Our publicly reported global debt underwriting market volumes decreased 26% in the 2006 three month period from the corresponding 2005 period, but increased 2% in the 2006 nine months from the corresponding 2005 period. Revenues for the 2006 three and nine months were positively impacted by our product mix, led by strong growth in our leveraged finance revenues and structured transactions. The increase in the 2006 three month revenues was partially offset by lower global debt underwriting market volumes. Both the 2006 three and nine months were also impacted by lower Investment Banking client-driven derivative and other capital market-related transactions of $24 million and $164 million, respectively, versus $90 million and $242 million for the comparable periods in 2005. Our global market share for publicly-reported global debt origination for the eight months of calendar 2006 was 6.4%, slightly lower than calendar year 2005. Our debt origination fee backlog at August 31, 2006 was a record level of approximately $333 million. Debt origination backlog may not be indicative of the level of future business due to the frequent use of the shelf registration process.

Global Finance—Equity revenues declined 28% and 4% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. Our publicly reported equity underwriting volumes were down 27% in the 2006 three months compared with the corresponding 2005 period, but were 20% greater for the 2006 nine months compared with the corresponding 2005 period. The decrease in the 2006 three month revenues from the corresponding 2005 period was driven by lower volumes in the current quarter. Revenues for the 2006 nine months declined versus the same period in 2005, despite higher volumes, due to the mix of underwriting activities in the different periods. Both the 2006 three and nine months were also impacted by higher Investment Banking client-driven derivative and other capital market-related transactions of $28 million and $66 million, respectively, versus $11 million and $28 million for the comparable periods in 2005. Our global market share for publicly-reported equity underwriting transactions for the eight months of calendar 2006 was 3.4%, down from 4.8% for calendar year 2005. Our equity-related fee backlog (for both filed and unfiled transactions) at August 31, 2006 was approximately $355 million.

Advisory Services revenues decreased 13%, in the 2006 three month period compared with the corresponding 2005 period, while Advisory Services revenues increased 36% in the 2006 nine months, compared with the corresponding 2005 period. Our completed transaction volume decreased 17% for the 2006 three months compared with 2005, while we had an increase of 27% for the nine month period ended 2006 compared to 2005. These results were better than the global market volume decrease of 25% and increase of 21%, respectively, over the same periods. Our global market share for publicly reported completed transactions for the eight months of calendar 2006 was 15.6%, up from 13.8% for calendar year 2005, and we have advised on three of the top five transactions announced in the current calendar year. M&A volumes benefited from increased financial sponsor and strategic acquisition activity. Our M&A fee backlog at August 31, 2006 was at a record level of approximately $294 million.

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

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Non-interest expenses rose 16% and 26% in the 2006 three and nine months, respectively, compared with 2005, attributable to an increase in compensation and benefits expense related to higher year-to-date revenues as well as increased headcount and higher non-personnel expenses related to increased business activity.

Income before taxes decreased 57% and 22% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods.

Capital Markets

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Principal transactions	$	2,081	$	1,970	6	%	$	6,820	$	5,601	22	%
Commissions	405		261		55		1,160		832		39
Interest and dividends	7,862		5,061		55		21,373		13,365		60
Other	30		7		329		79		24		229
Total revenues	10,378		7,299		42		29,432		19,822		48
Interest expense	7,531		4,773		58		20,461		12,379		65
Net revenues	2,847		2,526		13		8,971		7,443		21
Non-interest expenses	1,733		1,663		4		5,442		4,813		13
Income before taxes	$	1,114	$	863	29	%	$	3,529	$	2,630	34	%

The Capital Markets business segment includes institutional client-flow activities, prime brokerage, research, mortgage origination and securitization, and secondary-trading and financing activities in fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments and investments. We are a leading global market-maker in numerous equity and fixed income products including U.S., European and Asian equities, government and agency securities, money market products, corporate high-grade, high-yield and emerging market securities, mortgage and asset-backed securities, preferred stock, municipal securities, bank loans, foreign exchange, financing and derivative products. We are one of the largest investment banks in terms of U.S. and Pan-European listed equities trading volume, and we maintain a major presence in over-the-counter U.S. stocks, major Asian large capitalization stocks, warrants, convertible debentures and capital securities. In addition, the secured financing business manages our equity and fixed income matched book activities, supplies secured financing to institutional clients and provides secured funding for our inventory of equity and fixed income products. The Capital Markets segment also includes proprietary activities as well as principal investing in real estate and private equity.

Capital Markets Net Revenues

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Fixed Income	$	2,010	$	1,889	6	%	$	6,312	$	5,710	11	%
Equities	837		637		31		2,659		1,733		53
	$	2,847	$	2,526	13	%	$	8,971	$	7,443	21	%

Capital Markets net revenues for the 2006 three months were the third highest quarter ever for the segment, with revenues of over $2.8 billion, up 13% from the prior year. Net revenues for the 2006 nine months were a record, increasing 21% from the comparable period in 2005.

Fixed Income net revenues increased 6% for the 2006 three months versus the comparable period in 2005, and were a record for the 2006 nine months, increasing 11% over the corresponding 2005 period. The increase for the 2006 three months included record results in real estate and strong results in foreign exchange, partially offset by lower performances in residential mortgages, high yield, and interest rate products. The increase for the 2006 nine months reflects broad-based strength across various products, including real estate, credit and interest rate products, as well as higher contributions from non-U.S. regions. Real estate posted record results for both the 2006 three and nine month periods as global demand for this asset class remained high and market conditions remained favorable, and commercial mortgage-backed securitization activity levels increased. Foreign exchange also had strong results for the 2006 three months, given the shifting volatility of the U.S. dollar and the continued build-out of our client

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platform. Credit derivative products were also strong in the 2006 three months, due to solid customer flow activities as well as increased revenues associated with certain structured products meeting the required market valuation observability standard. High-yield product revenues in the 2006 three months were negatively impacted by widening credit spreads as compared with the prior year period. Interest rate products were negatively impacted for the 2006 three months by the continuing uncertainty regarding interest rates and inflation, but were up for the 2006 nine months as periods of fluctuating volatility and changes in the yield curve led to increased client activity and higher revenues. Residential mortgage net revenues decreased for both the 2006 three and nine months as compared to the comparable periods in 2005, due to lower levels of origination volumes, and some spread compression in securitization margins. Global residential mortgage origination volumes decreased to approximately $45 billion in the 2006 nine months from $65 billion in the comparable 2005 period due to the negative effects of rising interest rates and the softening U.S. housing market. These weaker U.S. mortgage results were partially offset by increased activity in our European mortgage businesses as well as continued strength in global securitization volumes. Our global residential securitization volume was approximately $102 billion and $94 billion in the nine months of 2006 and 2005, respectively.

Equities net revenues increased by 31% and 53% for the 2006 three and nine months, respectively, compared to the corresponding 2005 periods, primarily due to strong results in financing products coupled with solid customer flow activity in the cash and prime brokerage businesses. Despite a challenging quarter with equity valuations remaining flat to negative in June and July, our cash business realized its second highest quarterly performance, due to solid customer flow and strong results in our merger arbitrage business. Furthermore, our cash business had record net revenues for the 2006 nine months, due to solid customer flow as well as a gain on the conversion of our NYSE seats in the second quarter of 2006. The prime brokerage and financing business realized record revenues for both the 2006 three and nine months as we continued to add new clients and grow balances with existing clients. Equity derivatives for the 2006 three months declined compared to 2005 due to certain trading strategies, but was up for the 2006 nine months due to strong client activity and successful trading strategies, especially in Europe and Asia.

Interest and dividends revenue and Interest expense are a function of the level and mix of total assets and liabilities (primarily financial instruments owned and sold but not yet purchased, and collateralized borrowing and lending activities), the prevailing level of interest rates and the term structure of our financings. Interest and dividends revenue and Interest expense are integral components of our evaluation of our overall Capital Markets activities. Net interest revenues for the 2006 three months increased 15% compared with the corresponding period in 2005 primarily due to higher interest earning assets and a change in the mix of asset composition. For the 2006 nine months net interest revenues decreased 8% as compared to the same period in 2005, principally attributable to higher short term U.S. financing rates and a change in the mix of asset composition. Interest and dividends revenue rose 55% and 60% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, and interest expense rose 58% and 65% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, attributable to higher short-term financing rates coupled with higher levels of interest and dividend earning assets and interest-bearing liabilities.

Non-interest expenses for the 2006 three and nine months increased 4% and 13%, respectively, compared with the corresponding 2005 periods. The growth in non-interest expenses reflects higher compensation and benefits expense related to improved revenue performance coupled with higher non-personnel expenses. Non-personnel expenses grew primarily due to increased technology and communications expenses from continued investments in our trading platforms, and higher brokerage and clearance costs and professional fees from increased business activity.

Income before taxes increased 29% and 34% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods.

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Investment Management

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Principal transactions	$	123	$	115	7	%	$	363	$	323	12	%
Commissions	159		159		—		463		420		10
Interest and dividends	5		17		(71	)	13		51		(75	)
Asset management and other	336		234		44		976		672		45
Total revenues	623		525		19		1,815		1,466		24
Interest expense	18		14		29		38		46		(17	)
Net revenues	605		511		18		1,777		1,420		25
Non-interest expenses	483		385		25		1,415		1,107		28
Income before taxes	$	122	$	126	(3	)%	$	362	$	313	16	%

The Investment Management business segment consists of the Asset Management and Private Investment Management businesses. Asset Management generates fee-based revenues from customized investment management services for high-net-worth clients, as well as fees from mutual fund and other institutional investors. Asset Management also generates management and incentive fees from our role as general partner for private equity and other alternative investment partnerships. Private Investment Management provides comprehensive investment, wealth advisory and capital markets execution services to high-net-worth and middle market clients.

Investment Management Net Revenues

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Asset Management	$	349	$	272	28	%	$	1,064	$	761	40	%
Private Investment Management	256		239		7		713		659		8
	$	605	$	511	18	%	$	1,777	$	1,420	25	%

Changes in Assets Under Management

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In billions	2006		2005		Change		2006		2005		Change
Opening balance	$	198	$	151	31	%	$	175	$	137	28	%
Net additions	6		7		(14	)	24		17		41
Net market appreciation	3		6		(50	)	8		10		(20	)
Total increase	9		13		(31	)	32		27		19
Ending balance	$	207	$	164	26	%	$	207	$	164	26	%

Composition of Assets Under Management

							Percent Change
	August 31,		November 30,		August 31,		August 2006
In billions	2006		2005		2005		November 2005		August 2005
Equity	$	87	$	75	$	70	16	%	24	%
Fixed income	58		55		53		5		9
Money markets	43		29		26		48		65
Alternative investments	19		16		15		19		27
	$	207	$	175	$	164	18	%	26	%

Investment Management net revenues were a record in both the 2006 three and nine months, increasing 18% and 25%, respectively, compared with the corresponding 2005 periods, as Asset Management achieved strong results and Private Investment Management achieved record results for the three month period, and both achieved record results for the nine month period.

Asset Management net revenues increased 28% and 40% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. The increase in the three and nine months of 2006 is attributable to higher

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levels of assets under management and increased private equity management and incentive fees compared to the corresponding 2005 periods. Asset inflows have been strong across all investment categories.

Assets under management rose to a record $207 billion at August 31, 2006, up from $175 billion at November 30, 2005, reflecting net inflows of $24 billion plus net market appreciation of $8 billion. Assets under management at August 31, 2006 increased $43 billion or 26% compared with August 31, 2005, composed of net inflows of $35 billion plus net market appreciation of $8 billion.

Private Investment Management net revenues rose 7% and 8% to record levels in both the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, due to increased client activity in Fixed Income and Equity products.

Non-interest expenses increased 25% and 28% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods primarily due to higher compensation and benefits expense as we continue to build our global business platform.

Income before taxes decreased 3% in the 2006 three month period compared to the corresponding 2005 period and increased 16% in the 2006 nine month period over the comparable 2005 period.

Geographic Revenues

Net Revenues by Geographic Region

	Three Months						Nine Months
	Ended August 31,				Percent		Ended August 31,				Percent
In millions	2006		2005		Change		2006		2005		Change
Europe	$	1,161	$	855	36	%	$	3,370	$	2,687	25	%
Asia Pacific and other	429		427		—		1,550		1,226		26
Total Non-U.S.	1,590		1,282		24		4,920		3,913		26
U.S.	2,588		2,570		1		8,130		7,027		16
Net Revenues	$	4,178	$	3,852	8	%	$	13,050	$	10,940	19	%

Non-U.S. net revenues rose 24% and 26% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods. The 2006 third quarter non-U.S. net revenues are the third highest ever reported. Non-U.S. revenues represented 38% of total net revenues for both the 2006 three and nine months, respectively, compared with 33% and 36% in the corresponding 2005 periods. The improved net revenues in the 2006 three and nine compared with the same periods in 2005 were attributed to continued strength in the Capital Markets business segment in particular, reflecting record European net revenues and strong Asia Pacific net revenues.

Net revenues in Europe rose 36% and 25% in the 2006 three and nine months, respectively, compared with the corresponding 2005 periods, reflecting record revenue for the quarter. Fixed Income Capital Markets reported record net revenues in both the 2006 three and nine months, mainly due to strong performances in mortgages, high grade credit, foreign exchange and real estate. Equities Capital Markets also reported record net revenues in both the 2006 three and nine months, reflecting growth in prime brokerage and financing activities and strength in derivatives.

Net revenues in Asia Pacific and other were flat in the 2006 three months compared with the corresponding 2005 period, as strong results in real estate were offset by lower performances in interest rate products and high yield. Net revenues rose 26% in the 2006 nine months compared with the corresponding 2005 period, driven by strong results in real estate and derivatives.

Liquidity, Funding and Capital Resources

Management’s Finance Committee is responsible for developing, implementing and enforcing our liquidity, funding and capital policies. These policies include recommendations for capital and balance sheet size as well as the allocation of capital and balance sheet to the business units. Management’s Finance Committee oversees compliance with policies and limits with the goal of ensuring we are not exposed to undue liquidity, funding or capital risk.

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Liquidity Risk Management

We view liquidity and liquidity management as critically important to the Company. Our liquidity strategy seeks to ensure that we maintain sufficient liquidity to meet all of our funding obligations in all market environments. Our liquidity strategy is centered on five principles:

•We maintain a liquidity pool available to Holdings that is of sufficient size to cover expected cash outflows over the next twelve months in a stressed liquidity environment.

•We rely on secured funding only to the extent that we believe it would be available in all market environments.

•We aim to diversify our funding sources to minimize reliance on any given providers.

•Liquidity is assessed at the entity level. For example, because our legal entity structure can constrain liquidity available to Holdings, our liquidity pool excludes liquidity that is restricted from availability to Holdings.

•We maintain a comprehensive Funding Action Plan that represents a detailed action plan to manage a stress liquidity event, including a communication plan for regulators, creditors, investors and clients.

Liquidity pool. We maintain a liquidity pool available to Holdings that covers expected cash outflows for twelve months in a stressed liquidity environment. In assessing the required size of our liquidity pool, we assume that assets outside the liquidity pool cannot be sold to generate cash, unsecured debt cannot be issued, and any cash and unencumbered liquid collateral outside of the liquidity pool cannot be used to support the liquidity of Holdings. Our liquidity pool is sized to cover expected cash outflows associated with the following items:

•The repayment of all unsecured debt maturing in the next twelve months ($18.2 billion at August 31, 2006).

•The funding of commitments to extend credit made by Holdings and its unregulated subsidiaries based on a probabilistic analysis of these drawdowns. The funding of commitments to extend credit made by our regulated subsidiaries is covered by the liquidity pools maintained by these subsidiaries. (See “Summary of Contractual Obligations and Commitments—Lending-Related Commitments” in this MD&A and Note 7 to the Consolidated Financial Statements.)

•The impact of adverse changes on secured funding – either in the form of wider “haircuts” (the difference between the market and pledge value of assets) or in the form of reduced borrowing availability.

•The anticipated funding requirements of equity repurchases as we manage our equity base (including offsetting the dilutive effect of our employee incentive plans). (See “Equity Management” below.)

In addition, the liquidity pool is sized to cover the impact of a one notch downgrade of Holdings’ long-term debt ratings, including the additional collateral required for our derivative contracts and other secured funding arrangements. (See “Credit Ratings” below.)

The liquidity pool is primarily invested in highly liquid instruments including: money market funds, bank deposits, and U.S., European and Japanese Government bonds, and U.S. agency securities and other liquid securities that we believe have a highly reliable pledge value. We calculate our liquidity pool on a daily basis.

At August 31, 2006, the estimated pledge value of the liquidity pool available to Holdings was $28.5 billion, which is in excess of the items discussed above. Additionally, our regulated subsidiaries, such as our broker-dealers and bank institutions maintain their own liquidity pools to cover their stand-alone one year expected cash funding needs in a stressed liquidity environment. The estimated pledge value of the liquidity pools held by our regulated subsidiaries totaled an additional $42.9 billion at August 31, 2006.

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Funding of assets. We fund assets based on their liquidity characteristics, and utilize cash capital for our long-term funding needs. Our funding strategy incorporates the following factors:

•Liquid assets (i.e., assets for which a reliable secured funding market exists across all market environments including government bonds, U.S. agency securities, corporate bonds, asset-backed securities and high quality equity securities) are primarily funded on a secured basis.

•Secured funding “haircuts” are funded with cash capital.(1)

•Illiquid assets (e.g., fixed assets, intangible assets, and margin postings) and less liquid inventory positions (e.g., derivatives, private equity investments, certain corporate loans, certain commercial mortgages and real estate positions) are funded with cash capital.

•Unencumbered assets, irrespective of asset quality, that are not part of the liquidity pool are also funded with cash capital. These assets are typically unencumbered because of operational and asset-specific factors (e.g., securities moving between depots). We do not assume a change in these factors during a stressed liquidity event.

As part of our funding strategy, we also take steps to mitigate our main sources of contingent liquidity risk as follows:

•Commitments to extend credit - Cash capital is utilized to cover expected funding of commitments to extend credit. See “Summary of Contractual Obligations and Commitments—Lending-Related Commitments” in this MD&A.

•Ratings downgrade - Cash capital is utilized to cover the liquidity impact of a one notch downgrade on Holdings. A ratings downgrade would increase the amount of collateral to be posted against our derivative contracts and other secured funding arrangements. See “Credit Ratings” below.

•Customer financing - We provide secured financing to our clients typically through repurchase and prime broker agreements. These financing activities can create liquidity risk if the availability and terms of our secured borrowing agreements adversely change during a stressed liquidity event and we are unable to reflect these changes in our client financing agreements. We mitigate this risk by entering into term secured borrowing agreements, in which we can fund different types of collateral at pre-determined collateralization levels, and by the liquidity pools maintained at our broker-dealers.

Our policy is to operate with an excess of long-term funding sources over our long-term funding requirements. We seek to maintain a cash capital surplus at Holdings of at least $2 billion. As of August 31, 2006 and November 30, 2005, our cash capital surplus at Holdings totaled $4.7 billion and $6.2 billion, respectively. Additionally, cash capital surpluses in regulated entities at August 31, 2006 and November 30, 2005 amounted to $12.2 billion and $8.1 billion, respectively.

Diversification of funding sources. We seek to diversify our funding sources. We issue long-term debt in multiple currencies and across a wide range of maturities to tap many investor bases, thereby reducing our reliance on any one source.

•During 2006, we issued $37.6 billion of long-term borrowings. Long-term borrowings increased to $74.0 billion at August 31, 2006 from $53.9 billion at November 30, 2005 due to growth in our assets and the pre-funding of 2007 maturities. The weighted-average maturities of long-term borrowings were 6.3 years and 6.7 years at August 31, 2006 and November 30, 2005, respectively.

•We diversify our issuances geographically to minimize refinancing risk and broaden our debt-holder base. As of August 31, 2006, 48% of our long-term debt was issued outside the United States.

•We typically issue in a single maturity in sufficient size to create a liquid benchmark issuance (i.e., sufficient size to be included in the Lehman Bond Index, a widely used index for fixed income asset managers).

•In order to minimize refinancing risk, we set limits for the amount of long-term borrowings maturing over any three, six and twelve month horizon at 12.5%, 17.5% and 30.0% of outstanding long-term borrowings,

(1)Cash capital consists of stockholders’ equity, core deposit liabilities at our bank subsidiaries, the drawn portion of Holdings’ committed credit facilities with greater than one-year remaining life and liabilities with remaining terms of over one year.

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respectively—that is, $9.2 billion, $13.0 billion and $22.2 billion, respectively, at August 31, 2006. If we were to operate with debt above these levels, we would not include the additional amount as a source of cash capital.

