Lehman Brothers Limited – In Administration investment management and private equity. The Lehman Group’s headquarters were in New York, with regional headquarters in London and

Lehman Brothers Limited – InAdministration

Joint Administrators’ progress report for the period 15September 2008 to 14 March 2009

14 April 2009

Section Page

Section 1: Purpose of the Joint Administrators’ progress report 3

Section 2: Background information 4

Section 3: Overview of the actions taken by the Joint Administrators sinceappointment

6

3.1 Infrastructure and property 7

3.2 Recharges 9

3.3 Information technology 10

3.4 Human resources 14

3.5 Pensions 16

3.6 Tax 17

3.7 Intercompany 19

3.8 Affiliate company relationships 20

Section 4: Statutory and other information 22

4.1 Statement of Affairs 24

Section 5: Joint Administrators’ remuneration 25

Section 6: Receipts and payments account to 14 March 2009 27

Contents

PricewaterhouseCoopers LLP 3

Introduction

This report has been prepared by the Joint

Administrators of Lehman Brothers Limited

(“LBL” or the “Company”) under Rule

2.47(3)(a) of the Insolvency Rules 1986.

Creditors were notified of the Joint

Administrators’ Proposals for achieving the

purpose of the Administration on 5

November 2008. These were approved at a

meeting of creditors held on 21 November

2008.

This report provides details of the work

undertaken and the progress made during

the first six months to 14 March 2009.

Objectives of the Administration

The Joint Administrators are pursuing theobjective of achieving a better result forLBL’s creditors as a whole than would belikely if LBL were wound up (without firstbeing in Administration).

The specific aims of this Administration areto:

Realise all assets of LBL, where valuemay exist;

Provide ongoing employee andinfrastructure support to the other groupcompanies that are in Administration inexchange for appropriatereimbursement; and

Mitigate, as far as possible, any furtherliabilities against LBL by the transfer ortermination of contracts.

Creditors’ Committee

Your Creditors’ Committee (the

“Committee”) was elected at the meeting of

creditors and its members are:

1. Lehman Brothers Holdings Inc

2. The Trustees of the Lehman Brothers

Pension Scheme

3. Heron Quays (HQ2) T1 Limited

4. Origin HR Consulting Limited.

The Joint Administrators meet with the

Committee regularly. To date, three

meetings of the Committee have taken

place.

The meetings with the Committee provide

the Administrators with the opportunity to

explain in detail how we are dealing with key

aspects of the Administration and to consult

with them on critical issues.

Outcome for unsecured creditors

The Joint Administrators are not in a

position to give an estimate of the timing or

quantum of any dividend to unsecured

creditors.

However, creditors should be aware that

LBL is a shareholder of Lehman Brothers

International (Europe) – in Administration,

an unlimited company. LBL is therefore

potentially liable for any shortfall to creditors

of that estate. This could clearly have a

significant impact on funds available to

creditors of LBL.

Future reports

The next progress report to creditors will be

in six months time.

Signed:

MJA Jervis

Joint Administrator

Lehman Brothers Limited

Section 1: Purpose of the Joint Administrators’progress report


Background Information

Investment banking was at the core of thebusiness of the global Lehman BrothersGroup of companies (the “Lehman Group”).Until its recent collapse, the Lehman Groupwas one of the four biggest investmentbanks in the United States. It providedfinancial services to corporations,governments and municipalities, institutionalclients and high net worth individuals. Thebusiness activities of the Lehman Groupwere organised in three segments, namely:capital markets, investment banking andinvestment management. Those segmentsincluded businesses in equity and fixedincome sales, trading and research,investment banking, asset management,private investment management and privateequity.

The Lehman Group’s headquarters were inNew York, with regional headquarters inLondon and Tokyo and many offices inNorth America, Europe, the Middle East,Latin America and the Asia-Pacific region.

The ultimate parent company of the LehmanGroup is Lehman Brothers Holdings Inc.(“LBHI”), which is incorporated in the UnitedStates. The main trading companies withinthe UK were Lehman Brothers International(Europe) (“LBIE”) and Lehman BrothersEurope Limited (“LBEL”).

Events immediately preceding theAdministrators’ appointment

The Lehman Group operated in a marketthat depends heavily on investor and marketconfidence. In the period immediately priorto its insolvency, there was an escalatingloss of confidence in the Lehman Group, asevidenced by a significant deterioration inLBHI’s share price on the New York StockExchange of almost 80 per cent during theweek from Friday 5 September 2008 toFriday 12 September 2008.

