It is believed that a combination of long-term trends engender a favorable climate for revenue and profit growth in the financial services industry. Companies around the world are continuing to globalize their operations, including through merger and acquisition activity. They are strongly focused on stockholder value, which drives continual portfolio rebalancing, including mergers, acquisitions, divestitures, restructurings, joint ventures, company sales and related transactions. Intense and often increasing commercial competition is fueling the need for companies to realize economies of scale and scope and to optimize strategic positioning, which in turn drives the market for mergers and acquisitions. In addition, ongoing cycles in various international economies of deregulation and sometimes re-regulation add to the impetus of companies to either consolidate or restructure their portfolios. Long-term increases in investor demand for debt of non-investment grade issuers have driven growth in acquisitions by financial sponsors, as well as in the number of highly leveraged companies, a portion of which may become candidates for financial restructuring advisory services, particularly in less favorable economic environments. Aging populations in both developed and emerging economies around the world have increased the pools of savings available and the need for retirement investment services by institutions and individuals. Many institutional and high-net worth investors are increasing their allocations to alternative investments to diversify risk while maintaining high targeted absolute returns. Growing acceptance of these strategies fuels the market for products such as the hedge funds and merchant banking funds.

The markets have begun to experience greater than normal growth in comparison to recent fiscal periods. Recovery in global equity markets during 2003, increases in corporate profits and consumer income following the recent recession, and increasing availability of financing are driving increased demand for mergers and acquisitions and asset management services. However, these trends are cyclical in nature and subject to periodic reversal.

The Company offers corporate, partnership, institutional, government and individual clients across the globe a wide array of financial advisory services regarding mergers and acquisitions, restructurings and various other corporate finance matters. The Company advises clients on a wide range of strategic and financial issues. When the Company advises companies in the potential acquisition of another company or certain assets, its services include evaluating potential acquisition targets, providing valuation analyses, evaluating and proposing financial and strategic alternatives and rendering, if appropriate, fairness opinions. When the Company advises clients that are contemplating the sale of certain businesses, assets or their entire company, its services include evaluating and recommending financial and strategic alternatives with respect to a sale, advising on the appropriate sales process for the situation, valuation issues, assisting in preparing an offering memorandum or other appropriate sales materials and rendering, if appropriate, fairness opinions. For companies in financial distress, the Company’s services may include reviewing and analyzing the business, operations, properties, financial condition and prospects of the company, evaluating debt capacity, assisting in the determination of an appropriate capital structure and evaluating and recommending financial and strategic alternatives. When the Company assists clients in raising private or public market financing, its services include originating and executing private placements of equity, debt and related securities, assisting clients in connection with securing, refinancing or restructuring bank loans, originating public underwritings of equity, debt and convertible securities and originating and executing private placements of partnership and similar interests in alternative investment funds such as leveraged buyout, mezzanine or real estate focused funds.

The Company’s Asset Management business provides investment management and advisory services to institutional clients, financial intermediaries, private clients and investment vehicles around the world. The Company’s largest Asset Management subsidiaries are LAM in New York, San Francisco, London, Milan, Frankfurt, Hamburg, Tokyo, Sydney and Seoul and LFG in Paris.

At LAM, the Company conducts investment research on a global basis, to develop market, industry and company specific insight. Approximately 60 investment analysts, located in the Company’s worldwide offices, conduct research and evaluate investment opportunities around the world across all products and platforms. The LAM global research platform is organized around six global industry sectors: comsumer goods, financial services, health care, industrials, power, and technology, media and telecommunications. The Company’s Asset Management business provides equity, fixed income and cash management and alternative investment strategies to clients, paying close attention to clients’ varying and expanding investment needs.

Employee compensation and benefits expense was $574 million for the year ended December 31, 2004, an increase of $93 million, or 19%, versus expense of $481 million for the year ended December 31, 2003.

Non-compensation expense was $343 million for the year ended December 31, 2004, an increase of $30 million, or 10%, versus expense of $313 million for the year ended December 31, 2003.

Operating income was $358 million for the year ended December 31, 2004, a decrease of $31 million, or 8%, versus operating income of $389 million for the year ended December 31, 2003.

Provision for income taxes was $28 million for the year ended December 31, 2004, a decrease of $16 million versus $44 million for the year ended December 31, 2003.