Extendible issuances (in which, unless debt holders instruct us to redeem their debt instruments at least one year prior to stated maturity, the maturity date of these instruments is automatically extended) are included in these limits at their earliest maturity date. Based on experience, we expect the majority of these extendibles to remain outstanding beyond their earliest maturity date in a normal market environment and “roll” through the long-term-borrowings maturity profile.

Other long-term debt is accounted for in our long-term-borrowings maturity profile at its contractual maturity date if the debt is redeemable at our option. Long-term debt that is repayable at par at the holder’s option is included in these limits at its put date.

The quarterly long-term borrowings maturity schedule over the next five years at August 31, 2006 is as follows:

Long-Term Borrowings Maturity Profile Chart

•We use both committed and uncommitted bilateral and syndicated long-term bank facilities to complement our long-term debt issuance. In particular, Holdings maintains an unsecured revolving credit agreement with a syndicate of banks under which the banks have committed to provide up to $2.0 billion through February 22, 2009. We also maintain a $1.0 billion multi-currency unsecured, committed revolving credit facility with a syndicate of banks for Lehman Brothers Bankhaus AG (“LBBAG”), with a term of three and a half years expiring in April 2008. Our ability to borrow under such facilities is conditioned on complying with customary lending conditions and covenants. We have maintained compliance with the material covenants under these credit agreements at all times. As of August 31, 2006, there were no borrowings against Holdings’ or LBBAG’s credit facilities.

•Bank facilities provide us with further diversification and flexibility. For example, we draw on our committed syndicated credit facilities described above on a regular basis (typically 25% to 50% of the time on a weighted- average basis) to provide us with additional sources of long-term funding on an as-needed basis. We have the ability to prepay and redraw any number of times and to retain the proceeds for any term up to the maturity date of the facility. As a result, we see these facilities as having the same liquidity value as long-term borrowings with the same maturity dates, and we include these borrowings in our reported long-term borrowings at the facility’s stated final maturity date to the extent that they are outstanding as of the reporting date.

•We own three bank entities: Lehman Brothers Bank, a U.S.-based thrift institution, Lehman Brothers Commercial Bank, a U.S.-based industrial bank, and Lehman Brothers Bankhaus, a German bank. These regulated bank entities operate in a deposit-protected environment and are able to source low-cost unsecured funds that are primarily term deposits. These are generally insulated from a Company-specific or market liquidity event, thereby providing a reliable funding source for our mortgage products and selected loan assets

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and increasing our funding diversification. Overall, these bank institutions have raised $21.2 billion and $14.8 billion of customer deposit liabilities as of August 31, 2006 and November 30, 2005, respectively.

Legal Entity Structure. Our legal entity structure can constrain liquidity available to Holdings. Some of our legal entities, particularly our regulated broker-dealers and bank institutions, are restricted in the amount of funds that they can distribute or lend to Holdings.

•As of August 31, 2006, Holdings’ Total Equity Capital (defined as total stockholders’ equity of $18.4 billion plus $2.7 billion of junior subordinated notes) amounted to $21.1 billion. We believe Total Equity Capital to be a more meaningful measure of our equity than stockholders’ equity because junior subordinated notes are deeply subordinated and have maturities of at least 30 years at issuance. Leading rating agencies view these securities as equity capital for purposes of calculating net leverage. We aim to maintain a primary equity double leverage ratio (the ratio of equity investments in Holdings’ subsidiaries to its Total Equity Capital) of 1.0x or below. Our primary equity double leverage ratio was 0.88x as of August 31, 2006 and 0.85x as of November 30, 2005.

•Certain regulated subsidiaries are funded with subordinated debt issuances and/or subordinated loans from Holdings, which are counted as regulatory capital for those subsidiaries. Our policy is to fund subordinated debt advances by Holdings to subsidiaries for use as regulatory capital with long-term debt issued by Holdings having a maturity at least one year greater than the maturity of the subordinated debt advance.

Funding Action Plan. We have developed and regularly update a Funding Action Plan, which represents a detailed action plan to manage a stress liquidity event, including a communication plan for regulators, creditors, investors and clients. The Funding Action Plan considers two types of liquidity stress events—a Company-specific event, where there are no issues with the overall market liquidity; and a broader market-wide event, which affects not just our Company but the entire market.

In a Company-specific event, we assume we would lose access to the unsecured funding market for a full year and have to rely on the liquidity pool available to Holdings to continue to fund our balance sheet.

In a market liquidity event, in addition to the pressure of a Company-specific event, we also assume that, because the event is market wide, some counterparties to whom we have extended liquidity facilities draw on these facilities. To mitigate the effect of a market liquidity event, we have developed access to additional liquidity sources beyond the liquidity pool at Holdings. These sources include unutilized funding capacity in our bank entities, a conduit pre-funded with short-term liquid instruments, and unutilized capacity in our bank facilities. (See “Funding of Assets” above.)

We perform regular assessments of our funding requirements in stress liquidity scenarios to best ensure we can meet all our funding obligations in all market environments.

Cash Flows

Cash and cash equivalents decreased $733 million at August 31, 2006 compared with November 30, 2005, as net cash used in operating activities of $23.2 billion—attributable primarily to growth in financial instruments and other inventory positions owned—coupled with net cash used in investing activities of $610 million exceeded net cash provided by financing activities of $23.1 billion. Cash and cash equivalents declined $1.1 billion at August 31, 2005 compared with November 30, 2004, as net cash used in operating activities of $8.6 billion—attributable primarily to growth in securities and other inventory positions owned—coupled with net cash used in investing activities of $294 million exceeded net cash provided by financing activities of $7.8 billion.

Balance Sheet and Financial Leverage

Assets. Our balance sheet consists primarily of Cash and cash equivalents, Financial instruments and other inventory positions owned, and collateralized financing agreements. The liquid nature of these assets provides us with flexibility in financing and managing our business. The majority of these assets are funded on a secured basis through collateralized financing agreements.

Our total assets at August 31, 2006 increased by 16% to $474 billion, from $410 billion at November 30, 2005, due to an increase in secured financing transactions and net assets. Net assets at August 31, 2006 increased $28 billion due to increases in all inventory categories. We believe net assets is a more useful measure than total assets when comparing companies in the securities industry because it excludes certain assets considered to have a low risk profile (including Cash and securities segregated and on deposit for regulatory and other purposes, Securities received as collateral, Securities purchased under agreements to resell and Securities borrowed) and Identifiable

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intangible assets and goodwill. This definition of net assets is used by many of our creditors and a leading rating agency to evaluate companies in the securities industry. Under this definition, net assets were $239 billion and $211 billion at August 31, 2006 and November 30, 2005, respectively, as follows:

Net Assets

In millions	August 31, 2006		November 30, 2005
Total assets	$473,737		$410,063
Cash and securities segregated and on deposit for regulatory and other purposes	(5,736	)	(5,744	)
Securities received as collateral	(5,046	)	(4,975	)
Securities purchased under agreements to resell	(116,427	)	(106,209	)
Securities borrowed	(103,740	)	(78,455	)
Identifiable intangible assets and goodwill	(3,364	)	(3,256	)
Net assets	$239,424		$211,424

Our net assets consist of inventory necessary to facilitate client flow activities and, to a lesser degree, proprietary  and principal investment activities. As such, our mix of net assets is subject to change. In addition, due to the nature of our client flow activities and based on our business outlook, the overall size of our balance sheet will fluctuate from time to time and, at specific points in time, may be higher than the year-end or quarter-end amounts. Our total assets at quarter-ends were, on average, approximately 5% lower than amounts based on a monthly average over both the four and eight quarters ended August 31, 2006. Our net assets at quarter-ends were, on average, approximately 6% lower than amounts based on a monthly average over both the four and eight quarters ended August 31, 2006.

Leverage Ratios. Balance sheet leverage ratios are one measure used to evaluate the capital adequacy of a company. The gross leverage ratio is calculated as total assets divided by total stockholders’ equity. Our gross leverage ratios were 25.8x and 24.4x at August 31, 2006 and November 30, 2005, respectively. However, we believe net leverage based on net assets as defined above (which excludes certain assets considered to have a low risk profile and Identifiable intangible assets and goodwill) divided by tangible equity capital (Total stockholders’ equity plus Junior subordinated notes less Identifiable intangible assets and goodwill), to be a more meaningful measure of leverage in evaluating companies in the securities industry. Our net leverage ratio of 13.5x at August 31, 2006 decreased from 13.6x at November 30, 2005. We believe tangible equity capital to be a more representative measure of our equity for purposes of calculating net leverage because Junior subordinated notes are deeply subordinated and have maturities of at least 30 years at issuance, and we do not view the amount of equity used to support Identifiable intangible assets and goodwill as available to support our remaining net assets. This definition of net leverage is used by many of our creditors and a leading rating agency. Tangible equity capital and net leverage are computed as follows at August 31, 2006 and November 30, 2005:

Tangible Equity Capital and Net Leverage

In millions	August 31, 2006		November 30, 2005
Total stockholders’ equity	$18,396		$16,794
Junior subordinated notes (1)	2,692		2,026
Identifiable intangible assets and goodwill	(3,364	)	(3,256	)
Tangible equity capital	$17,724		$15,564
Gross leverage	25.8x		24.4x
Net leverage	13.5x		13.6x

(1)   See Note 6 to the Consolidated Financial Statements.

Net assets, tangible equity capital and net leverage as presented above are not necessarily comparable to similarly titled measures provided by other companies in the securities industry because of different methods of calculation.

Equity Management

The management of equity is a critical aspect of our capital management. The determination of the appropriate amount of equity is affected by a number of factors, including the amount of “risk equity” needed, the capital required by our regulators, balance sheet leverage and the dilutive effects of equity-based employee awards. Equity requirements constantly are changing, and we actively monitor risk requirements and potential investment opportunities. We continuously look at investment alternatives for our equity with the objective of maximizing

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shareholder value. In addition, in managing our capital, returning capital to shareholders by repurchasing shares is among the alternatives considered.

We maintain a stock repurchase program to manage our equity capital. Our stock repurchase program is effected through regular open-market purchases, as well as through employee transactions where employees tender shares of common stock to pay for the exercise price of stock options, and the required tax withholding obligations upon option exercises and conversion of restricted stock units to freely-tradable common stock. During 2006, we repurchased approximately 33.6 million shares of our common stock through open-market purchases at an aggregate cost of approximately $2.3 billion, or $67.91 per share. In addition, we withheld approximately 5.5 million shares of common stock from employees (associated with the issuance of shares under employee stock plans) at an equivalent cost of $381 million or $69.09 per common share.

For 2006, our Board of Directors has authorized the repurchase, subject to market conditions, of up to 80 million shares of Holdings common stock for the management of our equity capital, including approximately 55 million shares estimated for offsetting the 2006 dilution due to equity-based award plans. Our Board also authorized the repurchase in 2006, subject to market conditions, of up to an additional 30 million shares, for the possible acceleration of repurchases to offset a portion of 2007 dilution due to equity-based award plans. This authorization supersedes the stock repurchase program authorized in January 2005.

Included below are the changes in our Tangible Equity Capital for the nine months ended August 31, 2006 and the year ended November 30, 2005:

Tangible Equity Capital

	August 31,			November 30,
In millions	2006			2005
Beginning tangible equity capital	$	15,564		$	12,636
Net income	3,003			3,260
Dividends on common stock	(209		)	(233		)
Dividends on preferred stock	(49		)	(69		)
Common stock open-market repurchases	(2,282		)	(2,994		)
Common stock withheld from employees (1)	(381		)	(1,163		)
Equity-based award plans (2)	1,509			3,305
Net change in preferred stock	—			(250		)
Net change in junior subordinated notes included in tangible equity (3)	666			1,026
Other, net	(97		)	46
Ending tangible equity capital	$	17,724		$	15,564

(1)	Represents shares of common stock withheld in satisfaction of the exercise price of stock options and tax withholding obligations upon option exercises and conversion of restricted stock units.
(2)	This represents the sum of (i) proceeds received from employees upon the exercise of stock options, (ii) the incremental tax benefits from the issuance of stock-based awards and (iii) the value of employee services received – as represented by the amortization of deferred stock compensation.
(3)	Junior subordinated notes are deeply subordinated and have maturities of at least 30 years at issuance and are utilized in calculating equity capital by leading rating agencies.

Credit Ratings

Like other companies in the securities industry, we rely on external sources to finance a significant portion of our day-to-day operations. The cost and availability of unsecured financing are affected by our short-term and long-term credit ratings. Factors that may be significant to the determination of our credit ratings or otherwise affect our ability to raise short-term and long-term financing include our profit margin, our earnings trend and volatility, our cash liquidity and liquidity management, our capital structure, our risk level and risk management, our geographic and business diversification, and our relative positions in the markets in which we operate. Deterioration in any of these factors or combination of these factors may lead rating agencies to downgrade our credit ratings. This may increase the cost of, or possibly limit our access to, certain types of unsecured financings and trigger additional collateral requirements in derivative contracts and other secured funding arrangements. In addition, our debt ratings can affect certain capital markets revenues, particularly in those businesses where longer-term counterparty performance is critical, such as over-the-counter (“OTC”) derivative transactions, including credit derivatives and interest rate swaps.

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At August 31, 2006, the short- and long-term senior borrowings ratings of Holdings and LBI were as follows:

	Credit Ratings
	Holdings		LBI
	Short-	Long-	Short-	Long-
	term	term	term	term
Standard & Poor’s Ratings Services	A-1	A+	A-1+	AA-
Moody’s Investors Service	P-1	A1	P-1	Aa3
Fitch Ratings	F-1+	A+	F-1+	A+
Dominion Bond Rating Service Limited	R-1 (middle)	A (high)	R-1 (middle)	AA (low	)

On June 8, 2006, Moody’s Investors Service revised its outlook on Holdings and its subsidiaries to positive from stable. The outlook change indicates that over the medium term, if current trends continue, Holdings’ issuer credit ratings could be raised.

On June 16, 2006, Fitch Ratings revised its rating outlook to positive from stable. The revised outlook suggests an upgrade of Holdings’ long-term ratings may occur if current trends continue.

One September 28, 2006, Dominion Bond Rating Service revised the rating trend on all long-term ratings of Holdings and its related entities to positive from stable.

At August 31, 2006, counterparties had the right to require us to post additional collateral pursuant to derivative contracts and other secured funding arrangements of approximately $0.6 billion. Additionally, at that date we would have been required to post additional collateral pursuant to such arrangements of approximately $0.1 billion in the event we were to experience a downgrade of our senior debt rating of one notch and $1.8 billion in the event we were to experience a downgrade of our senior debt rating of two notches.

Summary of Contractual Obligations and Commitments

In the normal course of business, we enter into various commitments and guarantees, including lending commitments to high grade and high yield borrowers, private equity investment commitments, liquidity commitments and other guarantees. In all instances, we carry these commitments and guarantees at fair value, with changes in fair value recognized in Principal transactions in the Consolidated Statement of Income.

Lending-Related Commitments

Through our high grade and high yield sales, trading, underwriting and mortgage origination activities, we make commitments to extend credit in loan syndication transactions. We use various hedging and funding strategies to actively manage our market, credit and liquidity exposures on these commitments. We do not believe total commitments necessarily are indicative of actual risk or funding requirements because the commitments may not be drawn or fully used and such amounts are reported before consideration of hedges. These commitments and any related drawdowns of these facilities typically have fixed maturity dates and are contingent on certain representations, warranties and contractual conditions applicable to the borrower. We define high yield (non-investment grade) exposures as securities of or loans to companies rated BB+ or lower or equivalent ratings by recognized credit rating agencies, as well as non-rated securities or loans that, in management’s opinion, are non-investment grade. In addition, our residential and commercial mortgage platforms in our Capital Markets business make commitments to extend mortgage loans. From time to time, we may also provide contingent commitments to investment and non-investment grade counterparties related to acquisition financing. Our expectation is, and our past practice has been, to distribute through loan syndications to investors substantially all the credit risk associated with these acquisition financing loans, if the transaction closes. We do not believe these commitments are necessarily indicative of our actual risk because the borrower may not complete a contemplated acquisition or, if the borrower completes the acquisition, often will raise funds in the capital markets instead of drawing on our commitment. In addition, our Capital Markets business enters into secured financing commitments.

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The following table summarizes lending-related commitments at August 31, 2006 and November 30, 2005:

											Total
	Amount of Commitment Expiration per Period										Contractual Amount
					2008-		2010-		2012 and		August		November
In millions	2006		2007		2009		2011		Later		31, 2006		30, 2005
High grade (1)	$	666	$	3,351	$	2,758	$	9,877	$	892	$	17,544	$	14,039
High yield (2)	1,432		1,738		995		2,160		1,564		7,889		5,172
Mortgage commitments	10,682		149		789		239		46		11,905		9,417
Investment-grade contingent acquisition facilities	440		3,226		—		—		—		3,666		3,915
Non-investment-grade contingent acquisition facilities	5,333		8,211		—		—		817		14,361		4,738
Secured lending transactions, including forward starting resale and repurchase agreements	90,622		8,425		374		210		1,290		100,921		65,782

(1)	We view our net credit exposure for high grade commitments, after consideration of hedges, to be $5.0 billion and $5.4 billion at August 31, 2006 and November 30, 2005, respectively.
(2)	We view our net credit exposure for high yield commitments, after consideration of hedges, to be $6.7 billion and $4.4 billion at August 31, 2006 and November 30, 2005, respectively.

See Note 7 to the Consolidated Financial Statements for additional information about our lending-related commitments.

Off-Balance-Sheet Arrangements

In the normal course of business we engage in a variety of off-balance-sheet arrangements, including derivative contracts.

Derivatives

Derivatives often are referred to as off-balance-sheet instruments because neither their notional amounts nor the underlying instruments are reflected as assets or liabilities in our Consolidated Statement of Financial Condition. Instead, the market or fair values related to the derivative transactions are reported in the Consolidated Statement of Financial Condition as assets or liabilities in Derivatives and other contractual agreements, as applicable.

In the normal course of business, we enter into derivative transactions both in a trading capacity and as an end-user. We use derivative products in a trading capacity as a dealer to satisfy the financial needs of clients and to manage our own exposure to market and credit risks resulting from our trading activities (collectively, “Trading-Related Derivative Activities”). In this capacity, we transact extensively in derivatives including interest rate, credit (both single name and portfolio), foreign exchange and equity derivatives. Additionally, in 2005 we began trading in commodity derivatives. The use of derivative products in our trading businesses is combined with transactions in cash instruments to allow for the execution of various trading strategies. Derivatives are recorded at market or fair value in the Consolidated Statement of Financial Condition on a net-by-counterparty basis when a legal right of set-off exists and are netted across products when such provisions are stated in the master netting agreement. As an end-user, we use derivative products to adjust the interest rate nature of our funding sources from fixed to floating interest rates and to change the index on which floating interest rates are based (e.g., Prime to LIBOR).

We conduct our derivative activities through a number of wholly-owned subsidiaries. Our fixed income derivative products business is principally conducted through our subsidiary Lehman Brothers Special Financing Inc., and separately capitalized “AAA” rated subsidiaries, Lehman Brothers Financial Products Inc. and Lehman Brothers Derivative Products Inc. Our equity derivative products business is conducted through Lehman Brothers Finance S.A. and Lehman Brothers OTC Derivatives Inc. In addition, as a global investment bank, we also are a market maker in a number of foreign currencies. Counterparties to our derivative product transactions primarily are U.S. and foreign banks, securities firms, corporations, governments and their agencies, finance companies, insurance companies, investment companies and pension funds. We manage the risks associated with derivatives on an aggregate basis, along with the risks associated with our non-derivative trading and market-making activities in cash instruments, as part of our firmwide risk management policies. We use industry standard derivative contracts whenever appropriate.

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See Notes 1 and 2 to the Consolidated Financial Statements for additional information about our accounting policies and our Trading-Related Derivative Activities.

Special Purpose Entities

In the normal course of business, we establish special purpose entities (“SPEs”), sell assets to SPEs, transact derivatives with SPEs, own securities or interests in SPEs and provide liquidity or other guarantees for SPEs. SPEs are corporations, trusts or partnerships that are established for a limited purpose. There are two types of SPEs—qualifying special purpose entities (“QSPEs”) and variable interest entities (“VIEs”). SPEs by their nature generally do not provide equity owners with significant voting powers because the SPE documents govern all material decisions. Our primary involvement with SPEs relates to securitization transactions through QSPEs, in which transferred assets are sold to an SPE that issues securities supported by the cash flows generated by the assets (i.e., securitized). A QSPE can generally be described as an entity whose permitted activities are limited to passively holding financial assets and distributing cash flows to investors based on pre-set terms. Under SFAS 140 we do not consolidate QSPEs. Rather, we recognize only the interests in the QSPEs we continue to hold, if any. We account for such interests at fair value.

