- In equities, the company continues to bolster market-making capabilities and desk-based analytics while broadening prime brokerage and structured derivative platforms in all three regions.
- In fixed income, the company continues to focus on the evolution of the securitization markets into newer asset classes and regions, growing presence in the energy business, and on the development of new second and third-order products in the derivative space.
- In investment management, the company continues to target new pockets of wealth as it expands platform outside the U.S. while bolstering product offerings, particularly in alternatives. All of these actions are intended to bolster capacity to generate future growth in businesses as the company covers more clients in more asset classes, in more markets around the globe.

Year-to-Date Financial Highlights

- Book value per share increased to $37.15, up approximately 6% during the period and nearly 10% year-to-date.
- Net income was $2.4 billion, or $4.17 per common share, up 16% and 18%, respectively, from net income of $2.1 billion, or $3.52 per common share for the first half of fiscal 2006. The 2006 first half results include an after tax gain of $47 million, or 8 cents per common share, from the cumulative effect of a change in accounting principle associated with the firm''s adoption of SFAS 123R on December 1, 2005.
Net revenues were $10.6 billion, an increase of 19% from $8.9 billion for the first half of fiscal 2006.

Fiscal 2007 Outlook

- The global economy remains healthy and outlook is for global GDP to grow 3.2%, a slower rate than was realized in 2006 but still a level that continues to provide a favorable underpinning for sector.

- In the U.S., the economy faces risks of below trend growth on the one hand, but above target inflation on the other. As a result, the company expects the Fed to remain on hold for the remainder of the year. Interest rate outlook elsewhere is equally benign. The company expects the ECB to raise rates one more time, the Bank of England to hike rates two more times, and the Bank of Japan prepare to raise rates gradually.

- Global liquidity remains strong with considerable corporate cash on hand, large pools of uninvested capital from financial sponsors, a growing allocation of assets to hedge funds, cash consideration from M&A, proceeds from share buybacks that need to be invested and continued inflows from regions such as Asia and the Middle East. If anything, these trends are accelerating, with announced global M&A, announced LBO and stock buyback plans all up significantly. This pool of liquidity continues to provide a strong underpinning for the global capital markets and for own client-focused business model.

- View is that the global equity market indices will rise about 14% for full calendar year in 2007 in local currency terms, and with corporate earnings for the first quarter coming in better than expected, the company has raised earnings forecast for the year and it expects corporate earnings to increase 9% in 2007 globally.
- The company expects continued strength in capital markets activity for the remainder of 2007, with risk mitigation playing a more important role in investor decisionmaking.
- The company expects continued strength in investment banking activity for the remainder of 2007.
- The company expects announced M&A volumes to grow by about 30%.
- View is that equity origination will also increase by 10% to 15% this year and the company expects project gross global debt origination to rise 6% from the previous record in 2006, with non-U.S. origination representing a larger share of this growing pie.
- Consistent with the reported results, view is that Europe and Asia will continue to contribute a higher proportion of the growing fee pool in investment banking and capital markets.

Key questions from the second quarter earnings call conducted by Lehman Brothers Holdings, Inc. on June 12, 2007.

William Tanona (Goldman Sachs): Was the subprime U.S. residential mortgage business a negative contributor this quarter?

Christopher O’Meara: It was a lower contributor than it was in the past.

William Tanona (Goldman Sachs): You had a good all-around quarter at the fixed income business, but fixed income trading was the lowest since the fourth quarter of 2005. Mortgages were a big part of that. Where you might be on the revenue side to historic quarters as it relates to mortgage?

Christopher O’Meara: The company does not give guidance looking forward, but mortgages are at a low point in this recent period and looking forward the company would be in for better performance.

William Tanona (Goldman Sachs): Are you at 2003 levels on the mortgage side or what timeframe would you say you are at as it relates to the mortgage revenues?

Christopher O’Meara: It is hard to say because the business is different now. The company has significantly diversified this business over time into both asset classes and different geographies. The business is much bigger and broader than it was at any time in the past. The company is going through the down part of this cycle so it is in the late innings in terms of its revenue generation.

William Tanona (Goldman Sachs): Equities were strong on a sequential basis. Could you give a sense in terms of the delta quarter over quarter and what were the largest contributors as it pertains to derivatives, prime brokerage, prop trading, and execution services?

Christopher O’Meara: Quarter to quarter there was a significant increase and it is across the board. It is across regions and products, all of the products are up significantly. The company continues to build this business out. It has talked about the improvement in its capacity, its capabilities, its technology, and importantly its brand. It has seen that and it is taking shape, particularly overseas, where the company is getting a share of business and is serving clients in a strong way. Lehman Brothers sees that through the surveys that come back from independent survey providers where they come back and talk about the quality of its service offering.

William Tanona (Goldman Sachs): What was the largest contributor quarter over quarter?

Christopher O’Meara: As a percentage, the company does not disclose the specifics of the components. These are all big businesses which were strong. The derivatives business, largely a volatility business, is also strong, and then prime services.

William Tanona (Goldman Sachs): The operating leverage or margins, revenues were up 25% year over year, expenses followed and were commensurate, up 25%, so there was not much in the way of operating leverage. How are margins in the U.S. versus your international markets?