Dear Shareholders and Clients,
In 2007, Lehman Brothers produced another year of record net revenues, net income, and earnings per share and successfully managed through the difficult market environment. Our global platform of diversified businesses also produced record performance across each of our business segments as well as in Europe and Asia.

There were clearly two distinct market environments this year. The first half was relatively favorable, with low interest rates, strong economic growth, and ample liquidity across asset classes. The second half saw a U.S. housing recession, a credit freeze, and a repricing of credit-related securities. This caused disruptions in the mortgage markets, a sharp decline in liquidity, and a slowing of corporate and institutional activity.

In this challenging environment, our clients looked to us more than ever for new and different solutions and to be their trusted partner. Our client-focused strategy, which we have consistently followed since becoming a public company in 1994, was the key to our success. We remain committed to creating shareholder value through our focus on the four pillars of our strategy: driving diversified growth; delivering the whole Firm to our clients; managing risk, capital, and expenses; and preserving and strengthening our culture. Throughout the more favorable market environment of the first half and the dislocations of the second half, each of the four pillars of our strategy proved invaluable.

We continued to diversify our Firm by expanding our geographic footprint and growing our targeted businesses. The investments made this year have been a continuation of those we made over the past decade. In 2007, we opened offices in Doha-Qatar, Dubai, Geneva, Istanbul, Lisbon, Moscow, São Paolo, and Shanghai. In connection with our acquisitions of Grange Securities in Australia and Eagle Energy Partners in Texas, we added offices in Sydney, Melbourne, Perth, Brisbane, and Houston. In 2007, we also invested in many of our businesses, including commodities, prime services, Investment Management, Investment Banking, and emerging markets, as well as in our regions. These investments led to strong revenue growth in those targeted areas.

Over the past five years, Investment Banking revenues have grown by 23%, Equities Capital Markets by 40%, and Investment Management by 36%. During this same period, Asia has grown by 38% and Europe by 36%. Our revenues have never been more evenly balanced across our businesses, and we have achieved our best-ever geographic diversification, with half of the Firm's revenues generated outside the Americas. The result of all this
is that we have built a balanced global investment bank ?able to withstand the stresses of rapid shifts in world liquidity flows.

We delivered the whole Firm to our clients by leveraging our intellectual capital across each of our divisions and regions. As you will see throughout this Annual Report, we provided capabilities where our clients needed us most, deepened existing relationships, and formed important new ones.

We effectively managed our risk, balance sheet, and expenses. Ultimately, our performance in 2007 was about our "One Firm" sense of shared responsibility and careful management of our liquidity, capital commitments, and balance sheet positions. We benefited from our senior level focus on risk management and, more importantly, from a culture of risk management at every level of the Firm. It also helped that our senior leadership team has, on average, worked together for more than two decades and has successfully navigated difficult markets before. This experience proved to be especially valuable this year.

We also remained disciplined in how we managed our expenses. We maintained our 2006 ratio of compensation and benefits to revenues, and our ratio of non-personnel expenses to revenues remains one of the lowest in the industry.

We preserved and strengthened our One Firm culture. This culture of teamwork and ownership enabled us to continue to build our businesses, to provide the best solutions for our clients, and to deliver record results. ...

Despite this record performance, our greatest disappointment in 2007 was that our share price declined for the first time in five years. We are more focused than ever on demonstrating to the markets that we have a proven ability to continue to grow our diversified set of businesses, manage risk and capital effectively, and deliver strong results in all market environments.

Our Businesses
In Capital Markets - Fixed Income and Equities -we posted record revenues for the fifth year in a row with significant growth in derivatives, foreign exchange, and interest rate products. Fixed Income faced the greatest challenge from the difficult credit markets, with our mortgage origination and securitization businesses sharply impacted by the housing market downturn. Given the industry dynamics, we restructured our global mortgage origination business and closed both our U.S. subprime company, BNC Mortgage,  and our Korea Central Mortgage business.

As a result of this difficult environment, our Fixed Income net revenues fell by 29% to 6.0 billion, the first annual decline in nine  years. Despite the dislocations, our business continued to be recognized for excellence and ranked #1 by a leading industry consultant in U.S. fixed income market share, penetration, sales, research, trading, and overall quality. We have maintained our leading position in fixed income benchmarks, ranking #1 in fixed income indices by Institutional Investor every year since that survey began in 1997. The Firm also achieved a #1 ranking for the eighth consecutive year in the Institutional Investor All-America Fixed Income Research poll.

Notably, our Fixed Income sales credit volumes, a good measure of how we delivered for our clients, rose 40% in 2007. ...

Sincerely,
Richard S. Fuld, Jr.
Chairman and Chief Executive Officer
Joseph M. Gregory
President and Chief Operating Officer
February 15, 2008

Read Lehman Brothers, 2007 Annual Report Online

# Financial Highlights
# Letter to Shareholders and Clients
# Diversification Across Businesses
# Diversification Across Regions
# Sustainability
# Philanthropy
# Talent Management
# Partnering with Spelman College
# Financial Report

Download Lehman Brothers, 2007 Annual Report

PDF format, 3.1MB, 132Pages.

Lehman Brothers Holdings Inc. (Lehman Brothers) serves the financial needs of corporations, governments and municipalities, institutional clients and high-net-worth individuals worldwide.

The Company provides an array of services in equity and fixed income sales, trading and research, investment banking, asset management, private investment management and private equity.

The Company operates three business segments: Capital Markets, Investment Banking and Investment Management. Lehman Brothers generates client-flow revenues from institutional, corporate, government and high-net-worth clients by advising on and structuring transactions; serving as a market maker and/or intermediary in the global marketplace, including having securities and other financial instrument products; originating loans for distribution to clients in the securitization or principals market; providing investment management and advisory services, and acting as an underwriter to clients. (Google Finance)

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