We are a market leader in mortgage (both residential and commercial), municipal and other asset-backed securitizations that are principally transacted through QSPEs. See Note 3 to the Consolidated Financial Statements for additional information about our securitization activities.

In addition, we transact extensively with VIEs that do not meet the QSPE criteria because their permitted activities are not sufficiently limited or because the assets are not deemed qualifying financial instruments (e.g., real estate). Under FIN 46(R), we consolidate such VIEs if we are deemed to be the primary beneficiary of such entity. The primary beneficiary is the party that has either a majority of the expected losses or a majority of the expected residual returns of such entity, as defined. Examples of our involvement with VIEs include collateralized debt obligations, synthetic credit transactions, real estate investments through VIEs, and other structured financing transactions. See Note 3 to the Consolidated Financial Statements for additional information about our involvement with VIEs.

Other Commitments and Guarantees

The following table summarizes other commitments and guarantees at August 31, 2006 and November 30, 2005:

											Notional/
	Amount of Commitment Expiration per Period										Maximum Amount
					2008-		2010-		2012 and		August		November
In millions	2006		2007		2009		2011		Later		31, 2006		30, 2005
Derivative contracts (1)	$	52,255	$	96,857	$	113,949	$	87,887	$	215,690	$	566,638	$	539,461
Municipal-securities-related commitments	563		681		716		145		2,373		4,478		4,105
Other commitments with special purpose entities	1,194		198		554		617		2,428		4,991		6,321
Standby letters of credit	1,686		548		—		—		—		2,234		2,608
Private equity and other principal investment commitments	125		333		537		116		—		1,111		927

(1)We believe the fair value of these derivative contracts is a more relevant measure of the obligations because we believe the notional amount overstates the expected payout. At August 31, 2006 and November 30, 2005, the fair value of these derivative contracts approximated $11.3 billion and $9.4 billion, respectively.

See Note 7 to the Consolidated Financial Statements for additional information about our other commitments and guarantees.

Other Off-Balance-Sheet Activities

In the ordinary course of business we enter into various other types of off-balance-sheet arrangements. See “Summary of Contractual Obligations and Commitments” in this MD&A for additional information about our lending-related commitments and guarantees and our contractual obligations.

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Risk Management

As a leading global investment bank, risk is an inherent part of our business. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. The principal risks we face are credit, market, liquidity, legal, reputation and operational risks. Risk management is considered to be of paramount importance in our day-to-day operations. Consequently, we devote significant resources (including investments in employees and technology) to the measurement, analysis and management of risk.

While risk cannot be eliminated, it can be mitigated to the greatest extent possible through a strong internal control environment. Essential in our approach to risk management is a strong internal control environment with multiple overlapping and reinforcing elements. We have developed policies and procedures to identify, measure and monitor the risks involved in our global trading, brokerage and investment banking activities. Our approach applies analytical procedures overlaid with sound practical judgment working proactively with the business areas before transactions occur to ensure that appropriate risk mitigants are in place.

We also seek to reduce risk through the diversification of our businesses, counterparties and activities in geographic regions. We accomplish this objective by allocating the usage of capital to each of our businesses, establishing trading limits and setting credit limits for individual counterparties. Our focus is balancing risk versus return. We seek to achieve adequate returns from each of our businesses commensurate with the risks they assume. Nonetheless, the effectiveness of our approach to managing risks can never be completely assured. For example, unexpected large or rapid movements or disruptions in one or more markets or other unforeseen developments could have an adverse effect on our results of operations and financial condition. The consequences of these developments can include losses due to adverse changes in inventory values, decreases in the liquidity of trading positions, increases in our credit exposure to clients and counterparties and increases in general systemic risk.

Our overall risk limits and risk management policies are established by the Executive Committee. On a weekly basis, our Risk Committee, which consists of the Executive Committee, the Chief Risk Officer and the Chief Financial Officer, reviews all risk exposures, position concentrations and risk-taking activities. The Global Risk Management Division (the “Division”) is independent of the trading areas and reports directly to the Firm’s Chief Administrative Officer. The Division includes credit risk management, market risk management, quantitative risk management, sovereign risk management and operational risk management. Combining these disciplines facilitates a fully integrated approach to risk management. The Division maintains staff in each of our regional trading centers as well as in key sales offices. Risk management personnel have multiple levels of daily contact with trading staff and senior management at all levels within the Company. These discussions include reviews of trading positions and risk exposures.

Credit Risk

Credit risk represents the possibility that a counterparty or an issuer of securities or other financial instruments we hold will be unable to honor its contractual obligations to us. Credit risk management is therefore an integral component of our overall risk management framework. The Credit Risk Management Department (the “CRM Department”) has global responsibility for implementing our overall credit risk management framework.

The CRM Department manages the credit exposure related to trading activities by giving credit approval for counterparties, assigning internal risk ratings, establishing credit limits by counterparty, country and industry group and requiring master netting agreements and collateral in appropriate circumstances. The CRM Department considers the transaction size, the duration of a transaction and the potential credit exposure for complex derivative transactions in making our credit decisions. The CRM Department is responsible for the continuous monitoring and review of counterparty risk ratings, current credit exposures and potential credit exposures across all products and recommending valuation adjustments, when appropriate. Credit limits are reviewed periodically to ensure that they remain appropriate in light of market events or the counterparty’s financial condition.

The CRM Department also has responsibility for portfolio management of counterparty credit risks. This includes monitoring and reporting large exposures (current credit exposure and maximum potential exposure) and concentrations across countries, industries and products, as well as ensuring risk ratings are current and performing asset quality portfolio trend analyses.

Our Chief Risk Officer is a member of the Investment Banking Commitment, Investment, and Bridge Loan Approval Committees. Members of Credit and Market Risk Management participate in committee meetings, vetting and reviewing transactions. Decisions on approving transactions not only take into account the creditworthiness of the transaction on a stand-alone basis, but they also consider our aggregate obligor risk, portfolio concentrations,

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reputation risk and, importantly, the impact any particular transaction under consideration would have on our overall risk appetite. Exceptional transactions and/or situations are addressed and discussed with senior management including, when appropriate, the Executive Committee.

See “Critical Accounting Policies and Estimates—Derivatives and other contractual agreements” in this MD&A and Note 2 to the Consolidated Financial Statements for additional information about net credit exposure on OTC derivative contracts.

Market Risk

Market risk represents the potential change in value of a portfolio of financial instruments due to changes in market rates, prices and volatilities. Market risk management also is an essential component of our overall risk management framework. The Market Risk Management Department (the “MRM Department”) has global responsibility for developing and implementing our overall market risk management framework. To that end, it is responsible for developing the policies and procedures of the market risk management process; determining the market risk measurement methodology in conjunction with the Quantitative Risk Management Department (the “QRM Department”); monitoring, reporting and analyzing the aggregate market risk of trading exposures; administering market risk limits and the escalation process; and communicating large or unusual risks as appropriate. Market risks inherent in positions include, but are not limited to, interest rate, equity and foreign exchange exposures.

The MRM Department uses qualitative as well as quantitative information in managing trading risk, believing a combination of the two approaches results in a more robust and complete approach to the management of trading risk. Quantitative information is developed from a variety of risk methodologies based on established statistical principles. To ensure high standards of analysis, the MRM Department has retained seasoned risk managers with the requisite experience and academic and professional credentials.

Market risk is present in cash products, derivatives and contingent claim structures that exhibit linear as well as non-linear price behavior. Our exposure to market risk varies in accordance with the volume of client-driven market-making transactions, the size of our proprietary positions and the volatility of financial instruments traded. We seek to mitigate, whenever possible, excess market risk exposures through appropriate hedging strategies.

We participate globally in interest rate, equity and foreign exchange markets and, beginning in 2005, commodity markets. Our Fixed Income Division has a broadly diversified market presence in U.S. and foreign government bond trading, emerging market securities, corporate debt (investment and non-investment grade), money market instruments, mortgages and mortgage- and asset-backed securities, real estate, municipal bonds and interest rate derivatives. Our Equities Division facilitates domestic and foreign trading in equity instruments, indices and related derivatives. Our foreign exchange businesses are involved in trading currencies on a spot and forward basis as well as through derivative products and contracts.

We incur short-term interest rate risk in the course of facilitating the orderly flow of client transactions through the maintenance of government and other bond inventories. Market-making in high-grade corporate bonds and high-yield instruments exposes us to additional risk due to potential variations in credit spreads. Trading in international markets exposes us to spread risk between the term structures of interest rates in different countries. Mortgages and mortgage-related securities are subject to prepayment risk. Trading in derivatives and structured products exposes us to changes in the volatility of interest rates. We actively manage interest rate risk through the use of interest rate futures, options, swaps, forwards and offsetting cash-market instruments. Inventory holdings, concentrations and agings are monitored closely and used by management to selectively hedge or liquidate undesirable exposures.

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

We enter into foreign exchange transactions through our market-making activities. We are exposed to foreign exchange risk on our holdings of non-dollar assets and liabilities. We are active in many foreign exchange markets and have exposure to the Euro, Japanese yen, British pound, Swiss franc and Canadian dollar, as well as a variety of developed and emerging market currencies. We hedge our risk exposures primarily through the use of currency forwards, swaps, futures and options.

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If any of the strategies used to hedge or otherwise mitigate exposures to the various types of risks described above are not effective, we could incur losses. See Notes 1 and 2 to the Consolidated Financial Statements for additional information about our use of derivative financial instruments to hedge interest rate, currency, equity and other market risks.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. We face operational risk arising from mistakes made in the execution, confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted for. Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. Consequently, we rely heavily on our financial, accounting and other data processing systems. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and we expect that we will need to continue to upgrade and expand in the future to avoid disruption of, or constraints on, our operations.

Operational Risk Management (the “ORM Department”) is responsible for implementing and maintaining our overall global operational risk management framework, which seeks to minimize these risks through assessing, reporting, monitoring and mitigating operational risks.

We have a company-wide business continuity plan (the “BCP Plan”). The BCP Plan objective is to ensure that we can continue critical operations with limited processing interruption in the event of a business disruption. The BCP group manages our internal incident response process and develops and maintains continuity plans for critical business functions and infrastructure. This includes determining how vital business activities will be performed until normal processing capabilities can be restored. The BCP group is also responsible for facilitating disaster recovery and business continuity training and preparedness for our employees.

Reputational Risk

We recognize that maintaining our reputation among clients, investors, regulators and the general public is an important aspect of minimizing legal and operational risks. Maintaining our reputation depends on a large number of factors, including the selection of our clients and the conduct of our business activities. We seek to maintain our reputation by screening potential clients and by conducting our business activities in accordance with high ethical standards.

Potential clients are screened through a multi-step process that begins with the individual business units and product groups. In screening clients, these groups undertake a comprehensive review of the client and its background and the potential transaction to determine, among other things, whether they pose any risks to our reputation. Potential transactions are screened by independent committees in the Firm, which are composed of senior members from various corporate divisions of the Company including members of the Global Risk Management Division. These committees review the nature of the client and its business, the due diligence conducted by the business units and product groups and the proposed terms of the transaction to determine overall acceptability of the proposed transaction. In doing so, the committees evaluate the appropriateness of the transaction, including a consideration of ethical and social responsibility issues and the potential effect of the transaction on our reputation.

Value At Risk

Value-at-risk (VaR) measures the potential mark-to-market loss over a specified time horizon and is expressed at a given confidence level. We report an “empirical” VaR calculated based upon the distribution of actual trading revenue. We consider this empirical VaR based on net revenue volatility to be a comprehensive risk measurement tool because it incorporates virtually all of our trading activities and types of risk including market, credit and event risks. The table below presents VaR for each component of risk using historical daily net trading revenues. Under this method, we estimate a reporting daily VaR using actual daily net trading revenues over the previous 250 trading days. Such VaR is measured as the loss, relative to the median daily trading net revenue, at a 95% confidence level. This means there is a 1-in-20 chance that such loss on a particular day could exceed the reported VaR number.

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Value at Risk—Net Revenue Volatility

	VaR at									Average VaR Three Months Ended
In millions	8/31/06			5/31/06			11/30/05			8/31/06			5/31/06			11/30/05
Interest rate and commodity risk	$	26.8		$	23.5		$	24.5		$	24.5		$	23.8		$	25.0
Equity price risk	22.6			18.2			14.0			20.7			16.4			12.9
Foreign exchange risk	4.3			3.2			2.5			3.7			2.7			2.5
Diversification benefit	(17.2		)	(9.2		)	(5.2		)	(13.7		)	(7.8		)	(6.0		)
	$	36.5		$	35.7		$	35.8		$	35.2		$	35.1		$	34.4

	VaR Three Months Ended
	August 31, 2006				May 31, 2006				November 30, 2005
In millions	High		Low		High		Low		High		Low
Interest rate and commodity risk	$	27.1	$	23.0	$	25.1	$	22.9	$	26.2	$	24.3
Equity price risk	22.6		18.3		18.2		15.5		14.2		11.8
Foreign exchange risk	4.3		3.2		3.2		2.5		2.6		2.5
Total	36.5		33.7		37.5		33.6		36.1		32.5

Average net revenue volatility VaR for the quarter ended August 31, 2006 of $35.2 million was virtually unchanged from the quarter ended May 31, 2006.

VaR based on net revenue volatility is just one tool we use in evaluating firmwide risk. Another risk measurement tool is a model-based approach, using end-of-day positions, and modeling market risk, counterparty credit risk and event risk. Using this model-based approach, our average firmwide risk in the 2006 third quarter increased compared with the average in the fourth quarter of 2005 primarily due to an increase in event risk, primarily attributable to growth in our real estate investments. Our firmwide risk at August 31, 2006 increased compared to May 31, 2006 due to increases in both market risk and event risk; market risk increased due to higher interest rate exposure and event risk increased primarily due to growth in our real estate business.

The market risk component of the model-based risk measurement approach is based on a historical simulation VaR using end-of-day positions to determine the revenue loss at a 95% confidence level over a one-day time horizon. Specifically, the historical simulation approach involves constructing a distribution of hypothetical daily changes in the value of our financial instruments based on risk factors embedded in the current portfolio and historical observations of daily changes in these risk factors. Our method uses four years of historical data weighted to give greater impact to more recent time periods in simulating potential changes in market risk factors.

It is implicit in a historical simulation VaR methodology that positions will have offsetting risk characteristics, referred to as diversification benefit. We measure the diversification benefit within our portfolio of financial instruments by historically simulating how the positions in our current portfolio would have behaved in relation to each other (as opposed to using a static estimate of a diversification benefit, which remains relatively constant from period to period). Thus, from time to time there will be changes in our historical simulation VaR due to changes in the diversification benefit across our portfolio of financial instruments.

Average historical simulation VaR was $37.9 million for the quarter ended August 31, 2006, slightly up from $36.9 million for the quarter ended May 31, 2006. Historical simulation VaR was $49.9 million at August 31, 2006, up from $34.1 million at May 31, 2006 and $38.4 million at November 30, 2005, primarily attributable to a higher level of interest rate risk and a lower level of diversification benefit among interest rate products.

As with any predictive model, VaR measures have inherent limitations, and we could incur losses greater than the VaR reported above. These limitations include: historical market conditions and historical changes in market risk factors may not be accurate predictors of future market conditions or future market risk factors and VaR measurements are based on current positions, while future risk depends on future positions. In addition, a one day historical simulation VaR does not fully capture the market risk of positions that cannot be liquidated or hedged within one day.

In addition, because there is no uniform industry methodology for estimating VaR, different assumptions and methodologies could produce materially different results and therefore caution should be used when comparing such risk measures across firms. We believe our methods and assumptions used in these calculations are reasonable and prudent.

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Distribution of Daily Net Revenues

Substantially all of the Company’s inventory positions are marked-to-market daily with changes recorded in net revenues. The following chart sets forth the frequency distribution for daily net revenues for our Capital Markets and Investment Management business segments (excluding asset management fees) for the quarters ended August 31, 2006 and 2005.

As discussed throughout this MD&A, we seek to reduce risk through the diversification of our businesses and a focus on client-flow activities. This diversification and focus, combined with our risk management controls and processes, helps mitigate the net revenue volatility inherent in our trading activities. Although historical performance is not necessarily indicative of future performance, we believe our focus on business diversification and client-flow activities should continue to reduce the volatility of future net trading revenues.

Daily Trading Net Revenues

In the third quarter of 2006, there were no days with a net trading revenue loss. For the third quarter of 2005, there were no days with a net trading revenue loss that exceeded $20 million.

Critical Accounting Policies and Estimates

Generally accepted accounting principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management estimates are required in determining the valuation of inventory positions, particularly OTC derivatives, certain commercial mortgage loans and investments in real estate, certain high-yield positions, private equity and other principal investments, and non-investment-grade interests in securitizations. Additionally, significant management estimates are required in assessing the realizability of deferred tax assets, the fair value of assets and liabilities acquired in a business acquisition, the accounting treatment of QSPEs and VIEs, the outcome of litigation, the fair value of equity-based compensation awards and determining the allocation of the cost of acquired businesses to identifiable intangible assets and goodwill. Management believes the estimates used in preparing the financial statements are reasonable and prudent. Actual results could differ from these estimates.

The following is a summary of our critical accounting policies and estimates. See Note 1 to the Consolidated Financial Statements for a full description of these and other accounting policies.

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Fair Value

The determination of fair value is a critical accounting policy that is fundamental to our financial condition and results of operations. We record financial instruments classified as Financial instruments and other inventory positions owned and Financial instruments and other inventory positions sold but not yet purchased at market or fair value, with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income. In all instances, we believe we have established rigorous internal control processes to ensure we use reasonable and prudent measurements of fair value on a consistent basis.

When evaluating the extent to which estimates may be required in determining the fair values of assets and liabilities reflected in our financial statements, we believe it is useful to analyze the balance sheet as shown in the following table:

Summary Balance Sheet

In millions	August 31, 2006
Assets
Financial instruments and other inventory positions owned	$	204,492	43	%
Securities received as collateral	5,046		1
Collateralized agreements	220,167		46
Cash, Receivables and PP&E	36,134		8
Other assets	4,534		1
Identifiable intangible assets and goodwill	3,364		1
Total assets	$	473,737	100	%
Liabilities and Equity
Short-term borrowings and current portion of long-term borrowings	$	18,238	4	%
Financial instruments and other inventory positions sold but not yet purchased	120,871		26
Obligation to return securities received as collateral	5,046		1
Collateralized financing	164,717		35
Payables and other accrued liabilities	72,435		15
Total long-term capital (1)	92,430		19
Total liabilities and equity	$	473,737	100	%

(1)Total long-term capital includes long-term borrowings (excluding any borrowings with remaining maturities under twelve months) and total stockholders’ equity. We believe total long-term capital is useful to investors as a measure of our financial strength.

The majority of our assets and liabilities are recorded at amounts for which significant management estimates are not used. The following balance sheet categories, comprising 54% of total assets and 73% of total liabilities and equity, are valued either at historical cost or at contract value (including accrued interest) which, by their nature, do not require the use of significant estimates: Collateralized agreements, Cash, Receivables and PP&E, Short-term borrowings and the current portion of long-term borrowings, Collateralized financing, Payables and other accrued liabilities and Total long-term capital. Securities received as collateral and Obligation to return securities received as collateral are recorded at fair value, but due to their offsetting nature do not result in fair value estimates affecting the Consolidated Statement of Income. Financial instruments and other inventory positions owned and Financial instruments and other inventory positions sold but not yet purchased (long and short inventory positions, respectively), are recorded at market or fair value, the components of which may require, to varying degrees, the use of estimates in determining fair value.

When evaluating the extent to which management estimates may be used in determining the fair value for long and short inventory, we believe it is useful to consider separately derivatives and cash instruments.

Derivatives and other contractual agreements. The fair values of derivative assets and liabilities at August 31, 2006 were $21.8 billion and $16.0 billion, respectively (see Note 2 to the Consolidated Financial Statements). Included within these amounts were exchange-traded derivative assets and liabilities of $3.2 billion and $3.2 billion, respectively, for which fair value is determined based on quoted market prices. The fair values of our OTC derivative assets and liabilities at August 31, 2006 were $18.6 billion and $12.8 billion, respectively. With respect to OTC contracts, we view our net credit exposure to be $14.7 billion at August 31, 2006 and $10.5 billion at November 30, 2005, representing the fair value of OTC contracts in a net receivable position after consideration of collateral.

