Geographically, the firm has added significant scale in Asia. Recently the firm extended its presence into India, Canada, Australia, Brazil, Russia and the Middle East, all markets that it considers to be critically important. The company has received important mandates in all of these markets, already in the 2007 fiscal year.

Despite the more difficult market environment, we have continued to make progress in Capital Markets, as demonstrated by increased market share in many products, top rankings in surveys that evaluate overall quality and trading, sales, and research capabilities around the globe.

The firm is positioned for growth in capital markets, which is a truly global story, with 69% of equity revenues and 56% of our fixed income revenues in 2007 sourced outside the United States; in Europe and Asia. The firm has attempted to solidify these gains in international capital markets franchise, both through organic growth and also through acquisition.

In 2007, Lehman Brothers made purchases of Grange Securities in Australia, MNG in Turkey, and Brics in India. The company has continued to build its capabilities in a number of products, including derivatives, prime services, commodities and foreign exchange. These businesses have become and continue to be ever more important components of the firm’s revenue growth.

In investment management, the company continues to focus on building out the platform globally, and the growth in assets under management has been largely from net inflows, on the basis and on the back of strong performance. The company has continued to expand its product offerings. The private equity assets under management increased by 60% this year, as a result of new private equity funds launched in 2007. In 2007, the firm also grew this segment through the acquisition of HA Schupf, LightPoint and Dartmouth Capital, and the acquisition of minority stakes in a number of hedge fund managers, including DE Shaw and Spinnaker.

Outlook

The global economy continues to reverberate from two shocks; problems in the US housing market and the capital markets'' liquidity squeeze. As a result, the company has made some downward revisions to its projections on global economic growth. The firm’s outlook is for global GDP growth to be 2.7% in 2008, and it has lowered its US forecast to 1.8% for 2008. However, the management expects central banks to be proactive in promoting positive economic growth whether to rate cuts or providing additional liquidity to the system during the period of financial market stress. The firm has seen these recent actions by the Fed, the Bank of Canada, the Bank of England, the ECB and it is seeing collaboration amongst those parties.

The firm’s global growth assumptions also underpin its view in Investment Banking activity, going forward. The firm does expect announced M&A volumes to decline approximately 20% in 2008, which is in line with 2006 levels. Strategic buyers concurrently comprise about three quarters of M&A activity, and will account for a larger proportion of overall deal volume. The firm expects stock to become a more prominent form of consideration versus cash in these transactions. Given the changes witnessed in cross currency rates and current trade and balances, the firm also expects cross-border M&A and international activity to increase.

Higher equity market volatility will most likely cut equity issuance to be down in the near-term, as the firm has seen a number of IPO''s post from the market over the last several weeks. However, the company is expecting a significant amount of hybrid capitals come-to-market in the coming months, as financials increasingly address quickly their balance sheet issues and raise capital. This is a trend the firm continues to expect to see for the foreseeable future.

The firm still expects fixed income origination to grow to approximately $10 trillion for the full year 2007, although it is forecasting an 8% decline to $9.2 trillion for 2008, due to lower component of securizations in M&A financing. Despite credit spread widening, absolute rates for high grade borrowers who borrow on a fixed rate basis have changed little, due to rallies in treasuries. The firm is starting to see issuance pick up heading into the New Year. The firm is also seeing large numbers of borrowers turn out commercial paper given the shape of the credit curve and the attractiveness of doing so. Fortunately the new business, the firm is seeing in M&A and in debt underwriting is generally high margin business, which should help offset lower volumes. The other phenomenon, which is helping to bolster Investment Banking, is nontraditional business, primarily through derivative risk solutions for the corporate client. This has become an even more meaningful contributor to Investment Banking revenues.

In the Equity Capital Markets, the firm expects the 2008 return of 13% in local currency terms, while projecting corporate earnings globally to increase 2%, but declining 5% in the US. Equity valuations remained attractive, even after adjusting for higher risk premiums, which should bolster market activity. Given what the markets have been through recently, the firm expects active risk mitigation strategies to continue to be important tools for institutional investors globally.

Fixed Income Capital Markets will continue to face uncertainties over the near-term, as some products remain impaired, while others will need to trade at the stressed prices to clear bank balance sheet. Fortunately, the firm is starting to see the stress investment pools established initially in the leveraged loan space about $30 billion in the past few days alone and increasingly in the asset-backed space. Although risk aversion had prevailed in recent weeks, the fixed income investors cannot stay on the sidelines for extended periods of time, due to the inherent cash accumulation in portfolios from regular interest payments and maturities.

In the US alone, the firm estimates approximately $3.1 trillion of cash is coming, due to investors in 2008, from interest payments and redemptions. A further recalibration of risk and reward has brought corporate, securitized and mortgage credit, back to their cheapest levels in the current decade, a fact alone that will attract investors over time. In general, the firm expects customer activity to be strong with significant portfolio reallocations and rebalances occurring to take advantage of the opportunities that exist.

Key questions and answers from the fourth quarter fiscal 2007 earnings call conducted by Lehman Brothers Holdings Inc on December 13, 2007.

Guy Moszkowski (Merrill Lynch): Could you talk about the basis risk issues, which reduced hedge effectiveness in the quarter? Which areas were most affected and what caused that breakage?

Chris O''Meara: As we saw in this quarter, the credit spread widening extended out, it affected more products this time and went up the capital structure. We saw the big credit spread widening in Alt-A products, in prime products and in CMBS type products, which is more of a supply demand imbalance than anything else. We have a hedging program that might not be at the same parts of the capital structure, there might be some geared hedging and it''s across various different types of hedging products. We thought about ABX which is a product we use as hedging. We use total return swaps on home-equity loans, the Lehman Bond Index, overall. Some single name CDS on individual traunches of securitized product. It didn''t all work in the same direction. There are two things going on, one is that the notionals may not be fully hedged, and the second thing is the correlations didn''t necessarily work between the cash products and the index products in a precise way. That led to the breakage that we talked about.

Guy Moszkowski (Merrill Lynch): What would be the margin impact of moving to a more plain-vanilla environment which you alluded to? How should we think about the margin in your Fixed Income trading areas evolving relative to what we saw the last couple of years when more exotic products were more in favor?

Chris O''Meara: We would expect a pullback in the amount of securitize product volume that''s going to run through, particularly on the origination side. We would expect the new issue to come down significantly, for some period of time. The good news though is, that this shifts from being an origination opportunity to a secondary trading opportunity. When the market reaches equilibrium the activities will pickup, and there will be lots of secondary trading opportunities for us to help transition our clients who want to move in and out of these products, and also for us as a risk taker on this. When you think about what the margin decrease would be, certainly, it would be significant on the primary side, but we think at least part of that we''ll made up on the secondary side. As we look out, we talk about this $830 million of write-down that we experienced in this period from the significant credit spread widening, certainly, we wouldn''t expect that to recur.

Guy Moszkowski (Merrill Lynch): In general, VaR is defined as applying to liquid assets. As assets migrate to level 3, is there some potential that some of those assets fall out of the historical VaR calculation because they are no longer liquid?

Chris O''Meara: We don''t treat that that way. We put them in the VaR calculation whether they are in level 3 or level 2. Anything that was in there that''s a traded product we do put in there even if the trading markets have become opaque.