On Tuesday 9 September 2008, the shareprice fell 45 per cent following reports thatnegotiations with the Korean DevelopmentBank, regarding a potential majorinvestment in the Lehman Group, had beenput on hold.

The following day, the Lehman Groupannounced a third quarter loss of US$3.9billion.

At the same time, the Lehman Groupannounced plans to sell a majority stake inits investment management business and tospin-off the majority of its commercial realestate assets into a new, separate publiccompany. These measures failed to restoreinvestor confidence and the share price fella further 7 per cent on Wednesday 10September 2008.

Following the close of business that day,Moody’s Investors Service, one of the maincredit rating agencies, announced that, inthe absence of a purchaser for the LehmanGroup or its business by Monday 15September 2008, it intended to downgradethe Lehman Group’s credit rating.

Various steps were taken in an attempt toresolve the Lehman Group’s situation. Weunderstand that weekend discussions wereheld in New York with potential investorsand purchasers of the Lehman Group’sbusiness (or part thereof).

During the afternoon of 14 September 2008,we met with the directors of LBL in order toconsider what steps should be taken in theevent that the New York discussions to savethe group were to fail.

LBHI managed substantially all of thematerial cash resources of the LehmanGroup centrally. A continuing failure of LBHIto settle obligations to, or on behalf of, LBLat any point in time would result in theinsolvency of LBL, as it would be unable tomeet its liabilities as they fell due. On 14September 2008 the directors of LBL soughtassurances from LBHI that payments due tobe made to LBL on 15 September 2008would in fact be made by LBHI. Thedirectors also planned how to react in theevent that these assurances could no longerbe given by LBHI.

LBL was due to pay employee wages on17th September, and significant rentalpayments approximately a week later.

At approximately 12.30 am on 15September 2008, LBL was informed byLBHI that it would no longer be in a positionto make payments to or for LBL and otherLehman companies and was preparing tofile for Chapter 11 bankruptcy protection inthe US.

Section 2: Background Information


Overnight, preparations were made by thedirectors, employees and advisers for anumber of the Lehman Group companies inthe UK to seek the protection ofAdministration Orders and directors of thosecompanies, including LBL, met and resolvedto place those companies intoAdministration (collectively “the LehmanAdministration Companies”).

At 7.56 am on 15 September 2008Administration Orders were made in respectof each of the Lehman AdministrationCompanies. Having been appointed, theAdministrators and their teams immediatelyassumed responsibility for LBL’s affairs andbegan to pursue the purpose of theappointment.

Later on 15 September 2008, LBHIannounced that it had filed for Chapter 11bankruptcy protection in the US.

Business Activities

LBL was pivotal to the Group’s operationsas it held most of the UK Group’s servicecontracts including employee contracts. LBLalso maintained IT and generalinfrastructure to support the needs of theGroup.

In Administration, LBL has continued toprovide services to other LehmanAdministration Companies, and to receivecash from other Group entities to coverthese costs. LBL has been able to reducethe number, and therefore the value, ofcreditor claims it will receive.

LBL provided the following to the LehmanGroup within the UK:-

Central resources

LBL managed the key operational costs forthe Group, including employee wages, rent,rates and utilities. LBL received money topay these costs from other group companies(including LBIE and LB UK RE HoldingsLimited) according to the services providedto each.

Employees

LBL employed the majority of the personnelwho worked in the UK trading and operatingcompanies.

LBL also managed secondments andorganised all other personnel matters.

Property

The leases for many of the UK Groupproperties were held by LBL.

Administrative services

LBL organised other administrative needsfor the Group including mobile phone,photocopier and computer contracts.

Information Technology

LBL provided IT infrastructure and supportto many of the UK Lehman companies.


As set out in the Administrators’ Proposals,dated 5 November 2008, LBL was pivotal tothe Group’s operations as it held most of theUK Groups’ service contracts includingemployee contracts. LBL also maintained ITand general infrastructure to support theneeds of the Group.

In Administration, LBL has continued toprovide services to other LehmanAdministration Companies, and to receivecash from other Group entities to coverthese costs. LBL has been able to reducethe number, and therefore the value, ofcreditor claims it will receive.

Since their appointment, the Administratorshave used specialist teams from withinPricewaterhouseCoopers LLP, working withretained LBL employees, to ensure theoperations of LBL are properly coordinatedand the objective of the Administration ismet. The teams are:

Infrastructure and property Recharges Information technology Human Resources Pensions Tax Intercompany, and Affiliate company relationships.