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The following table sets forth the fair value of OTC derivatives by contract type and by remaining contractual maturity:

Fair Value of OTC Derivative Contracts by Maturity

									Cross
									Maturity
	Less						Greater		and Cash					Net
In millions	than		1 to 5		5 to 10		than 10		Collateral			OTC		Credit
August 31, 2006	1 Year		Years		Years		Years		Netting (1)			Derivatives		Exposure
Assets
Interest rate, currency and credit default swaps and options (2)	$	1,249	$	7,631	$	7,582	$	5,320	$	(13,251	)	$	8,531	$	8,133
Foreign exchange forward contracts and options	5,009		1,467		375		67		(5,434		)	1,484		1,209
Other fixed income securities contracts	4,813		102		13		4		(1,036		)	3,896		3,466
Equity contracts	2,128		4,909		710		781		(3,889		)	4,639		1,897
	$	13,199	$	14,109	$	8,680	$	6,172	$	(23,610	)	$	18,550	$	14,705
Liabilities
Interest rate, currency and credit default swaps and options (2)	$	1,188	$	4,797	$	4,729	$	2,680	$	(7,673	)	$	5,721
Foreign exchange forward contracts and options	5,473		1,747		545		58		(6,466		)	1,357
Other fixed income securities contracts	2,853		39		13		2		(1,012		)	1,895
Equity contracts	2,531		5,216		1,320		304		(5,573		)	3,798
	$	12,045	$	11,799	$	6,607	$	3,044	$	(20,724	)	$	12,771

(1)Cross-maturity netting represents the netting of receivable balances with payable balances for the same counterparty across maturity and product categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within the maturity category when appropriate. Cash collateral received or paid is netted on a counterparty basis, provided legal right of offset exists. Assets and liabilities at August 31, 2006 were netted down for cash collateral of approximately $11.3 billion and $7.8 billion, respectively.

(2)Includes commodity derivatives.

Presented below is a breakdown of net credit exposure at August 31, 2006 for OTC contracts based on actual ratings made by external rating agencies or by equivalent ratings established and used by our Credit Risk Management Department.

Net Credit Exposure

		August 31, 2006
		Less						Greater
Counterparty	S&P/Moody’s	than		1-5		5-10		than				November 30,
Risk Rating	Equivalent	1 Year		Years		Years		10 Years		Total		2005
iAAA	AAA/Aaa	5	%	5	%	5	%	4	%	19	%	19	%
iAA	AA/Aa	15		9		6		7		37		29
iA	A/A	11		6		5		7		29		32
iBBB	BBB/Baa	2		3		1		4		10		15
iBB	BB/Ba	2		0		0		1		3		3
iB or lower	B/B1 or lower	1		1		0		0		2		2
		36	%	24	%	17	%	23	%	100	%	100	%

The majority of our OTC derivatives are transacted in liquid trading markets for which fair value is determined using pricing models with readily observable market inputs. Where we cannot verify all of the significant model inputs to observable market data, we value the derivative at the transaction price at inception, and consequently, do not record a day one gain or loss in accordance with Emerging Issues Task Force (“EITF”) No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved In Energy Trading and Risk Management Activities. Subsequent to the transaction date, we recognize any profits deferred on these derivative transactions at inception in the period in which the significant model inputs become observable.

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Examples of derivatives where fair value is determined using pricing models with readily observable market inputs include interest rate swap contracts, TBAs, foreign exchange forward and option contracts in G-7 currencies and equity swap and option contracts on listed securities. However, the determination of fair value of certain complex, less liquid derivatives requires the use of significant estimates as they often combine one or more product types, requiring additional inputs, such as correlations and volatilities. Such derivatives include certain credit derivatives, equity option contracts with terms greater than five years, and certain other complex derivatives we provide to clients. We strive to limit the use of significant estimates by using consistent pricing assumptions between reporting periods and using observed market data for model inputs whenever possible. As the market for complex products develops, we refine our pricing models based on market experience to use the most current indicators of fair value.

Cash instruments. The majority of our non-derivative long and short inventory (i.e., cash instruments) is recorded at market value based on listed market prices or using third-party broker quotes and therefore does not incorporate significant estimates. Examples of inventory valued in this manner include government securities, agency mortgage-backed securities, listed equities, money market instruments, municipal securities and corporate bonds. However, in certain instances we may deem such quotations to be unrealizable (e.g., when the instruments are thinly traded or when we hold a substantial block of a particular security such that the listed price is not deemed to be readily realizable). In such instances, we determine fair value based on, among other factors, management’s best estimate giving appropriate consideration to reported prices and the extent of public trading in similar securities, the discount from the listed price associated with the cost at date of acquisition and the size of the position held in relation to the liquidity in the market. When the size of our holding of a listed security is likely to impair our ability to realize the quoted market price, we record the position at a discount to the quoted price reflecting our best estimate of fair value.

When quoted prices are not available, fair value is determined based on pricing models or other valuation techniques, including the use of implied pricing from similar instruments. Pricing models typically are used to derive fair value based on the net present value of estimated future cash flows including adjustments, when appropriate, for liquidity, credit and/or other factors. For the vast majority of instruments valued through pricing models, significant estimates are not required because the market inputs to such models are readily observable and liquid trading markets provide clear evidence to support the valuations derived from such pricing models. Examples of inventory valued using pricing models or other valuation techniques for which the use of management estimates are necessary include certain mortgages and mortgage-backed positions, real estate inventory, non-investment-grade retained interests, certain derivative and other contractual agreements, as well as certain high yield and certain private equity and other principal investments.

Mortgages, mortgage-backed and real estate inventory positions. Mortgages and mortgage-backed positions include mortgage loans (both residential and commercial), non-agency mortgage-backed securities and real estate investments. We are a market leader in mortgage-backed securities trading. We originate residential and commercial mortgage loans as part of our mortgage trading and securitization activities. We originated approximately $45 billion and $65 billion of residential mortgage loans in 2006 and 2005, respectively. We securitized approximately $102 billion and $94 billion of residential mortgage loans in 2006 and 2005, respectively, including both originated loans and those we acquired in the secondary market. In addition, we originated approximately $27 billion and $18 billion of commercial mortgage loans in 2006 and 2005, respectively, the majority of which has been sold through securitization or syndicate activities. See Note 3 to the Consolidated Financial Statements for additional information about our securitization activities. We record mortgage loans at fair value, with related mark-to-market gains and losses recognized in Principal transactions in the Consolidated Statement of Income.

Management estimates are generally not required in determining the fair value of residential mortgage loans because these positions are securitized frequently. Certain commercial mortgage loans and investments, due to their less liquid nature, may require management estimates in determining fair value. Fair value for these positions is generally based on analyses of both cash flow projections and underlying property values. We use independent appraisals to support our assessment of the property in determining fair value for these positions. Fair value for approximately $4.6 billion and $3.6 billion at August 31, 2006 and November 30, 2005, respectively, of our total mortgage loan inventory is determined using the above valuation methodologies, which may involve the use of significant estimates. Because a portion of these assets have been financed on a non-recourse basis, our net investment position is limited to $3.8 billion and $3.5 billion at August 31, 2006 and November 30, 2005, respectively.

We invest in real estate through direct investments in equity and debt. We record real estate held for sale at the lower of cost or fair value. The assessment of fair value generally requires the use of management estimates and generally is based on property appraisals provided by third parties and also incorporates an analysis of the related

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property cash flow projections. We owned real estate investments of approximately $8.9 billion and $7.9 billion at August 31, 2006 and November 30, 2005, respectively. Because significant portions of these assets have been financed on a non-recourse basis, our net investment position was limited to $6.2 billion and $4.8 billion at August 31, 2006 and November 30, 2005, respectively.

High yield. We underwrite, invest and make markets in high yield corporate debt securities. We also syndicate, trade and invest in loans to below-investment-grade-rated companies. For purposes of this discussion, high yield debt instruments are defined as securities of or loans to companies rated BB+ or lower or equivalent ratings by recognized credit rating agencies, as well as non-rated securities or loans that, in management’s opinion, are non-investment grade. Non-investment grade securities generally involve greater risks than investment grade securities due to the issuer’s creditworthiness and the lower liquidity of the market for such securities. In addition, these issuers generally have relatively higher levels of indebtedness resulting in an increased sensitivity to adverse economic conditions. We recognize these risks and seek to reduce market and credit risk through the diversification of our products and counterparties. High yield debt instruments are carried at fair value, with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income. Non-Investment Grade instruments at August 31, 2006 and November 30, 2005 included long positions with an aggregate fair value of approximately $8.9 billion and $4.5 billion, respectively. At August 31, 2006 and November 30, 2005, the largest industry concentrations were 30% and 22%, respectively, categorized within the finance and insurance industrial classifications. The largest geographic concentrations at August 31, 2006 and November 30, 2005 were 64% and 65%, respectively, in the United States. The majority of these positions are valued using broker quotes or listed market prices. However, at August 31, 2006 and November 30, 2005, approximately $720 million and $610 million, respectively, of these positions were valued using other valuation techniques because there was little or no trading activity. In such instances, we use prudent judgment in determining fair value, which may involve using analyses of credit spreads associated with pricing of similar instruments, or other valuation techniques. We mitigate our aggregate and single-issuer net exposure through the use of derivatives, non-recourse financing and other financial instruments.

Private equity and other principal investments. Our Private Equity business operates in five major asset classes: Merchant Banking, Real Estate, Venture Capital, Fixed Income Related Investments and Private Funds Investments. We have raised privately-placed funds in all of these classes, for which we act as general partner and in which we have general and in some cases limited partner interests. In addition, we generally co-invest in the investments made by the funds or may make other non-fund-related direct investments. We carry our private equity investments, including our partnership interests, at fair value based on our assessment of each underlying investment. At August 31, 2006 and November 30, 2005, our private equity related investments totaled $2.5 billion and $1.6 billion, respectively. The real estate industry represented the highest concentrations at 21% and 27% at August 31, 2006 and November 30, 2005, respectively, and the largest single-investment exposures were $228 million and $180 million, respectively.

The determination of fair value for these investments often requires the use of estimates and assumptions because these investments generally are less liquid and often contain trading restrictions. At August 31, 2006 and November 30, 2005, we estimate that approximately $163 million and $172 million, respectively, of these investments have readily determinable fair values because they are publicly-traded securities with limited remaining trading restrictions. For the remainder of these positions, fair value is based on our assessment of the underlying investments incorporating valuations that consider expected cash flows, earnings multiples and/or comparisons to similar market transactions. Valuation adjustments, which may involve the use of significant management estimates, are an integral part of pricing these instruments, reflecting consideration of credit quality, concentration risk, sale restrictions and other liquidity factors. Additional information about our private equity and other principal investment activities, including related commitments, can be found in Note 7 to the Consolidated Financial Statements.

Non-investment grade interests in securitizations. We held approximately $1.4 billion and $700 million, respectively, of non-investment grade interests in securitizations at August 31, 2006 and November 30, 2005. Because these interests primarily represent the junior interests in securitizations for which there are not active trading markets, estimates generally are required in determining fair value. We value these instruments using prudent estimates of expected cash flows and consider the valuation of similar transactions in the market. See Note 3 to the Consolidated Financial Statements for additional information about the effect of adverse changes in assumptions on the fair value of these interests.

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Identifiable Intangible Assets and Goodwill

Determining the fair values and useful lives of certain assets acquired and liabilities assumed associated with business acquisitions—intangible assets in particular—requires significant judgment. In addition, we are required to assess for impairment goodwill and other intangible assets with indefinite lives at least annually using fair value measurement techniques. Periodically estimating the fair value of a reporting unit and intangible assets with indefinite lives involves significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recognized and the magnitude of such a charge. We completed our last goodwill impairment test as of August 31, 2006, and no impairment was identified.

SPEs

The Company is a market leader in securitization transactions, including securitizations of residential and commercial loans, municipal bonds and other asset backed transactions. The vast majority of such securitization transactions are designed to be in conformity with the SFAS 140 requirements of a QSPE. Securitization transactions meeting the requirements of a QSPE are deemed to be off-balance-sheet. The assessment of whether a securitization vehicle meets the accounting requirements of a QSPE requires significant judgment involving complex matters, particularly in evaluating whether servicing activities meet the conditions of permitted activities under SFAS 140 and whether or not derivatives are considered to be passive.

In addition, the evaluation of whether an entity is subject to the requirements of FIN 46(R) as a variable interest entity (VIE) and the determination of whether the Company is deemed to be the primary beneficiary of such VIE is a critical accounting policy that requires significant management judgment.

See Note 1 to the Consolidated Financial Statements for additional information about the Company’s accounting policies.

Legal Reserves

In the normal course of business we have been named as a defendant in a number of lawsuits and other legal and regulatory proceedings. Such proceedings include actions brought against us and others with respect to transactions in which we acted as an underwriter or financial advisor, actions arising out of our activities as a broker or dealer in securities and commodities and actions brought on behalf of various classes of claimants against many securities firms, including us. In addition, our business activities are reviewed by various taxing authorities around the world with regard to corporate income tax rules and regulations. We provide for potential obligations that may arise out of legal, regulatory and tax proceedings to the extent they are probable and estimable.

2-for-1 Stock Split

On April 5, 2006, the stockholders of Holdings approved an increase in the Company’s authorized shares of common stock to 1.2 billion from 600 million, and the Board of Directors approved a 2-for-1 common stock split, in the form of a stock dividend, for holders of record as of April 18, 2006, which was paid on April 28, 2006. On April 5, 2006, the Company’s Restated Certificate of Incorporation was amended to effect the increase in authorized common shares.

Accounting and Regulatory Developments

SFAS 158. In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”). SFAS 158 requires recognition in the Consolidated Statement of Financial Condition of the over or underfunded status of postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. For pension plans, the benefit obligation is the projected benefit obligation, for other postretirement plans, the benefit obligation is the accumulated postretirement obligation. Upon adoption, SFAS 158 requires the recognition of previously unrecognized actuarial gains and losses and prior service costs within Accumulated other comprehensive income, net of tax (a component of Stockholders’ equity).

SFAS 158 is effective for our fiscal year ending November 30, 2007, with early adoption permitted for our fiscal year ending November 30, 2006.

Based on information available at November 30, 2005, we would have reduced Accumulated other comprehensive income (net of tax) by approximately $300 million. The actual impact of adopting SFAS 158 will be dependent upon

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the then current fair value of plan assets and the amount of projected benefit obligation, measured as of the adoption date.

SFAS 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 nullifies the guidance in EITF 02-3 which precluded the recognition of a trading profit at the inception of a derivative contract, unless the fair value of such derivative is obtained from a quoted market price, or other valuation technique incorporating observable market data. SFAS 157 also precludes the use of a liquidity or block discount, when measuring instruments traded in an active market at fair value. SFAS 157 requires that costs related to acquiring financial instruments carried at fair value should not be capitalized, but rather should be expensed as incurred. SFAS 157 also clarifies that an issuer’s credit standing should be considered when measuring liabilities at fair value.

SFAS 157 is effective for our fiscal year beginning December 1, 2007, with earlier application permitted for our fiscal year beginning December 1, 2006. SFAS 157 must be applied prospectively, except that the provisions related to block discounts and the guidance in EITF 02-3 are to be applied as a one time cumulative effect adjustment to opening retained earnings in the first interim period for the fiscal year in which SFAS 157 is initially applied.

We are evaluating the provisions of SFAS 157 and their effect on our consolidated financial statements.

SFAS 156. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”). SFAS 156 amends SFAS 140 with respect to the accounting for separately-recognized servicing assets and liabilities. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value basis.

We elected to early adopt SFAS 156 as of December 1, 2005 and to measure all classes of servicing assets and liabilities at fair value. Servicing assets and liabilities at November 30, 2005 are accounted for at the lower of amortized cost or market value basis. As a result of adopting SFAS 156, we recognized an $18 million after-tax ($33 million pre-tax) increase to opening retained earnings as of December 1, 2005, representing the effect of remeasuring all servicing assets and liabilities that existed at November 30, 2005 from a lower of amortized cost or market value basis to a fair value basis. This change in accounting principle did not have a material effect on our 2006 consolidated financial statements.

See Note 3 to the Consolidated Financial Statements, “Securitizations and Other Off-Balance-Sheet Arrangements,” for additional information.

SFAS 155. We issue structured notes (also referred to as hybrid instruments) for which the interest rates or principal payments are linked to the performance of an underlying measure (including single securities, baskets of securities, commodities, currencies, or credit events). Through November 30, 2005, we assessed the payment components of these instruments to determine if the embedded derivative required separate accounting under SFAS 133, and if so, the embedded derivative was bifurcated from the host debt instrument and accounted for at fair value and reported in long-term borrowings along with the related host debt instrument which was accounted for on an amortized cost basis.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”). SFAS 155 permits fair value measurement of any structured note that contains an embedded derivative that would require bifurcation under SFAS 133. Such fair value measurement election is permitted on an instrument-by-instrument basis. We elected to early adopt SFAS 155 as of December 1, 2005 and we have applied SFAS 155 fair value measurement to all structured notes issued after November 30, 2005 as well as to certain structured notes that existed at November 30, 2005. The effect of adoption resulted in a $24 million after-tax ($43 million pre-tax) decrease to opening retained earnings as of December 1, 2005, representing the difference between the fair value of these structured notes and the prior carrying value as of November 30, 2005. The net after-tax adjustment included structured notes with gross gains of $18 million ($32 million pre-tax) and gross losses of $42 million ($75 million pre-tax). This change in accounting principle did not have a material effect on our 2006 consolidated financial statements.

SFAS 123(R).In December 2004, the FASB issued SFAS 123(R), which we adopted on December 1, 2005. SFAS 123(R) requires public companies to recognize expense in the income statement for the grant-date fair value of

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awards of equity instruments to employees. Expense is to be recognized over the period employees are required to provide service. See Note 1 to the Consolidated Financial Statements for additional information about our accounting policies.

SFAS 123(R) clarifies and expands the guidance in SFAS 123 in several areas, including measuring fair value and attributing compensation cost to reporting periods. Under the modified prospective transition method applied in the adoption of SFAS 123(R) compensation cost is recognized for the unamortized portion of outstanding awards granted prior to the adoption of SFAS 123. Upon adoption of SFAS 123(R) on December 1, 2005, we recognized an after-tax gain of approximately $47 million as the cumulative effect of a change in accounting principle, attributable to the requirement to estimate forfeitures at the date of grant instead of recognizing them as incurred. The adoption of SFAS 123(R) did not otherwise have a material effect on our 2006 consolidated financial statements for the three and nine months ended August 31, 2006, and is not expected to otherwise have a material effect on our fiscal 2006 consolidated financial statements.

EITF Issue No. 04-5. In June 2005, the FASB ratified the consensus reached in EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”) which requires general partners (or managing members in the case of limited liability companies) to consolidate their partnerships or to provide limited partners with substantive rights to remove the general partner or to terminate the partnership. As the general partner of numerous private equity, merchant banking and asset management partnerships, we adopted EITF 04-5 immediately for partnerships formed or modified after June 29, 2005. For partnerships formed on or before June 29, 2005 that have not been modified, we are required to adopt EITF 04-5 on December 1, 2006 in a manner similar to a cumulative-effect-type adjustment or by retrospective application.

We do not expect adoption of EITF 04-5 for partnerships formed on or before June 29, 2005 that have not been modified will have a material effect on our consolidated financial statements.

FSP FIN 46(R)-6. In April 2006 the FASB issued FASB Staff Position FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R) (“FSP FIN 46(R)-6”). FSP FIN 46(R)-6 addresses how variability should be considered when applying FIN 46(R). Variability affects the determination of whether an entity is a VIE, which interests are variable interests, and which party, if any, is the primary beneficiary of the VIE required to consolidate. FSP FIN 46(R)-6 clarifies that the design of the entity also should be considered when identifying which interests are variable interests.

We adopted FSP FIN 46(R)-6 effective September 1, 2006. FSP FIN 46(R)-6 must be applied prospectively to all entities in which we first become involved as of the date of adoption.

We do not expect that the adoption of FSP FIN 46(R)-6 will have a material effect on our consolidated financial statements.

FIN 48. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We must adopt FIN 48 no later than December 1, 2007. Early application is permitted on December 1, 2006.

We are evaluating the effect the adoption of FIN 48 will have on our consolidated financial statements.