We comment in more detail on the activitiesof the teams overleaf.

The teams are coordinated and managed bya central Project Management Office (PMO),which is responsible for agreeing the overallteam structures and objectives, monitoringprogress, and ensuring appropriateresourcing.

On 22 October, the Administrators of LBL,LBIE and other Lehman AdministrationCompanies completed the sale of theInvestment Banking, Global Finance andEquity divisions to Nomura. Following thissale:

The HR team has addressed the legaland practical issues of separating andtransferring approximately 2,400employees;

The Infrastructure and Property teamhave addressed the relocation of peoplewithin the building (Nomura taking asublease of part of 25 Bank St), and theidentification and recharging of costs;and

The IT team have addressedconsequential IT changes whilstensuring continuity of services.

A Cost Recharge Agreement has beenimplemented to enable LBL to recover costsfrom other Lehman AdministrationCompanies to the extent they are notrecovered from other entities, or attributableto LBL’s activities on its own behalf.

In addition to ensuring delivery of services toother Lehman Administration Companies,and to recharging and recovering costsincurred, LBL has its own assets,comprising primarily fixtures, fittings, ITassets and tax refunds, as well as inter-company receivables. The teams’responsibilities include the management andrealisation of those assets, for the benefit ofthe creditors of LBL, and the minimisation ofobligations to creditors.

Section 3: Overview of the actions taken by theJoint Administrators since appointment


Background

At the commencement of the Administration,LBL held the service (IT and property)contracts required to support the LehmanAdministration Companies, including leasesand other contracts for properties and inparticular 25 Bank Street (the currentlocation of the bank in the UK), Broadgate(the previous UK headquarters), datacentres, business continuity centres,overflow offices, residential properties,European branches and storage facilities.

LBL recovers costs incurred under therelevant leases and contracts from theLehman Administration Companies andfrom subtenants of the property at 25 BankStreet.

Objectives

The objectives of the Infrastructure andProperty team are to:

Ensure the delivery of infrastructure andproperty services;

Process supplier transactions on behalfof the Lehman AdministrationCompanies;

Minimise the costs of Infrastructure andProperty as far as practicable; and

Coordinate the recovery of incurred costson an appropriate basis from theparticipating entities.

Progress to date

Initial issues

Our priority has been to:

Identify and retain key LBL employeesessential to the management ofinfrastructure and property;

Implement controls to ensure costs areauthorised by an appropriate teamunder the control of the Administrators;

Review the budgeting process to ensurewe understand the costs incurred;

Support the negotiation of cost sharingagreements and to implement arecharge mechanism enabling LBL torecover costs; and

Negotiate and agree bases forcontinued supply of services fromvendors. To date no critical serviceshave been interrupted. Immediately

following our appointment, a number ofvendors commenced legal proceedingsagainst LBL for purported breaches ofpre-Administration contracts. Thesedisputes have to date been managedwithout disruption to services.

Properties

London

Negotiations with the landlord of 25 BankStreet, Canary Wharf Group, as a part of thesale of businesses to Nomura, resulted inthe sub-letting of approximately one third ofthe building to Nomura.

25 Bank Street has been reorganised tooptimise occupancy efficiency and reducecosts. LBL is looking to market the emptyspace using its agents.

25 Bank Street has changed from a singletenanted building to a multi tenantedbuilding. Significant effort has beencommitted to supporting the tenants of thebuilding, including Nomura, which hasmaterially reduced the occupancy andoperating costs for the LehmanAdministration Companies.

Given the costs and risks associated withbeing the head lessee for a property such as25 Bank Street, a major focus has been toidentify and implement the bestmanagement structure to support theoperation of the building. This process isongoing and meanwhile we have negotiatedcontinuing arrangements with vendorsranging from mail room services through tobuilding maintenance, which both reducecosts and preserve our ability to operate.

Numerous savings have been achieved byreducing contracts with other LBL landlordsand service providers, such as the surrenderof the lease at Broadgate, and the reduction,transfer or termination of LBL's contractswith business continuity centres and storagefacilities.

Branches

Property transfers or disposals have nowbeen completed in Kuwait, Riyadh andMunich.

Section 3.1: Infrastructure and Property


Future Strategy

The main priority is to assess potential,alternatives to the current infrastructurearrangements. This is a very challengingproject, particularly given the ITinfrastructure within 25 Bank Street.

These decisions will be explored with theCreditors’ Committee over coming months.