Consolidated Supervised Entity. In June 2004, the SEC approved a rule establishing a voluntary framework for comprehensive, group-wide risk management procedures and consolidated supervision of certain financial services holding companies. The framework is designed to minimize the duplicative regulatory burdens on U.S. securities firms resulting from the European Union (the “EU”) Directive (2002/87/EC) concerning the supplementary supervision of financial conglomerates active in the EU. The rule also allows companies to use an alternative method, based on internal risk models, to calculate net capital charges for market and derivative-related credit risk. Under this rule, the SEC will regulate the holding company and any unregulated affiliated registered broker-dealer pursuant to an undertaking to be provided by the holding company, including subjecting the holding company to capital requirements generally consistent with the International Convergence of Capital Measurement and Capital Standards published by the Basel Committee on Banking Supervision.

As of December 1, 2005, Holdings became regulated by the SEC as a consolidated supervised entity (CSE). As such, Holdings is subject to group-wide supervision and examination by the SEC and, accordingly, we are subject to

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minimum capital requirements on a consolidated basis. LBI is approved to calculate its net capital under provisions as specified by the applicable SEC rules. At August 31, 2006, we were in compliance with minimum capital requirements.

Effects of Inflation

Because our assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation, office space leasing costs and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our consolidated financial condition and results of operations in certain businesses.

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LEHMAN BROTHERS HOLDINGS INC.

PART I – FINANCIAL INFORMATION

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The information under the caption “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management” in this Report is incorporated herein by reference.

ITEM 4. Controls and Procedures

Our management, with the participation of the Chairman and Chief Executive Officer and the Chief Financial Officer of Holdings (its principal executive officer and principal financial officer, respectively), evaluated our disclosure controls and procedures as of the end of the fiscal quarter covered by this Report.

Based on that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the fiscal quarter covered by this Report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by Holdings in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by Holdings in such reports is accumulated and communicated to our management, including the Chairman and Chief Executive Officer and the Chief Financial Officer of Holdings, as appropriate to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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LEHMAN BROTHERS HOLDINGS INC.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

See Part I, Item 3, “Legal Proceedings,” in the Form 10-K and Part II, Item 1, “Legal Proceedings,” in Holdings’ subsequent Quarterly Reports on Form 10-Q for a complete description of certain proceedings previously reported by us, including those listed below; only significant subsequent developments in such proceedings and new matters, if any, since the filing of the latest Form 10-Q are described below. Capitalized terms used in this Item that are defined in the Form 10-K have the meanings ascribed to them in the Form 10-K.

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

Although there can be no assurance as to the ultimate outcome, we generally have denied, or believe we have a meritorious defense and will deny, liability in all significant cases pending against us, including the matters described below and in the Form 10-K and subsequent Forms 10-Q, and we intend to defend vigorously each such case. Based on information currently available, we believe the amount, or range, of reasonably possible losses in connection with the actions against us, including the matters described below and in the Form 10-K and subsequent Forms 10-Q, in excess of established reserves, in the aggregate, not to be material to the Company’s consolidated financial condition or cash flows. However, losses may be material to our operating results for any particular future period, depending on the level of our income for such period.

Bader v. Ainslie, et al.

On August 3, 2006, a purported shareholder derivative action captioned Bader v. Ainslie, et al., was filed against Holdings and certain of its directors in the United States District Court for the Southern District of New York seeking various types of equitable and injunctive relief. The complaint purports to bring claims under §14(a) of the Securities Exchange Act of 1934 and unspecified state law fiduciary duty claims alleging that the Firm’s proxy statements for the years 2002 through 2006 contained false or misleading statements or failed to disclose material facts. Specifically, the complaint alleges that the Black-Scholes method of valuing stock options granted to the directors and executive officers of Holdings and the deductibility of those options were incorrectly described and applied.

Wright, et al. v. Lehman Brothers Holdings Inc, et al. (reported in the first quarter Form 10-Q)

The Carlton Energy group plaintiffs who brought suit in state court in Harris County, Texas, have agreed to stay their action and bring their claims in the action brought by A. Vernon Wright in Los Angeles Superior Court.

ITEM 1A. Risk Factors

There are no material changes from the risk factors set forth in Part I, Item 1A, in the Form 10-K.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth information with respect to purchases made by or on behalf of Holdings or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended), of our common stock during the quarter ended August 31, 2006.

	Issuer Purchases of Equity Securities
				Total Number of	Maximum Number
				Shares Purchased	of Shares that May
	Total Number			as Part of Publicly	Yet Be Purchased
	of Shares	Average Price		Announced Plans	Under the Plans or
	Purchased	Paid per Share		or Programs	Programs
Month # 1 (June 1— June 30, 2006):
Common stock repurchases (1)	3,735,000			3,735,000
Employee transactions (2)	55,461			55,461
Total	3,790,461	$	63.87	3,790,461	78,945,390
Month # 2 (July 1—July 31, 2006):
Common stock repurchases (1)	3,530,000			3,530,000
Employee transactions (2)	145,564			145,564
Total	3,675,564	$	62.95	3,675,564	75,269,826
Month # 3 (August 1—August 31, 2006):
Common stock repurchases (1)	3,735,000			3,735,000
Employee transactions (2)	653,715			653,715
Total	4,388,715	$	65.20	4,388,715	70,881,111
Total, June 1, 2006— August 31, 2006:
Common stock repurchases (1)	11,000,000			11,000,000
Employee transactions (2)	854,740			854,740
Total	11,854,740	$	64.07	11,854,740	70,881,111

(1)We have an ongoing common stock repurchase program, pursuant to which we repurchase shares in the open market on a regular basis. As previously announced, in January 2006 our Board of Directors authorized the repurchase in 2006, subject to market conditions, of up to 80 million shares of Holdings common stock in 2006, for the management of the Firm’s equity capital, including offsetting 2006 dilution due to employee stock plans. Our Board also authorized the repurchase in 2006, subject to market conditions, of up to an additional 30 million shares, for the possible acceleration of repurchases to offset a portion of 2007 dilution due to employee stock plans. This authorization supersedes the stock repurchase program authorized in January 2005. The number of shares authorized to be repurchased in the open market is reduced by the actual number of Employee Offset Shares (as defined below) received.

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

For more information about the repurchase program and employee stock plans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources—Equity Management” in Part I, Item 2, and Note 10 to the Consolidated Financial Statements in Part I, Item 1, in this Report, and Notes 11 and 14 to the Consolidated Financial Statements in Part II, Item 8, and “Security Ownership of Certain Beneficial Owners and Management” in Part III, Item 12, of the Form 10-K.

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ITEM 5. Other Information

On October 10, 2006, Holdings, by authorization of its Board of Directors, filed with the Delaware Secretary of State two Certificates of Retirement pursuant to Section 243(b) of the General Corporation Law of the State of Delaware (the “DGCL”) and a Certificate of Elimination pursuant to Section 151(g) of the DGCL, which together had the effect of eliminating from Holdings’ Restated Certificate of Incorporation, dated May 27, 1994, as amended (the “Old Certificate of Incorporation”), all reference to five series of preferred stock that had previously been repurchased or redeemed in full at various times and reducing the number of shares of preferred stock, $1.00 par value per share, that the Registrant is authorized to issue from 38,000,000 to 24,999,000. The Certificates of Retirement and the Certificate of Elimination collectively identify the five series of preferred stock that had been repurchased or redeemed, and copies thereof are filed as Exhibits 3.01, 3.02 and 3.03, respectively, and are incorporated herein by reference in their entirety.

In addition, since May 27, 1994, various other certificates of amendment, merger, correction, designations and change of registered agent have been filed by Holdings with the Delaware Secretary of State. As a matter of corporate housekeeping and for ease of reference, the Board of Directors has approved, pursuant to Section 245(b) of the DGCL, the filing of a Restated Certificate of Incorporation (the “2006 Restated Certificate of Incorporation”) that incorporates all of these previous changes and the Certificates of Retirement and Elimination described above. The 2006 Restated Certificate of Incorporation, which was filed with the Delaware Secretary of State on October 10, 2006, merely restates and integrates but does not further amend the Old Certificate of Incorporation. A copy of the 2006 Restated Certificate of Incorporation is filed as Exhibit 3.04 and incorporated herein by reference in its entirety.

Pursuant to the DGCL, none of the foregoing actions required a vote of Holdings' shareholders.

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ITEM 6. Exhibits

The following exhibits are filed as part of (or are furnished with, as indicated below) this Quarterly Report or, where indicated, were heretofore filed and are hereby incorporated by reference:

3.01*	Certificate of Retirement of the Cumulative Convertible Voting Preferred Stock, Series A of the Registrant
3.02*	Certificate of Retirement of the Redeemable Voting Preferred Stock of the Registrant
3.03*	Certificate of Elimination of the Cumulative Voting Preferred Stock, Cumulative Convertible Voting Preferred Stock, Series B and Fixed/Adjustable Cumulative Rate Preferred Stock, Series E of the Registrant
3.04*	Restated Certificate of Incorporation of the Registrant dated October 10, 2006
3.05	By-Laws of the Registrant, amended as of April 5, 2006 (incorporated by reference to Exhibit 3.09 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2006)
11.01	Computation of Per Share Earnings (omitted in accordance with section (b)(11) of Item 601 of Regulation S-K; the computation of per share earnings is set forth in Part I, Item 1, in Note 8 to the Consolidated Financial Statements (Earnings Per Common Share))
12.01*	Computation of Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends
15.01*	Letter of Ernst & Young LLP regarding Unaudited Interim Financial Information
31.01*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a)
31.02*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a)
32.01*	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Enacted by Section 906 of the Sarbanes-Oxley Act of 2002 (This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)
32.02*	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Enacted by Section 906 of the Sarbanes-Oxley Act of 2002 (This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.)

*Filed/furnished herewith

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SIGNATURE

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

	LEHMAN BROTHERS HOLDINGS INC. (Registrant)
Date: October 10, 2006	By:	/s/ Christopher M. O’Meara
		Chief Financial Officer, Controller and Executive Vice President (principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit No.	Exhibit
3.01	Certificate of Retirement of the Cumulative Convertible Voting Preferred Stock, Series A of the Registrant
3.02	Certificate of Retirement of the Redeemable Voting Preferred Stock of the Registrant
3.03	Certificate of Elimination of the Cumulative Voting Preferred Stock, Cumulative Convertible Voting Preferred Stock, Series B and Fixed/Adjustable Cumulative Rate Preferred Stock, Series E of the Registrant
3.04	Restated Certificate of Incorporation of the Registrant dated October 10, 2006
12.01	Computation of Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends
15.01	Letter of Ernst & Young LLP regarding Unaudited Interim Financial Information
31.01	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a)
31.02	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a)
32.01	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Enacted by Section 906 of the Sarbanes-Oxley Act of 2002
32.02	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Enacted by Section 906 of the Sarbanes-Oxley Act of 2002

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EX-3.01

EXHIBIT 3.01

CERTIFICATE OF RETIREMENT OF THE

CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK, SERIES A OF

LEHMAN BROTHERS HOLDINGS INC.

Pursuant to Section 243(b) of the General Corporation Law

of the State of Delaware

Lehman Brothers Holdings Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 243(b) of the General Corporation Law of the State of Delaware, hereby certifies as follows:

1.             That the Restated Certificate of Incorporation of the Corporation, as amended (the “Certificate of Incorporation”) authorizes the issuance of 13,000,000 shares of Cumulative Convertible Voting Preferred Stock, Series A, $1.00 par value per share, of the Corporation (“Series A Preferred Stock”) and such shares of Series A Preferred Stock have been duly issued and subsequently redeemed by the Corporation.

2.             That the aforesaid 13,000,000 shares of Series A Preferred Stock have been retired.

3.             That the Certificate of Incorporation prohibits the reissuance of shares of Series A Preferred Stock that are redeemed by the Corporation.

4.             That, accordingly, the Certificate of Incorporation shall be amended so as to reduce the authorized number of shares of preferred stock, $1.00 par value per share, of the Corporation by 13,000,000 shares and eliminate from the Certificate of Incorporation all reference to the Series A Preferred Stock.

IN WITNESS WHEREOF, the undersigned, being duly authorized thereto, does hereby affirm, under penalties of perjury, that this certificate is the act and deed of the Corporation and that the facts herein stated are true, and accordingly has hereunto set his hand this 10^th day of October, 2006.

	Lehman Brothers Holdings Inc.
	By:	/s/ Barrett S. DiPaolo
		Name:	Barrett S. DiPaolo
		Title:	Vice President
Attest:
/s/ Madeline L. Shapiro
Madeline L. Shapiro
Assistant Secretary

EX-3.02

EXHIBIT 3.02

CERTIFICATE OF RETIREMENT OF THE

REDEEMABLE VOTING PREFERRED STOCK OF

LEHMAN BROTHERS HOLDINGS INC.

Pursuant to Section 243(b) of the General Corporation Law

of the State of Delaware

Lehman Brothers Holdings Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 243(b) of the General Corporation Law of the State of Delaware, hereby certifies as follows:

1.             That the Restated Certificate of Incorporation of the Corporation, as amended (the “Certificate of Incorporation”) authorizes the issuance of 1,000 shares of Redeemable Voting Preferred Stock, $1.00 par value per share, of the Corporation (“Redeemable Voting Preferred Stock”) and such shares of Redeemable Voting Preferred Stock have been duly issued and subsequently redeemed by the Corporation.

2.             That the aforesaid 1,000 shares of Redeemable Voting Preferred Stock have been retired.

3.             That the Certificate of Incorporation prohibits the reissuance of shares of Redeemable Voting Preferred Stock that are redeemed by the Corporation.

4.             That, accordingly, the Certificate of Incorporation shall be amended so as to reduce the authorized number of shares of preferred stock, $1.00 par value per share, of the Corporation by 1,000 shares and eliminate from the Certificate of Incorporation all reference to the Redeemable Voting Preferred Stock.

IN WITNESS WHEREOF, the undersigned, being duly authorized thereto, does hereby affirm, under penalties of perjury, that this certificate is the act and deed of the Corporation and that the facts herein stated are true, and accordingly has hereunto set his hand this 10^th day of October, 2006.

	Lehman Brothers Holdings Inc.
	By:	/s/ Barrett S. DiPaolo
		Name:	Barrett S. DiPaolo
		Title:	Vice President
Attest:
/s/ Madeline L. Shapiro
Madeline L. Shapiro
Assistant Secretary

EX-3.03

EXHIBIT 3.03

CERTIFICATE OF ELIMINATION OF THE

CUMULATIVE VOTING PREFERRED STOCK,

CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK, SERIES B, AND

FIXED/ADJUSTABLE CUMULATIVE RATE PREFERRED STOCK, SERIES E, OF
LEHMAN BROTHERS HOLDINGS INC.

Pursuant to Section 151(g)
of the General Corporation Law
of the State of Delaware

Lehman Brothers Holdings Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, hereby certifies as follows:

1.     That, pursuant to Section 151 of the General Corporation Law of the State of Delaware and authority granted in Restated Certificate of Incorporation of the Corporation, as amended (the “Certificate of Incorporation”), as such authority was delegated to the Executive Committee of the Board of Directors of the Corporation, the Executive Committee by resolution duly adopted, authorized the issuance of:

(a)   8,000,000 shares of Cumulative Voting Preferred Stock, $1.00 par value per share, of the Corporation (the “Cumulative Voting Preferred Stock”), and established the voting powers, designations, preferences and relative, participating and other rights, and the qualifications, limitations or restrictions thereof, and, on May 27, 1994, filed a Certificate of Designations (the “Cumulative Voting Preferred Stock Certificate of Designations”) with respect to such Cumulative Voting Preferred Stock in the office of the Secretary of State of the State of Delaware (the “Secretary of State”), which was restated, without amendment, in the Certificate of Incorporation;

(b)   13,000,000 shares of Cumulative Convertible Voting Preferred Stock, Series B, $1.00 par value per share of the Corporation (the “Series B Preferred Stock”), and established the voting powers, designations, preferences and relative, participating and other rights, and the qualifications, limitations or restrictions thereof, and, on April 10, 1997, filed a Certificate of Designations and on July 10, 1997 filed an Amended Certificate of Designations (the “Series B Certificate of Designations”) with respect to such Series B Preferred Stock in the office of the Secretary of State; and

(c)   57,500 shares of Fixed/Adjustable Rate Cumulative Preferred Stock, Series E, $1.00 par value per share of the Corporation (the “Series E Preferred Stock”), and established the voting powers, designations, preferences and relative, participating and other rights, and the qualifications, limitations or restrictions thereof, and, on March 28, 2000, filed a Certificate of Designations (the “Series E Certificate of Designations,” and, together with the Cumulative Voting Preferred Stock Certificate of Designations and the Series B Certificate of Designations, the “Certificates of Designations”) with respect to such Series E Preferred Stock in the office of the Secretary of State.

2.     That no shares of said Cumulative Voting Preferred Stock, Series B Preferred Stock or Series E Preferred Stock remain outstanding and no shares thereof will be issued subject to said Certificates of Designations.

3.     That the Board of Directors of the Corporation has adopted the following resolutions:

WHEREAS, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation and as such authority was delegated to the Executive Committee of the Board of Directors, the Executive Committee (a) created a series of 8,000,000 shares of Cumulative Voting Preferred Stock, $1.00 par value per share (the “Cumulative Voting Preferred Stock”) by filing a Certificate of Designations of the Corporation with the Secretary of State of Delaware on May 27, 1994, as restated, without amendment, in the Restated Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on May 27, 1994 (the “Cumulative Voting  Preferred Stock Certificate of Designations”); (b) created a series of 13,000,000 shares of Cumulative Convertible Voting Preferred Stock, Series B, $1.00 par value per share (the “Series B Preferred Stock”) by filing a Certificate of Designations of the Corporation with the Secretary of State of the State of Delaware on April 10, 1997, as amended in its entirety by the Certificate of Designations of the Corporation filed with the Secretary of State of the State of Delaware on July 10, 1997 (the “Series B Certificate of Designations”); and (c) created a series of 57,500 shares of Fixed/Adjustable Rate Cumulative Preferred Stock, Series E, $1.00 par value per share (the “Series E Preferred Stock”) by filing a Certificate of Designations of the Corporation with the Secretary of State on March 28, 2000 (the “Series E Certificate of Designations” and, with the Cumulative Voting Preferred Stock Certificate of Designations and the Series B Certificate of Designations, the “Certificates of Designations”); and

WHEREAS, 8,000,000 shares of such Cumulative Voting Preferred Stock, 12,998,100 shares of such Series B Preferred Stock and 50,000 shares of such Series E Preferred Stock have been duly issued and subsequently redeemed and reacquired by the Corporation, and no shares of Cumulative Voting Preferred Stock, Series B Preferred Stock or Series E Preferred Stock are outstanding and no such shares will hereafter be issued; and

WHEREAS, it is desirable that, pursuant to Section 151(g) of the General Corporation Law of the State of Delaware, the shares of Cumulative Voting Preferred Stock, Series B Preferred Stock and Series E Preferred Stock resume the status of authorized but unissued shares of preferred stock, $1.00 par value per share, of the Corporation and that all matters set forth in the Certificates of Designations with respect to the Cumulative Voting Preferred Stock, Series B Preferred Stock and Series E Preferred Stock be eliminated from the Certificate of Incorporation;

NOW THEREFORE, BE IT

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RESOLVED, that as of the date hereof no shares of Cumulative Voting Preferred Stock, Series B Preferred Stock or Series E Preferred Stock are outstanding and no shares of Cumulative Voting Preferred Stock, Series B Preferred Stock or Series E Preferred Stock will be issued subject to their respective Certificates of Designations; and be it further

RESOLVED, that the aforesaid 8,000,000 shares of Cumulative Voting Preferred Stock, 12,998,100 shares of Series B Preferred Stock and 50,000 shares of Series E Preferred Stock that have been redeemed and reacquired by the Corporation shall resume the status of authorized but unissued shares of preferred stock, $1.00 par value per share, of the Corporation; and be it further

RESOLVED, that all matters set forth in the Cumulative Voting Preferred Stock Certificate of Designations with respect to the Cumulative Voting Preferred Stock, the Series B Certificate of Designations with respect to the Series B Preferred Stock and in the Series E Certificate of Designations with respect to the Series E Preferred Stock be eliminated from the Certificate of Incorporation; and be it further

RESOLVED, that the officers of the Corporation be, and hereby are, authorized and directed to execute, acknowledge and file one or more certificates with the office of the Secretary of State of the State of Delaware setting forth a copy of the foregoing resolutions, and when such certificate or certificates become effective it or they shall have the effect of eliminating from the Certificate of Incorporation all matters set forth in the Certificates of Designations with respect to the Cumulative Voting Preferred Stock, the Series B Preferred Stock and the Series E Preferred Stock.

4.     That, accordingly, all 8,000,000 shares of Cumulative Voting Preferred Stock, 12,998,100 shares of Series B Preferred Stock and 50,000,000 shares of Series E Preferred Stock shall resume the status of authorized but unissued shares of preferred stock, $1.00 par value per share, of the Corporation and all matters set forth in the Certificates of Designations with respect to such Cumulative Voting Preferred Stock, Series B Preferred Stock and Series E Preferred Stock be, and hereby are, eliminated from the Certificate of Incorporation.

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IN WITNESS WHEREOF, the undersigned, being duly authorized thereto, does hereby affirm, under penalties of perjury, that this certificate is the act and deed of the Corporation and that the facts herein stated are true, and accordingly has hereunto set his hand this 10^th day of October, 2006.

	LEHMAN BROTHERS HOLDINGS INC.
	By:	/s/ Barrett S. DiPaolo
		Name:	Barrett S. DiPaolo
		Title:	Vice President
Attest:
/s/ Madeline L. Shapiro
Madeline L. Shapiro
Assistant Secretary

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EX-3.04

EXHIBIT 3.04

RESTATED CERTIFICATE OF INCORPORATION

OF

LEHMAN BROTHERS HOLDINGS INC.

Pursuant to Section 245 of the

General Corporation Law of the State of Delaware

The present name of the corporation is Lehman Brothers Holdings Inc. The corporation was incorporated under the name “Shearson/American Express Holdings Inc.” by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on December 29, 1983. This Restated Certificate of Incorporation of the corporation only restates and integrates and does not further amend the provisions of the corporation’s existing Restated Certificate of Incorporation as heretofore amended or supplemented, and there is no discrepancy between the provisions of the existing Restated Certificate of Incorporation as heretofore amended and supplemented and the provisions of this Restated Certificate of Incorporation. This Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. The existing Restated Certificate of Incorporation of the corporation is hereby integrated and restated to read in its entirety as follows:

1.NAME. The name of the corporation is Lehman Brothers Holdings Inc. (the “Corporation”).

2.ADDRESS. The address of its registered office in the State of Delaware is The Prentice-Hall Corporation System, Inc., 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle 19808. The registered Agent at such address is The Prentice-Hall Corporation System, Inc.

3.PURPOSE. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “GCL”).

4.CAPITAL STOCK.

4.1.Authorized Shares. The total number of shares of capital stock which the Corporation shall have authority to issue is one billion two hundred million (1,200,000,000) shares of common stock with one vote per share, $0.10 par value per share (the “Common Stock”), and twenty-four million nine hundred ninety-nine thousand (24,999,000) shares of preferred stock, $1.00 par value per share (the “Preferred Stock”). Shares of Preferred Stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the Board of Directors of the Corporation (the “Board of Directors”) or any committee thereof established by resolution of the Board of Directors pursuant to the By-Laws prior to the issuance of any shares thereof. Each such class or series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be

adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with the laws of the State of Delaware.

Pursuant to the authority conferred by this Article 4 upon the Board of Directors of the Corporation and as such authority was delegated to the Executive Committee of the Board of Directors, the Executive Committee created a series of 575,000 shares of Preferred Stock designated as 5.94% Cumulative Preferred Stock, Series C (the “Series C Preferred Stock”) by filing a Certificate of Designations of the Corporation with the Secretary of State of the State of Delaware (the “Secretary of State”) on May 13, 1998, and the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the Series C Preferred Stock are set forth in Exhibit A hereto and are incorporated herein by reference.

Pursuant to the authority conferred by this Article 4 upon the Board of Directors of the Corporation and as such authority was delegated to the Executive Committee of the Board of Directors, the Executive Committee created a series of 46,000 shares of Preferred Stock designated as 5.67% Cumulative Preferred Stock, Series D (the “Series D Preferred Stock”) by filing a Certificate of Designations of the Corporation with the Secretary of State on July 22, 1998, and the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the Series D Preferred Stock are set forth in Exhibit B hereto and are incorporated herein by reference.

Pursuant to the authority conferred by this Article 4 upon the Board of Directors of the Corporation and as such authority was delegated to the Executive Committee of the Board of Directors, the Executive Committee created a series of 138,000 shares of Preferred Stock designated as 6.50% Cumulative Preferred Stock, Series F (the “Series F Preferred Stock”) by filing a Certificate of Designations of the Corporation with the Secretary of State on August 25, 2003, and the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the Series F Preferred Stock are set forth in Exhibit C hereto and are incorporated herein by reference.

Pursuant to the authority conferred by this Article 4 upon the Board of Directors of the Corporation and as such authority was delegated to the Executive Committee of the Board of Directors, the Executive Committee created a series of 52,000 shares of Preferred Stock designated as Floating Rate Cumulative Preferred Stock, Series G (the “Series G Preferred Stock”) by filing a Certificate of Designations of the Corporation with the Secretary of State on January 30, 2004, and increased the number of Series G Preferred Stock from 52,000 shares to 120,000 shares by filing a Certificate of Increase of the Corporation with the Secretary of State on August 12, 2004, and the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the Series G Preferred Stock are set forth in Exhibit D hereto and are incorporated herein by reference.

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4.2.No Preemptive Rights. No shares of the capital stock of the Corporation shall be entitled to preemptive rights.

5.BY-LAWS. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the By-Laws of the Corporation.

6.ELECTION OF DIRECTORS.

6.1.Number, Election and Term. Except as otherwise fixed pursuant to the provisions of Article 4 hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed from time to time by or pursuant to the By-Laws. Each director who is serving as a director on the date of this Restated Certificate of Incorporation shall hold office until the next annual meeting of stockholders after such date, notwithstanding that such director may have been elected for a term that extended beyond the date of such next annual meeting of stockholders, and until his successor shall be elected and shall qualify, subject, however, to prior death, disability, resignation, retirement, disqualification or removal from office. At each annual meeting of stockholders after the date of this Restated Certificate of Incorporation, directors elected at such annual meeting shall hold office until the next annual meeting of stockholders and until his successor shall be elected and shall qualify, subject, however, to prior death, disability, resignation, retirement, disqualification or removal from office. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

6.2.Newly Created Directorships and Vacancies. Newly created directorships resulting from any increase in the authorized number of directors and any vacancies on the Board of Directors resulting from death, disability, resignation, retirement, disqualification, removal from office or other cause shall be filled by a majority vote of the directors then in office, by a sole remaining director or if there are no directors then in office, by the stockholders.

7.INDEMNIFICATION.

7.1.Right to Indemnification. The Corporation shall have the power to indemnify to the fullest extent permitted, from time to time, by applicable law any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, trustee, employee or agent of or in any other capacity with another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines, penalties and amounts paid in settlement in connection with such action, suit or proceeding. The Corporation shall have the power to enter into

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agreements providing any such indemnity.

7.2.Expenses. The Corporation shall have the power to advance to a director, officer, employee or agent of the Corporation expenses incurred in connection with defending any action, suit or proceeding referred to above or in the By-Laws at any time before the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the indemnified person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article 7 or as provided in the By-Laws. The Corporation shall have the power to enter into agreements providing for such advancement of expenses.

7.3.Non-exclusivity. The indemnification and other rights provided for in this Article 7 shall not be exclusive of any provision with respect to indemnification or the payment of expenses in the By-Laws or any other contract or agreement between the Corporation and any officer, director, employee or agent of the Corporation or any other person.

7.4.Future Changes. Neither the amendment nor repeal of this Article 7, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article 7, shall eliminate or reduce the effect of such provisions in respect of any act or omission or any matter occurring prior to such amendment, repeal or adoption of an inconsistent provision regardless of when any cause of action, suit or claim relating to any such matter accrued or matured or was commenced, and such provision shall continue to have effect in respect of such act, omission or matter as if such provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted.

8.COMPROMISE OR SETTLEMENT PROPOSALS. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation.

9.ACTION OF STOCKHOLDERS. Any action required or permitted to be taken by the holders of the capital stock of the Corporation must be effected at a duly called annual or

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special meeting of such holders and may not be taken by written consent in lieu of a meeting.

10.DIRECTORS’ LIABILITY.

10.1.Limitation of Liability of Directors. A director shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided that this sentence shall not eliminate or limit the liability of a director (i) for any breach of his duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which the director derives an improper personal benefit. If the GCL is amended after the date this Restated Certificate of Incorporation becomes effective to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the GCL, as so amended.

10.2.Future Changes. Neither the amendment nor repeal of this Article 10, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article 10 shall eliminate or reduce the effect of such provisions, in respect of any matter occurring prior to such amendment, repeal or adoption of an inconsistent provision or in respect of any act or omission or any matter occurring prior to such amendment, repeal or adoption of an inconsistent provision, regardless of when any cause of action, suit or claim relating to any such matter accrued or matured or was commenced, and such provision shall continue to have effect in respect of such act, omission or matter as if such provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted.

11.AMENDMENTS. The affirmative vote of the holders of at least a majority of shares of capital stock entitled to vote, voting together as a single class, shall be required to amend or repeal any provision in this Restated Certificate of Incorporation or adopt any provision inconsistent with any such provision unless a higher percentage is specified herein, in which case such higher percentage will be applicable.

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IN WITNESS WHEREOF, the undersigned has hereunto signed his name and affirms that the statements made in this Restated Certificate of Incorporation are true under the penalties of perjury this 10^th day of October, 2006.

			/s/ Barrett S. DiPaolo
		Barrett S. DiPaolo
		Vice President
Attest:
	/s/ Madeline L. Shapiro
Madeline L. Shapiro
Assistant Secretary

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EXHIBIT A

DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS

OF THE

5.94% CUMULATIVE PREFERRED STOCK, SERIES C

($500.00 initial liquidation preference per share)

OF

LEHMAN BROTHERS HOLDINGS INC.

1.             Designation and Amount; Fractional Shares. The Executive Committee of the Board of Directors has authorized the issuance of a series of preferred stock shall be designated as the “5.94% Cumulative Preferred Stock, Series C” (the “Series C Preferred Stock”). The Series C Preferred Stock shall be perpetual and the authorized number of shares of Series C Preferred Stock shall be five hundred seventy-five thousand (575,000) shares. The Series C Preferred Stock is issuable in whole shares only.

2.             Dividends. Holders of shares of Series C Preferred Stock shall be entitled to receive, when, as and if declared by the Board or a duly authorized committee thereof out of funds of the Corporation legally available for payment, cumulative cash dividends at the rate of 5.94% per annum per share on the initial liquidation preference of $500.00 per share. Dividends on the Series C Preferred Stock shall be payable quarterly, in arrears, on February 28, May 31, August 31 and November 30 of each year, commencing August 31, 1998 (each a “Dividend Payment Date”). If any date on which dividends would otherwise be payable shall be or be declared a national or New York State holiday, or if banking institutions in the State of New York shall be closed because of a banking moratorium or otherwise on such date, then the Dividend Payment Date shall be the next succeeding day on which such banks shall be open. Dividends on shares of the Series C Preferred Stock shall be fully cumulative and shall accumulate (whether or not earned or declared), on a daily basis, without interest, from the previous Dividend Payment Date, except that the first dividend shall accrue, without interest, from the date of initial issuance of the Series C Preferred Stock. Accumulated and unpaid dividends shall not bear interest. Dividends shall be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on each record date, which shall be the 15th day immediately preceding each such Dividend Payment Date (each of which dates being a “Dividend Payment Record Date”). Dividends payable on the Series C Preferred Stock for any full quarterly period shall be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period shorter than a full quarter, on the basis of the actual number of days elapsed in such a 90-day quarter. Dividends shall cease to accrue on the Series C Preferred Stock on the date of their earlier redemption pursuant to Section 6, unless the Corporation shall default in providing funds for the payment of redemption price on the shares called for redemption pursuant thereto.

If, prior to 18 months after the date of the original issuance of the Series C Preferred Stock, one or more amendments to the Internal Revenue Code of 1986, as amended (the

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“Code”), are enacted that reduce the percentage of the dividends-received deduction (currently 70%) as specified in section 243(a)(1) of the Code or any successor provision (the “Dividends-Received Percentage”), the amount of each dividend payable (if declared) per share of Series C Preferred Stock for dividend payments made on or after the effective date of such change in the Code will be adjusted by multiplying the amount of the dividend payable described above (before adjustment) by the following fraction (the “DRD Formula”), and rounding the result to the nearest cent (with one-half cent rounded up):

1- .35(1-.70)

1- .35(1-DRP)

For the purposes of the DRD Formula, “DRP” means the Dividends-Received Percentage (expressed as a decimal) applicable to the dividend in question; provided, however, that if the Dividends-Received Percentage applicable to the dividend in question shall be less than 50%, then the DRP shall equal .50. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the Internal Revenue Service (“IRS”) to the effect that such amendment does not apply to a dividend payable on the Series C Preferred Stock, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such dividend. Such opinion shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

If any such amendment to the Code is enacted after the dividend payable on a Dividend Payment Date has been declared, the amount of the dividend payable on such Dividend Payment Date will not be increased; instead, additional dividends (the “Post Declaration Date Dividends”) equal to the excess, if any, of (x) the product of the dividend paid by the Corporation on such Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of the Dividend-Received Percentage applicable to the dividend in question and .50) over (y) the dividend paid by the Corporation on such Dividend Payment Date, will be payable (if declared) to holders of Series C Preferred Stock on the Dividend Payment Record Date applicable to the next succeeding Dividend Payment Date or, if the Series C Preferred Stock is called for redemption prior to such Dividend Payment Record Date, to holders of Series C Preferred Stock on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a dividend so payable on the Series C Preferred Stock, then such amendment will not result in the payment of Post Declaration Date Dividends. The opinion referenced in the previous sentence shall be based upon the legislation amendment or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to a Dividend Payment Date as to which the Corporation previously paid dividends on the Series C Preferred Stock (each, an “Affected

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Dividend Payment Date”), the Corporation will pay (if declared) additional dividends (the “Retroactive Dividends”) to holders of Series C Preferred Stock on the Dividend Payment Record Date applicable to the next succeeding Dividend Payment Date (or, if such amendment is enacted after the dividend payable on such Dividend Payment Date has been declared, to holders of Series C Preferred Stock on the Dividend Payment Record Date following the date of enactment) or, if the Series C Preferred Stock is called for redemption prior to such Dividend Payment Record Date, to holders of Series C Preferred Stock on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the dividend paid by the Corporation on each Affected Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage and .50 applied to each Affected Dividend Payment Date) over (y) the sum of the dividend paid by the Corporation on each Affected Dividend Payment Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a dividend payable on an Affected Dividend Payment Date for the Series C Preferred Stock, then such amendment will not result in the payment of Retroactive Dividends with respect to such Affected Dividend Payment Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Series C Preferred Stock that reduces the Dividends-Received Percentage.

In the event that the amount of dividends payable per share of the Series C Preferred Stock is adjusted pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Series C Preferred Stock.

No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in Section 8 below), with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Series C Preferred Stock, dividends for all dividend payment periods of the Series C Preferred Stock ending on or before the Dividend Payment Date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Series C Preferred Stock next preceding such Dividend Payment Date, on the other hand.

Except as set forth in the preceding sentence, unless full cumulative dividends on the Series C Preferred Stock have been paid through the most recently completed quarterly dividend

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period for the Series C Preferred Stock, no dividends (other than in common stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the common stock or on any other stock of the Corporation ranking junior to or on a parity with the Series C Preferred Stock as to dividends, nor may any common stock or any other stock of the Corporation ranking junior to or on a parity with the Series C Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Series C Preferred Stock outstanding to the last Dividend Payment Date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity stock or common stock may be converted into or exchanged for stock of the Corporation ranking junior to the Series C Preferred Stock as to dividends.

3.             Liquidation Preference. The shares of Series C Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of common stock and any other stock of the Corporation ranking junior to the Series C Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series C Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of common stock or any other such junior stock, an amount equal to the liquidation preference of $500.00 per share plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Series C Preferred Stock to the date of final distribution. The holders of the Series C Preferred Stock shall not be entitled to receive the preferential amounts as aforesaid until the liquidation preference of any other stock of the Corporation ranking senior to the Series C Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the preferential amounts as aforesaid, the holders of shares of Series C Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock and Series C Preferred Stock shall be insufficient to pay in full the preferential amounts payable thereon, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale, lease, exchange or transfer of all or any part of the Corporation’s assets shall be considered a liquidation, dissolution or winding up of the Corporation.

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4.             Conversion. The Series C Preferred Stock is not convertible into, or exchangeable for, other securities or property.

5.             Voting Rights. The Series C Preferred Stock, except as provided herein or as otherwise from time to time required by law, shall have no voting rights. Whenever, at any time or times, dividends payable on the shares of Series C Preferred Stock or on any Parity Preferred Stock shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the authorized number of directors of the Corporation shall automatically be increased by two and the holders of the Series C Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Parity Preferred Stock outstanding at the time upon which like voting rights have been conferred and are exercisable (“Voting Parity Stock”), voting together as a class, to elect two directors (hereinafter the “Preferred Directors” and each a “Preferred Director”) to fill such newly created directorships at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set aside for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Series C Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause. Any vacancy created thereby may be filled only by the affirmative vote of the holders of shares of Series C Preferred Stock voting separately as a class (together with the holders of shares of Voting Parity Stock). If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Series C Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock held as may be granted to them).

So long as any shares of any Series C Preferred Stock remain outstanding, the Corporation shall not, without the affirmative vote of the holders of at least 66-2/3% of the shares of such Series C Preferred Stock (i) authorize, create or issue any capital stock of the Corporation ranking, as to dividends or upon liquidation, dissolution or winding up, prior to such Series C Preferred Stock, or reclassify any authorized capital stock of the Corporation into any such shares of such capital stock or issue any obligation or security convertible into or evidencing the right to purchase any such shares of capital stock, or (ii) amend, alter or repeal the certificate of designations for such Series C Preferred Stock, or the Restated Certificate of Incorporation of the Corporation, whether by merger, consolidation or otherwise, so as to adversely affect the powers, preferences or special rights of such Series C Preferred Stock. Any increase in the amount of authorized common stock or other authorized preferred stock, or any increase or decrease in the number of shares of any series of preferred stock or the authorization, creation and issuance of other classes or series of common stock or other stock, in each case ranking on a parity with or junior to the shares of Series C Preferred Stock with respect to the

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payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to adversely affect such powers, preferences or special rights.

The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required or upon which the holders of Series C Preferred Stock shall be entitled to vote shall be effected, all outstanding shares of Series C Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption.

6.             Redemption. The shares of Series C Preferred Stock shall not be redeemable prior to May 31, 2008. On and after such date, the Corporation, at its option, may redeem shares of the Series C Preferred Stock, as a whole or in part, at any time or from time to time, at a redemption price equal to $500.00 per share, plus, in each case, an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption.

The holders of shares of Series C Preferred Stock at the close of business on a Dividend Payment Record Date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the call for redemption thereof (except that holders of shares called for redemption on a date occurring between such Record Date and the Dividend Payment Date shall not be entitled to receive such dividend on such Dividend Payment Date) or the Corporation’s default in payment of the dividend due on such Dividend Payment Date.

If fewer than all the outstanding shares of Series C Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be selected by lot or pro rata or by any other means determined by the Board of Directors in its sole discretion to be equitable.

If full cumulative dividends on the Series C Preferred Stock have not been paid or set apart for payment with respect of all prior dividend periods, the Series C Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Series C Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Series C Preferred Stock.

In the event the Corporation shall redeem shares of Series C Preferred Stock, written notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days nor  more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder’s address as the same appears on the stock books of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of Series C Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (a) the redemption date; (b) the number of shares of Series C Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed from such holder, the number of shares to be redeemed from such holder; (c) the redemption price and any accumulated and

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unpaid dividends to the redemption date; (d) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date (unless the Corporation shall default in providing funds for the payment of the redemption price of the shares called for redemption at the time and place specified in such notice).

If a notice of redemption has been given pursuant to this Paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Series C Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. The Corporation’s obligation to provide funds for the payment of the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption shall be deemed fulfilled if, on or before a redemption date, the Corporation shall deposit, with a bank or trust company, or an affiliate of a bank or trust company, having an office or agency in New York City and having a capital and surplus of at least $50,000,000, such funds sufficient to pay the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption, in trust for the account of the holders of the shares to be redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds be delivered upon redemption of the shares of Series C Preferred Stock so called for redemption.

Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time.

Shares of Series C Preferred Stock that have been issued and

reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the preferred stock.

7.             Amendment of Resolution. The Board reserves the right by from time to time to increase or decrease the number of shares that constitute the Series C Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this Certificate of Designations within the limitations provided by law, this resolution and the Restated Certificate of Incorporation.