Cost Recharge Mechanism

LBL exists as a service company, holdingcontracts and making payments toemployees and suppliers for services thatenable the other Lehman AdministrationCompanies to perform their functions, butwhich are of little benefit to LBL on astandalone basis.

Our priority has been to review LBL’s budgetand develop a strategy that would enable itto recover these costs. Following thisreview, we implemented a Cost RechargeAgreement which now provides LBL with acontractual entitlement to recover itsoutgoings from other group companies.

Under the Cost Recharge Agreement, LBLis reimbursed for payroll costs relating toany employee paid by LBL, who has workedfor a group company. The identity of thegroup company concerned is determined byreference to the objectives that have beenagreed with each employee and which referto the various work-stream activities beingundertaken.

To recover building, occupancy andoperational costs, which account for all non-payroll costs incurred by LBL, we apportionthe total budgeted costs across the groupcompanies, based on the proportion ofLehman Group staff working in 25 BankStreet on behalf of each company. Thisexcludes legal advisors and Administrators’staff who work at 25 Bank Street, however itwas agreed that using Lehman Group staffnumbers would provide a reasonableindication of the level of activity beingcarried out in each company. It alsoavoided the complexities associated withadvisory staff working across multipleactivities.

We are continuing to refine the model tomake the apportionment as fair as possible.The fact that costs for vacant space need tobe recharged makes occupation of 25 BankStreet more expensive than market rates;however LBL is committed to recharging allof its costs and, as a service company, webelieve that it is reasonable for it to do so.

Since the Administration began we haveissued invoices to Lehman Groupcompanies under the Cost RechargeAgreement totalling over £168 million.

Section 3.2: Recharges


Objective

The objective of the IT function is to provide

the Lehman Administration Companies with

a secure, stable, cost effective and

appropriate technology platform to facilitate

the achievement of the purposes of the

Administration Orders.

The key tasks are to:

Refine the technology solution to meetchanging requirements over time;

Minimise the risks represented bydependencies on third parties;

Manage the service delivery from thirdparty purchasers of businesses;

Manage key contracts with externalparties;

Decommission the legacy technology inan optimal fashion;

Capture and store data from the coreapplications for future use;

Background on the legacy architecture

Similar to most other large investmentbanking groups, Lehman Brothers operateda global IT architecture that wasindependent of legal entity. Applicationdevelopers and support staff were located inLondon, New York, Sweden, India and theFar East and applications tended to behosted where the developer that had led thedevelopment was based. Development ofapplications was also shared globally withmultiple legal entities contributingdevelopment time and funding.

The diagram below illustrates the scale ofthe IT infrastructure in terms of numbers ofstaff, applications and the servers thathosted the applications.

Section 3.3: Information Technology

India

• 1350 IT employees• 10 contractorsLondon

• 2 data centres

• 7,000 servers• 720 IT employees

• 190 IT contractors• 700 3rd party IT contracts

• 70 market data feeds• 2,000 applications in use

• 2008 IT budget £204m

US Applications

LBHI

US ApplicationsBarcap

Exclusive EUEquities & IBD

Nomura

ServicesNomura India

Local SystemsLBIE (SKorea)

EuropeanApplications

LBIE

US

• 13 data centres• 16,000 servers

• 2,400 IT employees• 900 IT contractors

Asia• 14 data centres

• 3,500 servers• 375 IT employees• 230 IT contractors

Asia PlatformsNomura

Total• 29 data centres• 26,500 servers• 4,800 IT employees• 1,200 IT contractors

India

• 1350 IT employees• 10 contractorsLondon

• 2 data centres

• 7,000 servers• 720 IT employees

• 190 IT contractors• 700 3rd party IT contracts

• 70 market data feeds• 2,000 applications in use

• 2008 IT budget £204m

US Applications

LBHI

US ApplicationsBarcap

Exclusive EUEquities & IBD

Nomura

ServicesNomura India

Local SystemsLBIE (SKorea)

EuropeanApplications

LBIE

US

• 13 data centres• 16,000 servers

• 2,400 IT employees• 900 IT contractors

Asia• 14 data centres

• 3,500 servers• 375 IT employees• 230 IT contractors

Asia PlatformsNomura

Total• 29 data centres• 26,500 servers• 4,800 IT employees• 1,200 IT contractors


The complexity of the architecture led to anumber of immediate issues for the LehmanAdministration Companies:

The IT service needed to ensure thewind down of trading positions in the UKhad to be provided from multiplelocations and legal entities includingthird party purchasers of thebusinesses;

Ownership of the IT infrastructureincluding the core business applicationswas not clear; and

Key data that was needed to unwind thetrades was co-mingled with otherentities’ data and was located in anumber of different global locations.