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8.             Rank. Any stock of any class or classes or series of the Corporation shall be deemed to rank:

(a) prior to shares of the Series C Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Series C Preferred Stock;

(b) on a parity with shares of the Series C Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Series C Preferred Stock, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Series C Preferred Stock (the term “Parity Preferred Stock” being used to refer to any stock on a parity with the shares of Series C Preferred Stock, either as to dividend or upon  liquidation dissolution or winding up, or both, as the content may require); and

(c) junior to shares of the Series C Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class or classes or series shall be common stock or if the holders of the Series C Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes or series.

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EXHIBIT B

DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS

OF THE

5.67% CUMULATIVE PREFERRED STOCK, SERIES D

($5,000.00 initial liquidation preference per share)

OF

LEHMAN BROTHERS HOLDINGS INC.

1.             Designation and Amount; Fractional Shares. The  series of preferred stock shall be designated as the “5.67% Cumulative  Preferred Stock, Series D” (the “Series D Preferred Stock”). The Series D Preferred Stock shall be perpetual and the authorized number of shares of Series D Preferred Stock shall be forty-six thousand (46,000) shares. The Series D Preferred Stock is issuable in whole shares only.

2.             Dividends. Holders of shares of Series D Preferred Stock shall be entitled to receive, when, as and if declared by the Board or a duly authorized committee thereof out of funds of the Corporation legally available for payment, cumulative cash dividends at the rate of 5.67% per annum per share on the initial liquidation preference of $5,000.00 per share. Dividends on the Series D Preferred Stock shall be payable quarterly, in arrears, on February 28, May 31, August 31 and November 30 of each year, commencing August 31, 1998 (each a “Dividend Payment Date”). If any date on which dividends would otherwise be payable shall be or be declared a national or New York State holiday, or if banking institutions in the State of New York shall be closed because of a banking moratorium or otherwise on such date, then the Dividend Payment Date shall be the next succeeding day on which such banks shall be open. Dividends on shares of the Series D Preferred Stock shall be fully cumulative and shall accumulate (whether or not earned or declared), on a daily basis, without interest, from the previous Dividend Payment Date, except that the first dividend shall accrue, without interest, from the date of initial issuance of the Series D Preferred Stock. Accumulated and unpaid dividends shall not bear interest. Dividends shall be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on each record date, which shall be the 15th day of the month in which such Dividend Payment Date occurs (each of which dates being a “Dividend Payment Record Date”). Dividends payable on the Series D Preferred Stock for any full quarterly period shall be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period shorter than a full quarter, on the basis of the actual number of days elapsed in such a 90-day quarter. Dividends shall cease to accrue on the Series D Preferred Stock on the date of their earlier redemption pursuant to Section 6, unless the Corporation shall default in providing funds for the payment of redemption price on the shares called for redemption pursuant thereto.

If, prior to 18 months after the date of the original issuance of the Series D Preferred Stock, one or more amendments to the Internal Revenue Code of 1986, as amended (the “Code”), are enacted that reduce the percentage of the dividends-received deduction (currently

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70%) as specified in section 243(a)(1) of the Code or any successor provision (the “Dividends-Received Percentage”), the amount of each dividend payable (if declared) per share of Series D Preferred Stock for dividend payments made on or after the effective date of such change in the Code will be adjusted by multiplying the amount of the dividend payable described above (before adjustment) by the following fraction (the “DRD Formula”), and rounding the result to the nearest cent (with one-half cent rounded up):

1- .35(1-.70)

1- .35(1-DRP)

For the purposes of the DRD Formula, “DRP” means the Dividends-Received Percentage (expressed as a decimal) applicable to the dividend in question; provided, however, that if the Dividends-Received Percentage applicable to the dividend in question shall be less than 50%, then the DRP shall equal .50. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the Internal Revenue Service (“IRS”) to the effect that such amendment does not apply to a dividend payable on the Series D Preferred Stock, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such dividend. Such opinion shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

If any such amendment to the Code is enacted after the dividend payable on a Dividend Payment Date has been declared, the amount of the dividend payable on such Dividend Payment Date will not be increased; instead, additional dividends (the “Post Declaration Date Dividends”) equal to the excess, if any, of (x) the product of the dividend paid by the Corporation on such Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of the Dividend-Received Percentage applicable to the dividend in question and .50) over (y) the dividend paid by the Corporation on such Dividend Payment Date, will be payable (if declared) to holders of Series D Preferred Stock on the Dividend Payment Record Date applicable to the next succeeding Dividend Payment Date or, if the Series D Preferred Stock is called for redemption prior to such Dividend Payment Record Date, to holders of Series D Preferred Stock on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a dividend so payable on the Series D Preferred Stock, then such amendment will not result in the payment of Post Declaration Date Dividends. The opinion referenced in the previous sentence shall be based upon the legislation amendment or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to a Dividend Payment Date as to which the Corporation previously paid dividends on the Series D Preferred Stock (each, an “Affected Dividend Payment Date”), the Corporation will pay (if declared) additional dividends (the

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“Retroactive Dividends”) to holders of Series D Preferred Stock on the Dividend Payment Record Date applicable to the next succeeding Dividend Payment Date (or, if such amendment is enacted after the dividend payable on such Dividend Payment Date has been declared, to holders of Series D Preferred Stock on the Dividend Payment Record Date following the date of enactment) or, if the Series D Preferred Stock is called for redemption prior to such Dividend Payment Record Date, to holders of Series D Preferred Stock on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the dividend paid by the Corporation on each Affected Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage and .50 applied to each Affected Dividend Payment Date) over (y) the sum of the dividend paid by the Corporation on each Affected Dividend Payment Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a dividend payable on an Affected Dividend Payment Date for the Series D Preferred Stock, then such amendment will not result in the payment of Retroactive Dividends with respect to such Affected Dividend Payment Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation.

Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Series D Preferred Stock that reduces the Dividends-Received Percentage.

In the event that the amount of dividends payable per share of the Series D Preferred Stock is adjusted pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Series D Preferred Stock.

No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in Section 8 below), with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Series D Preferred Stock, dividends for all dividend payment periods of the Series D Preferred Stock ending on or before the Dividend Payment Date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Series D Preferred Stock next preceding such Dividend Payment Date, on the other hand.

Except as set forth in the preceding sentence, unless full cumulative dividends on the Series D Preferred Stock have been paid through the most recently completed quarterly dividend period for the Series D Preferred Stock, no dividends (other than in common stock of the

17

Corporation) may be paid or declared and set aside for payment or other distribution made upon the common stock or on any other stock of the Corporation ranking junior to or on a parity with the Series D Preferred Stock as to dividends, nor may any common stock or any other stock of the Corporation ranking junior to or on a parity with the Series D Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Series D Preferred Stock outstanding to the last Dividend Payment Date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity stock or common stock may be converted into or exchanged for stock of the Corporation ranking junior to the Series D Preferred Stock as to dividends.

3.             Liquidation Preference. The shares of Series D Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of common stock and any other stock of the Corporation ranking junior to the Series D Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series D Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of common stock or any other such junior stock, an amount equal to the liquidation preference of $5,000.00 per share plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Series D Preferred Stock to the date of final distribution. The holders of the Series D Preferred Stock shall not be entitled to receive the preferential amounts as aforesaid until the liquidation preference of any other stock of the Corporation ranking senior to the Series D Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the preferential amounts as aforesaid, the holders of shares of Series D Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock and Series D Preferred Stock shall be insufficient to pay in full the preferential amounts payable thereon, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale, lease, exchange or transfer of all or any part of the Corporation’s assets shall be considered a liquidation, dissolution or winding up of the Corporation.

4.             Conversion. The Series D Preferred Stock is not convertible into, or exchangeable for, other securities or property.

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5.             Voting Rights. The Series D Preferred Stock, except as provided herein or as otherwise from time to time required by law, shall have no voting rights. Whenever, at any time or times, dividends payable on the shares of Series D Preferred Stock or on any Parity Preferred Stock shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the authorized number of directors of the Corporation shall automatically be increased by two and the holders of the Series D Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Parity Preferred Stock outstanding at the time upon which like voting rights have been conferred and are exercisable (“Voting Parity Stock”), voting together as a class, to elect two directors (hereinafter the “Preferred Directors” and each a “Preferred Director”) to fill such newly created directorships at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set aside for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Series D Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause. Any vacancy created thereby may be filled only by the affirmative vote of the holders of shares of Series D Preferred Stock voting separately as a class (together with the holders of shares of Voting Parity Stock). If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Series D Preferred Stock shall be entitled to ten votes for each share held (the holders of shares of any other class or series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock held as may be granted to them).

So long as any shares of any Series D Preferred Stock remain outstanding, the Corporation shall not, without the affirmative vote of the holders of at least 66-2/3% of the shares of such Series D Preferred Stock (i) authorize, create or issue any capital stock of the Corporation ranking, as to dividends or upon liquidation, dissolution or winding up, prior to such Series D Preferred Stock, or reclassify any authorized capital stock of the Corporation into any such shares of such capital stock or issue any obligation or security convertible into or evidencing the right to purchase any such shares of capital stock, or (ii) amend, alter or repeal the certificate of designations for such Series D Preferred Stock, or the Restated Certificate of Incorporation of the Corporation, whether by merger, consolidation or otherwise, so as to adversely affect the powers, preferences or special rights of such Series D Preferred Stock. Any increase in the amount of authorized common stock or other authorized preferred stock, or any increase or decrease in the number of shares of any series of preferred stock or the authorization, creation and issuance of other classes or series of common stock or other stock, in each case ranking on a parity with or junior to the shares of Series D Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to adversely affect such powers, preferences or special rights.

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In exercising the voting rights set forth in this Paragraph 5 or when otherwise granted voting rights by operation of law or by the Corporation, each share of Series D Preferred Stock shall be entitled to ten votes.

The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required or upon which the holders of Series D Preferred Stock shall be entitled to vote shall be effected, all outstanding shares of Series D Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption.

6.             Redemption. The shares of Series D Preferred Stock shall not be redeemable prior to August 31, 2008. On and after such date, the Corporation, at its option, may redeem shares of the Series D Preferred Stock, as a whole or in part, at any time or from time to time, at a redemption price equal to $5,000.00 per share, plus, in each case, an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption.

The holders of shares of Series D Preferred Stock at the close of business on a Dividend Payment Record Date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the call for redemption thereof (except that holders of shares called for redemption on a date occurring between such Record Date and the Dividend Payment Date shall not be entitled to receive such dividend on such Dividend Payment Date) or the Corporation’s default in payment of the dividend due on such Dividend Payment Date.

If fewer than all the outstanding shares of Series D Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be selected by lot or pro rata or by any other means determined by the Board of Directors in its sole discretion to be equitable.

If full cumulative dividends on the Series D Preferred Stock have not been paid or set apart for payment with respect of all prior dividend periods, the Series D Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Series D Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Series D Preferred Stock.

In the event the Corporation shall redeem shares of Series D Preferred Stock, written notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days nor  more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder’s address as the same appears on the stock books of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of Series D Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (a) the redemption date; (b) the number of shares of Series D Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed from such holder, the number of

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shares to be redeemed from such holder; (c) the redemption price and any accumulated and unpaid dividends to the redemption date; (d) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date (unless the Corporation shall default in providing funds for the payment of the redemption price of the shares called for redemption at the time and place specified in such notice).

If a notice of redemption has been given pursuant to this Paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Series D Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. The Corporation’s obligation to provide funds for the payment of the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption shall be deemed fulfilled if, on or before a redemption date, the Corporation shall deposit, with a bank or trust company, or an affiliate of a bank or trust company, having an office or agency in New York City and having a capital and surplus of at least $50,000,000, such funds sufficient to pay the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption, in trust for the account of the holders of the shares to be redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds be delivered upon redemption of the shares of Series D Preferred Stock so called for redemption.

Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time.

Shares of Series D Preferred Stock that have been issued and

reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the preferred stock.

7.             Amendment of Resolution. The Board reserves the right by from time to time to increase or decrease the number of shares that constitute the Series D Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this

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Certificate of Designations within the limitations provided by law, this resolution and the Restated Certificate of Incorporation.

8.             Rank. Any stock of any class or classes or series of the Corporation shall be deemed to rank:

(a) prior to shares of the Series D Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Series D Preferred Stock;

(b) on a parity with shares of the Series D Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Series D Preferred Stock, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Series D Preferred Stock (the term “Parity Preferred Stock” being used to refer to any stock on a parity with the shares of Series D Preferred Stock, either as to dividend or upon  liquidation dissolution or winding up, or both, as the content may require); and

(c) junior to shares of the Series D Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class or classes or series shall be common stock or if the holders of the Series D Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes or series.

The Series D Preferred Stock shall rank, as to dividends and upon liquidation, dissolution or winding up, on a parity with the Corporation’s 5.94% Cumulative Preferred Stock, Series C.

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EXHIBIT C

DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS

OF THE

6.50% CUMULATIVE PREFERRED STOCK, SERIES F

($2,500.00 initial liquidation preference per share)

OF

LEHMAN BROTHERS HOLDINGS INC.

1.             Designation and Amount; Fractional Shares. The series of preferred stock shall be designated as the “6.50% Cumulative Preferred Stock, Series F” (the “Series F Preferred Stock”). The Series F Preferred Stock shall be perpetual and the authorized number of shares of Series F Preferred Stock shall be one hundred thirty-eight thousand (138,000) shares. The Series F Preferred Stock is issuable in whole shares only.

2.             Dividends. Holders of shares of Series F Preferred Stock shall be entitled to receive, when, as and if declared by the Board or a duly authorized committee thereof out of funds of the Corporation legally available for payment, cumulative cash dividends at the rate of 6.50% per annum on the initial liquidation preference of $2,500.00 per share. Dividends on the Series F Preferred Stock shall accrue from the date of initial issuance and shall be payable quarterly, in arrears, on February 28, May 31, August 31 and November 30 of each year, commencing November 30, 2003 (each a “Dividend Payment Date”). If any date on which dividends would otherwise be payable shall be or be declared a national or New York State holiday, or if banking institutions in the State of New York shall be closed because of a banking moratorium or otherwise on such date, then the Dividend Payment Date shall be the next succeeding day on which such banks shall be open. Dividends on shares of the Series F Preferred Stock shall be fully cumulative and shall accumulate (whether or not earned or declared), on a daily basis, without interest, from the previous Dividend Payment Date, except that the first dividend shall accrue, without interest, from the date of initial issuance of the Series F Preferred Stock. Accumulated and unpaid dividends shall not bear interest. Dividends shall be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on each record date, which shall be the 15^th day of the month in which such Dividend Payment Date occurs (or, if the Dividend Payment Date is postponed for any of the reasons discussed above in this paragraph, the 15^th day of the month prior to such Dividend Payment Date) (each of which dates being a “Dividend Payment Record Date”). Dividends payable on the Series F Preferred Stock for any full quarterly period shall be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period shorter than a full quarter, on the basis of the actual number of days elapsed in such a 90-day quarter. Dividends shall cease to accrue on the Series F Preferred Stock on the date of their earlier redemption pursuant to Section 6, unless the Corporation shall default in providing funds for the payment of the redemption price on the shares called for redemption pursuant thereto.

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No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in Section 8 below) unless there shall also be or have been declared and paid or set apart for payment on the Series F Preferred Stock, dividends for all dividend payment periods of the Series F Preferred Stock ending on or before the Dividend Payment Date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Series F Preferred Stock coinciding with or next preceding such Dividend Payment Date, on the other hand.

Except as set forth in the preceding sentence, unless full cumulative dividends on the Series F Preferred Stock have been paid through the most recently completed quarterly dividend period for the Series F Preferred Stock, no dividends (other than in common stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the common stock or on any other stock of the Corporation ranking junior to or on a parity with the Series F Preferred Stock as to dividends, nor may any common stock or any other stock of the Corporation ranking junior to or on a parity with the Series F Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Series F Preferred Stock outstanding to the last Dividend Payment Date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity stock or common stock may be converted into or exchanged for stock of the Corporation ranking junior to the Series F Preferred Stock as to dividends.

3.             Liquidation Preference. The shares of Series F Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of common stock and any other stock of the Corporation ranking junior to the Series F Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series F Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of common stock or any other such junior stock, an amount equal to the liquidation preference of $2,500.00 per share plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Series F Preferred Stock to the date of final distribution. The holders of the Series F Preferred Stock shall not be entitled to receive the preferential amounts as aforesaid until the liquidation preference of any other stock of the Corporation ranking senior to the Series F Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the preferential amounts as aforesaid, the holders of shares of Series F Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred

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Stock and Series F Preferred Stock shall be insufficient to pay in full the preferential amounts payable thereon, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale, lease, exchange or transfer of all or any part of the Corporation’s assets shall be considered a liquidation, dissolution or winding up of the Corporation.

4.             Conversion. The Series F Preferred Stock is not convertible into, or exchangeable for, other securities or property.

5.             Voting Rights. The Series F Preferred Stock, except as provided herein or as otherwise from time to time required by law, shall have no voting rights. Whenever, at any time or times, dividends payable on the shares of Series F Preferred Stock or on any Parity Preferred Stock shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the authorized number of directors of the Corporation shall automatically be increased by two and the holders of the Series F Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Parity Preferred Stock outstanding at the time upon which like voting rights have been conferred and are exercisable (“Voting Parity Stock”), voting together as a class, to elect two directors (hereinafter the “Preferred Directors” and each a “Preferred Director”) to fill such newly created directorships at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set aside for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Series F Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause. Any vacancy created thereby may be filled only by the affirmative vote of the holders of shares of Series F Preferred Stock voting separately as a class (together with the holders of shares of Voting Parity Stock). If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Series F Preferred Stock shall be entitled to ten votes for each share held (the holders of shares of any other class or series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock held as may be granted to them).

So long as any shares of any Series F Preferred Stock remain outstanding, the Corporation shall not, without the affirmative vote of the holders of at least 66-2/3% of the shares of such Series F Preferred Stock (i) authorize, create or issue any capital stock of the Corporation ranking, as to dividends or upon liquidation, dissolution or winding up, prior to such Series F Preferred Stock, or reclassify any authorized capital stock of the Corporation into any such shares of such capital stock or issue any obligation or security convertible into or

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evidencing the right to purchase any such shares of capital stock, or (ii) amend, alter or repeal the certificate of designations for such Series F Preferred Stock, or the Restated Certificate of Incorporation of the Corporation, whether by merger, consolidation or otherwise, so as to adversely affect the powers, preferences or special rights of such Series F Preferred Stock. Any increase in the amount of authorized common stock or other authorized preferred stock, or any increase or decrease in the number of shares of any series of preferred stock or the authorization, creation and issuance of other classes or series of common stock or other stock, in each case ranking on a parity with or junior to the shares of Series F Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to adversely affect such powers, preferences or special rights.

In exercising the voting rights set forth in this Section 5 or when otherwise granted voting rights by operation of law or by the Corporation, each share of Series F Preferred Stock shall be entitled to ten votes.

The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required or upon which the holders of Series F Preferred Stock shall be entitled to vote shall be effected, all outstanding shares of Series F Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption.

6.             Redemption. The shares of Series F Preferred Stock shall not be redeemable prior to August 31, 2008. On and after such date, the Corporation, at its option, may redeem shares of the Series F Preferred Stock, as a whole or in part, at any time or from time to time, at a redemption price equal to $2,500.00 per share, plus, in each case, an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption.

The holders of shares of Series F Preferred Stock at the close of business on a Dividend Payment Record Date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the call for redemption thereof (except that holders of shares called for redemption on a date occurring between such Record Date and the Dividend Payment Date shall not be entitled to receive such dividend on such Dividend Payment Date) or the Corporation’s default in payment of the dividend due on such Dividend Payment Date.

If fewer than all the outstanding shares of Series F Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be selected by lot or pro rata or by any other means determined by the Board of Directors in its sole discretion to be equitable.

If full cumulative dividends on the Series F Preferred Stock have not been paid or set apart for payment with respect of all prior dividend periods, the Series F Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Series F Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Series F Preferred Stock.

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In the event the Corporation shall redeem shares of Series F Preferred Stock, written notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days nor  more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder’s address as the same appears on the stock books of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of Series F Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (a) the redemption date; (b) the number of shares of Series F Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed from such holder, the number of shares to be redeemed from such holder; (c) the redemption price and any accumulated and unpaid dividends to the redemption date; (d) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date (unless the Corporation shall default in providing funds for the payment of the redemption price of the shares called for redemption at the time and place specified in such notice).

If a notice of redemption has been given pursuant to this Section 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Series F Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. The Corporation’s obligation to provide funds for the payment of the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption shall be deemed fulfilled if, on or before a redemption date, the Corporation shall deposit, with a bank or trust company, or an affiliate of a bank or trust company, having an office or agency in New York City and having a capital and surplus of at least $50,000,000, such funds sufficient to pay the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption, in trust for the account of the holders of the shares to be redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds be delivered upon redemption of the shares of Series F Preferred Stock so called for redemption.

Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time.

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Shares of Series F Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the preferred stock.

7.             Amendment of Resolution. The Board reserves the right from time to time to increase or decrease the number of shares that constitute the Series F Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this Certificate of Designations within the limitations provided by law, this resolution and the Restated Certificate of Incorporation.

8.             Rank. Any stock of any class or classes or series of the Corporation shall be deemed to rank:

(a) prior to shares of the Series F Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Series F Preferred Stock;

(b) on a parity with shares of the Series F Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Series F Preferred Stock, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Series F Preferred Stock (the term “Parity Preferred Stock” being used to refer to any stock on a parity with the shares of Series F Preferred Stock, either as to dividend or upon  liquidation dissolution or winding up, or both, as the content may require); and

(c) junior to shares of the Series F Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class or classes or series shall be common stock or if the holders of the Series F Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes or series.

The Series F Preferred Stock shall rank, as to dividends and upon liquidation, dissolution or winding up, on a parity with the Corporation’s 5.94% Cumulative Preferred Stock, Series C, the Corporation’s 5.67% Cumulative Preferred Stock, Series D, and any Parity Preferred Stock issued hereafter.

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EXHIBIT D

DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS
OF THE
FLOATING RATE CUMULATIVE PREFERRED STOCK, SERIES G
($2,500.00 initial liquidation preference per share)

OF

LEHMAN BROTHERS HOLDINGS INC.

1.             Designation and Amount; Fractional Shares. The series of preferred stock shall be designated as the “Floating Rate Cumulative Preferred Stock, Series G” (the “Series G Preferred Stock”). The Series G Preferred Stock shall be perpetual and the authorized number of shares of Series G Preferred Stock shall be one hundred twenty thousand (120,000) shares. The Series G Preferred Stock is issuable in whole shares only.

2.             Dividends. Holders of shares of Series G Preferred Stock shall be entitled to receive, when, as and if declared by the Board or a duly authorized committee thereof out of funds of the Corporation legally available for payment, cumulative cash dividends at the Applicable Rate (as defined in Section 3). Dividends on the Series G Preferred Stock shall accrue from the date of initial issuance and shall be payable monthly, in arrears, on the 15th day of each month, commencing March 15, 2004 (each a “Dividend Payment Date”), provided that if any date on which dividends would otherwise be payable shall not be a New York and London business day, then the Dividend Payment Date will be the next succeeding New York and London business day, unless such day falls in the next calendar month, in which case the Dividend Payment Date will be the immediately preceding New York and London business day. “New York business day” means any day that is not a Saturday or Sunday and that, in New York City, is not a day on which banking institutions generally are authorized or obligated by law or executive order to be closed. (“London business day” means any day other than a Saturday or a Sunday on which dealings in deposits in dollars are transacted, or with respect to any future date are expected to be transacted, in the London interbank market.)  Dividends on shares of the Series G Preferred Stock shall be fully cumulative and shall accumulate (whether or not earned or declared), on a daily basis, without interest, from and including the previous Dividend Payment Date to but excluding the current Dividend Payment Date (for avoidance of doubt, in each case as such Dividend Payment Date may have been postponed or accelerated as aforesaid), except that the first dividend shall accrue, without interest, from the date of initial issuance of the Series G Preferred Stock. Accumulated and unpaid dividends shall not bear interest. Dividends shall be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on each record date, which shall be the 1st day of the month in which such Dividend Payment Date occurs (or, if the Dividend Payment Date is postponed for any of the reasons discussed above in this paragraph, the 1st day of the month prior to such Dividend Payment Date) (each of which dates being a “Dividend Payment Record Date”). Dividends payable on the Series G Preferred Stock shall be computed on the basis of a 360-day year and the actual number of days elapsed. Dividends shall cease to accrue on the Series G Preferred Stock on the date of

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their earlier redemption pursuant to Section 6, unless the Corporation shall default in providing funds for the payment of the redemption price on the shares called for redemption pursuant thereto.

No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in Section 8 below) unless there shall also be or have been declared and paid or set apart for payment on the Series G Preferred Stock, dividends for all dividend payment periods of the Series G Preferred Stock ending on or before the Dividend Payment Date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Series G Preferred Stock coinciding with or next preceding such Dividend Payment Date, on the other hand.

Except as set forth in the preceding sentence, unless full cumulative dividends on the Series G Preferred Stock have been paid through the most recently completed monthly dividend period for the Series G Preferred Stock, no dividends (other than in common stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the common stock or on any other stock of the Corporation ranking junior to or on a parity with the Series G Preferred Stock as to dividends, nor may any common stock or any other stock of the Corporation ranking junior to or on a parity with the Series G Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Series G Preferred Stock outstanding to the last Dividend Payment Date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity stock or common stock may be converted into or exchanged for stock of the Corporation ranking junior to the Series G Preferred Stock as to dividends.

3.             Definition of Applicable Rate, etc. The “Applicable Rate” for any dividend period shall be a floating rate per annum of 0.75% above one-month LIBOR, but in no event will the Applicable Rate be less than 3.0% per annum. For the first dividend period, the Applicable Rate will be 3.0%. LIBOR, with respect to a dividend period, means the rate (expressed as a percentage per annum) for deposits in U.S. dollars for a one-month period that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the second London business day immediately preceding the first day of such dividend period. The term “Telerate Page 3750” means the display on Bridge Telerate, Inc. on page 3750, or any successor service or page for the purpose of displaying the London interbank offered rates of major banks.

If LIBOR cannot be determined as described above, the Corporation will select four major banks in the London interbank market. The Corporation will request that the principal London offices of those four selected banks provide their offered quotations to prime banks in the London interbank market at approximately 11:00 a.m., London time, on the second London business day immediately preceding the first day of such dividend period. These quotations will

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be for deposits in U.S. dollars for a one-month period. Offered quotations must be based on a principal amount equal to an amount that is representative of a single transaction in U.S. dollars in the market at the time.

If two or more quotations are provided, LIBOR for the dividend period will be the arithmetic mean of the quotations. If fewer than two quotations are provided, the Corporation will select three major banks in New York City and will then determine LIBOR for the dividend period as the arithmetic mean of rates quoted by those three major banks in New York City to leading European banks at approximately 3:00 p.m., New York City time, on the second London business day immediately preceding the first day of such dividend period. The rates quoted will be for loans in U.S. dollars, for a one-month period. Rates quoted must be based on a principal amount equal to an amount that is representative of a single transaction in U.S. dollars in the market at the time. If fewer than three New York City banks selected by the Corporation are quoting rates, LIBOR for the applicable period will be the same as for the immediately preceding dividend period.

The term “dividend period” means the period from and including each Dividend Payment Date to but excluding the next succeeding Dividend Payment Date (for avoidance of doubt, in each case as such Dividend Payment Date may have been postponed or accelerated as aforesaid).

4.             Liquidation Preference. The shares of Series G Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of common stock and any other stock of the Corporation ranking junior to the Series G Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series G Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of common stock or any other such junior stock, an amount equal to the liquidation preference of $2,500.00 per share plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Series G Preferred Stock to the date of final distribution. The holders of the Series G Preferred Stock shall not be entitled to receive the preferential amounts as aforesaid until the liquidation preference of any other stock of the Corporation ranking senior to the Series G Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the preferential amounts as aforesaid, the holders of shares of Series G Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock and Series G Preferred Stock shall be insufficient to pay in full the preferential amounts payable thereon, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale, lease, exchange or transfer of all or any part of the Corporation’s assets shall be considered a liquidation, dissolution or winding up of the Corporation.

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5.             Conversion. The Series G Preferred Stock is not convertible into, or exchangeable for, other securities or property.

6.             Voting Rights. The Series G Preferred Stock, except as provided herein or as otherwise from time to time required by law, shall have no voting rights. Whenever, at any time or times, dividends payable on the shares of Series G Preferred Stock or on any Parity Preferred Stock shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the authorized number of directors of the Corporation shall automatically be increased by two and the holders of the Series G Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Parity Preferred Stock outstanding at the time upon which like voting rights have been conferred and are exercisable (“Voting Parity Stock”), voting together as a class, to elect two directors (hereinafter the “Preferred Directors” and each a “Preferred Director”) to fill such newly created directorships at the Corporation’s next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set aside for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Series G Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause. Any vacancy created thereby may be filled only by the affirmative vote of the holders of shares of Series G Preferred Stock voting separately as a class (together with the holders of shares of Voting Parity Stock). If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Series G Preferred Stock shall be entitled to ten votes for each share held (the holders of shares of any other class or series of Voting Parity Stock being entitled to such number of votes, if any, for each share of such stock held as may be granted to them).

So long as any shares of any Series G Preferred Stock remain outstanding, the Corporation shall not, without the affirmative vote of the holders of at least 66-2/3% of the shares of such Series G Preferred Stock (i) authorize, create or issue any capital stock of the Corporation ranking, as to dividends or upon liquidation, dissolution or winding up, prior to such Series G Preferred Stock, or reclassify any authorized capital stock of the Corporation into any such shares of such capital stock or issue any obligation or security convertible into or evidencing the right to purchase any such shares of capital stock, or (ii) amend, alter or repeal the certificate of designations for such Series G Preferred Stock, or the Restated Certificate of Incorporation of the Corporation, whether by merger, consolidation or otherwise, so as to adversely affect the powers, preferences or special rights of such Series G Preferred Stock. Any increase in the amount of authorized common stock or other authorized preferred stock, or any increase or decrease in the number of shares of any series of preferred stock or the authorization, creation and issuance of other classes or series of common stock or other stock, in each case ranking on a parity with or junior to the shares of Series G Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to adversely affect such powers, preferences or special rights.

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In exercising the voting rights set forth in this Section 5 or when otherwise granted voting rights by operation of law or by the Corporation, each share of Series G Preferred Stock shall be entitled to ten votes.

The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required or upon which the holders of Series G Preferred Stock shall be entitled to vote shall be effected, all outstanding shares of Series G Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption.

7.             Redemption. The shares of Series G Preferred Stock shall not be redeemable prior to February 15, 2009. On any Dividend Payment Date on and after such date, the Corporation, at its option, may redeem shares of the Series G Preferred Stock, as a whole or in part, at a redemption price equal to $2,500.00 per share, plus, in each case, an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption.

The holders of shares of Series G Preferred Stock at the close of business on a Dividend Payment Record Date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the call for redemption thereof (except that holders of shares called for redemption on a date occurring between such Record Date and the Dividend Payment Date shall not be entitled to receive such dividend on such Dividend Payment Date) or the Corporation’s default in payment of the dividend due on such Dividend Payment Date.

If fewer than all the outstanding shares of Series G Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be selected by lot or pro rata or by any other means determined by the Board of Directors in its sole discretion to be equitable.

If full cumulative dividends on the Series G Preferred Stock have not been paid or set apart for payment with respect of all prior dividend periods, the Series G Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Series G Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Series G Preferred Stock.

In the event the Corporation shall redeem shares of Series G Preferred Stock, written notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 20 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder’s address as the same appears on the stock books of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of Series G Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (a) the redemption date; (b) the number of shares of Series G Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed from such holder, the number of shares to be redeemed from such holder; (c) the redemption price and any accumulated and

33

unpaid dividends to the redemption date; (d) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date (unless the Corporation shall default in providing funds for the payment of the redemption price of the shares called for redemption at the time and place specified in such notice).

If a notice of redemption has been given pursuant to this Section 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Series G Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. The Corporation’s obligation to provide funds for the payment of the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption shall be deemed fulfilled if, on or before a redemption date, the Corporation shall deposit, with a bank or trust company, or an affiliate of a bank or trust company, having an office or agency in New York City and having a capital and surplus of at least $50,000,000, such funds sufficient to pay the redemption price (and any accumulated and unpaid dividends to the redemption date) of the shares called for redemption, in trust for the account of the holders of the shares to be redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds be delivered upon redemption of the shares of Series G Preferred Stock so called for redemption.

Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time.

Shares of Series G Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the preferred stock.

8.             Amendment of Resolution. The Board reserves the right from time to time to increase or decrease the number of shares that constitute the Series G Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this Certificate of Designations within the limitations provided by law, this resolution and the Restated Certificate of Incorporation.

34

9.             Rank. Any stock of any class or classes or series of the Corporation shall be deemed to rank:

(a) prior to shares of the Series G Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Series G Preferred Stock;

(b) on a parity with shares of the Series G Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Series G Preferred Stock, if the holders of stock of such class or classes or series shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Series G Preferred Stock (the term “Parity Preferred Stock” being used to refer to any stock on a parity with the shares of Series G Preferred Stock, either as to dividend or upon  liquidation, dissolution or winding up, or both, as the content may require); and

(c) junior to shares of the Series G Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class or classes or series shall be common stock or if the holders of the Series G Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes or series.

The Series G Preferred Stock shall rank, as to dividends and upon liquidation, dissolution or winding up, on a parity with the Corporation’s 5.94% Cumulative Preferred Stock, Series C, the Corporation’s 5.67% Cumulative Preferred Stock, Series D, the Corporation’s 6.50% Cumulative Preferred Stock, Series F and any Parity Preferred Stock issued hereafter.

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35

EX-12.01

EXHIBIT 12.01

LEHMAN BROTHERS HOLDINGS INC.

Computation of Ratios of Earnings to Fixed Charges and

to Combined Fixed Charges and Preferred Stock Dividends

(Unaudited)

	Nine Months
	Ended August 31,		Year Ended November 30,
Dollars in millions	2006		2005		2004		2003		2002
Pre-tax earnings from continuing operations	$	4,416	$	4,829	$	3,518	$	2,536	$	1,399
Add: Fixed charges (excluding capitalized interest)	20,666		18,040		9,773		8,724		10,709
Pre-tax earnings before fixed charges	$	25,082	$	22,869	$	13,291	$	11,260	$	12,108
Fixed charges:
Interest	$	20,499	$	17,790	$	9,674	$	8,640	$	10,626
Other (1)	76		125		114		119		103
Total fixed charges	20,575		17,915		9,788		8,759		10,729
Preferred stock dividend requirements	73		101		129		143		155
Total combined fixed charges and preferred stock dividends	$	20,648	$	18,016	$	9,917	$	8,902	$	10,884
Ratio of earnings to fixed charges	1.22		1.28		1.36		1.29		1.13
Ratio of earnings to combined fixed charges and preferred stock dividends	1.21		1.27		1.34		1.26		1.11

(1)Other fixed charges consist of the interest factor in rentals and capitalized interest.

EX-15.01

EXHIBIT 15.01

LEHMAN BROTHERS HOLDINGS INC.

Letter of Ernst & Young LLP regarding Unaudited Interim Financial Information

October 10, 2006

To the Board of Directors and Stockholders of
Lehman Brothers Holdings Inc.

We are aware of the incorporation by reference in the following Registration Statements and Post Effective Amendments:

(1)	Registration Statement (Form S-3 No. 033-53651) of Lehman Brothers Holdings Inc.,
(2)	Registration Statement (Form S-3 No. 033-56615) of Lehman Brothers Holdings Inc.,
(3)	Registration Statement (Form S-3 No. 033-58548) of Lehman Brothers Holdings Inc.,
(4)	Registration Statement (Form S-3 No. 033-62085) of Lehman Brothers Holdings Inc.,
(5)	Registration Statement (Form S-3 No. 033-65674) of Lehman Brothers Holdings Inc.,
(6)	Registration Statement (Form S-3 No. 333-14791) of Lehman Brothers Holdings Inc.,
(7)	Registration Statement (Form S-3 No. 333-30901) of Lehman Brothers Holdings Inc.,
(8)	Registration Statement (Form S-3 No. 333-38227) of Lehman Brothers Holdings Inc.,
(9)	Registration Statement (Form S-3 No. 333-44771) of Lehman Brothers Holdings Inc.,
(10)	Registration Statement (Form S-3 No. 333-50197) of Lehman Brothers Holdings Inc.,
(11)	Registration Statement (Form S-3 No. 333-60474) of Lehman Brothers Holdings Inc.,
(12)	Registration Statement (Form S-3 No. 333-61878) of Lehman Brothers Holdings Inc.,
(13)	Registration Statement (Form S-3 No. 033-64899) of Lehman Brothers Holdings Inc.,
(14)	Registration Statement (Form S-3 No. 333-75723) of Lehman Brothers Holdings Inc.,
(15)	Registration Statement (Form S-3 No. 333-76339) of Lehman Brothers Holdings Inc.,
(16)	Registration Statement (Form S-3 No. 333-108711) of Lehman Brothers Holdings Inc.,
(17)	Registration Statement (Form S-3 No. 333-121067) of Lehman Brothers Holdings Inc.,
(18)	Registration Statement (Form S-3 No. 333-134553) of Lehman Brothers Holdings Inc.,
(19)	Registration Statement (Form S-3 No. 333-51913) of Lehman Brothers Inc.,
(20)	Registration Statement (Form S-3 No. 333-08319) of Lehman Brothers Inc.,
(21)	Registration Statement (Form S-3 No. 333-63613) of Lehman Brothers Inc.,
(22)	Registration Statement (Form S-3 No. 033-28381) of Lehman Brothers Inc.,
(23)	Registration Statement (Form S-3 No. 002-95523) of Lehman Brothers Inc.,
(24)	Registration Statement (Form S-3 No. 002-83903) of Lehman Brothers Inc.,
(25)	Registration Statement (Form S-4 No. 333-129195) of Lehman Brothers Inc.,
(26)	Registration Statement (Form S-8 No. 033-53923) of Lehman Brothers Holdings Inc.,
(27)	Registration Statement (Form S-8 No. 333-07875) of Lehman Brothers Holdings Inc.,
(28)	Registration Statement (Form S-8 No. 333-57239) of Lehman Brothers Holdings Inc.,
(29)	Registration Statement (Form S-8 No. 333-59184) of Lehman Brothers Holdings Inc.,
(30)	Registration Statement (Form S-8 No. 333-68247) of Lehman Brothers Holdings Inc.,
(31)	Registration Statement (Form S-8 No. 333-110179) of Lehman Brothers Holdings Inc.,
(32)	Registration Statement (Form S-8 No. 333-110180) of Lehman Brothers Holdings Inc.,
(33)	Registration Statement (Form S-8 No. 333-121193) of Lehman Brothers Holdings Inc.,
(34)	Registration Statement (Form S-8 No. 333-130161) of Lehman Brothers Holdings Inc.;

of our report dated October 10, 2006 relating to the unaudited consolidated interim financial statements of Lehman Brothers Holdings Inc. that is included in its Form 10-Q for the quarter ended August 31, 2006.

We are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933 (the “Act”), is not a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.

New York, NY

EX-31.01

EXHIBIT 31.01

LEHMAN BROTHERS HOLDINGS INC.

CERTIFICATION

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

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

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

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

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:October 10, 2006

/s/ Richard S. Fuld, Jr.

Richard S. Fuld, Jr.

Chairman and Chief Executive Officer

EX-31.02

EXHIBIT 31.02

LEHMAN BROTHERS HOLDINGS INC.

CERTIFICATION

I, Christopher M. O’Meara, certify that:

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

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

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

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:October 10, 2006

/s/ Christopher M. O’Meara

Christopher M. O’Meara

Chief Financial Officer, Controller and Executive Vice President

EX-32.01

EXHIBIT 32.01

LEHMAN BROTHERS HOLDINGS INC.

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), I, Richard S. Fuld, Jr., certify that:

1.The Quarterly Report on Form 10-Q for the quarter ended August 31, 2006 (the “Report”) of Lehman Brothers Holdings Inc. (the “Company”) as filed with the Securities and Exchange Commission as of the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:October 10, 2006

/s/ Richard S. Fuld, Jr.

Richard S. Fuld, Jr.

Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Lehman Brothers Holdings Inc. and will be retained by Lehman Brothers Holdings Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.02

EXHIBIT 32.02

LEHMAN BROTHERS HOLDINGS INC.

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. Section 1350) I, Christopher M. O’Meara, certify that:

1.The Quarterly Report on Form 10-Q for the quarter ended August 31, 2006 (the “Report”) of Lehman Brothers Holdings Inc. (the “Company”) as filed with the Securities and Exchange Commission as of the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:October 10, 2006

/s/ Christopher M. O’Meara

Christopher M. O’Meara

Chief Financial Officer, Controller and Executive Vice President

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Lehman Brothers Holdings Inc. and will be retained by Lehman Brothers Holdings Inc. and furnished to the Securities and Exchange Commission or its staff upon request.