Progress to date

After securing control of and access to keydata, applications and infrastructure, wethen needed to implement a model to allowus to run IT to support the wind down.

To achieve this we performed the following:

Gained an understanding of keysystems required for theAdministrations. As at 15 September2008 the Lehman AdministrationCompanies were dependent upon over2000 applications. We analysed andreduced the business requirements andsettled on 120 critical applications. Thisallowed us to start retiring redundantapplications;

Analysed the IT staff for ongoingsupport – we identified a core numberof staff needed to support the IT on anongoing basis, being 60 core staff out ofthe original 720. Appropriate costreductions were implemented and anumber of IT staff had, in any event,resigned;

Implemented an operating model andgovernance processes for on-going ITsupport;

Negotiated a Transitional ServiceAgreement (“TSA”) with a third partypurchaser of the main London basedinvestment banking and equitiesbusiness – this covered IT applicationsand support that they would provide tous, the infrastructure that we would

provide the related costs to berecharged and defined service levels;

Negotiated a TSA with LBHI to allowmutual provision of services;

Negotiated a TSA with other third partybusiness purchasers, which is due to becompleted over the coming weeks;

Reviewed contracts for softwareapplications, IT service provision andmarket data provision, ensuringcoverage for those services we neededand terminating those that we did notneed;

Developed and agreed datagovernance principles with other entitiesto allow trading data to be passed fromco-mingled sources to entities entitledto such data; and

Identified key data that needed to bearchived for forensic and legal purposesand developed a plan for archiving,accessing and interpreting data.

These focussed actions have contributed toa reduction in the cost base for IT for LBLfrom £204m to approximately £50m.

We now have a secure, stable, costeffective and appropriate technologyplatform to support wind down activities.

Key issues and challenges

Migration to the target IT architecture

Two of the key tasks to achieve theobjective of the IT function are to:

Refine the technology solution to meetchanging wind down requirements overtime; and

Decommission the legacy technologyachieving best possible outcome forcreditors


We have performed a considerable amountof analysis to asses the options for thetarget architecture. We considered threekey options:

Legacy option - Use existingarchitecture (fairly complex architecturebased in US and Europe) – a number ofthe applications currently being usedare being supported by third parties.The TSAs that allow us access to theseapplications have a defined end date.In addition, the current infrastructure isreasonably complex and costly withpotential for simplification. It wastherefore decided that this was not along term solution.

Simplification – Use a rationalised UK-based architecture and eliminatedependencies by recreating hostedapplications in the UK or replacing themwith alternative applications. We wouldalso need to take a similar approach forother hosted applications as we nearedthe end of the TSA.

Outsourcing – Outsource the requiredapplication functionality, support andpotentially, some business processes tothird party service providers leavingonly decision making with the LehmanAdministration Companies. Afterinvestigation it was apparent that thecomplexity of the infrastructure makeswholesale outsourcing not practical orcost effective.

The strategy for the target IT architecture isa combination of Simplification andOutsourcing. For areas where we can find asuitable third party service provider we willoutsource. This can primarily be achievedfor front office valuation applications.

For back office applications where we havenot yet identified appropriate third partyservice providers we will migrate a numberof the core applications, including themainframe cash settlement system onto asingle application that provides the requiredfunctionality.

We are currently running a proof of conceptfor an application. The application isalready owned and we have sufficient in-house IT and operations skills. We will thenneed a small number of other core middle

office and back office applications where thecore replacement system does not includethat functionality.

Customisation of tools to support theAdministration

Since the business processes that arerequired to perform the wind down differfrom the legacy business processes, wehave customised the legacy applications toprovide tools to support our activities. Keytools that have been customised and arebeing provided for wind down are:

ART (Asset Realisation Tool) – thisprovides a single counterparty view thatidentifies all the exposures to a singlecounterparty and stores all relatedcounterparty valuations, positions andallows a statement to be prepared, onceall data is available

The Trust Property Tool – This toolfacilitates the process to capture datafrom clients with trust property andsegregated client money. It interfaceswith ART in relation to valuation data.

DART (Daily Asset Reporting Tool) –this tool provides a front end reportinglayer for information that is stored in themainframe settlement system to providean easier user interface to view astock’s position from books and recordsand from the external world depots.

QMS (Query Management System) –this system tracks all external queriesreceived and tracks response andresolution.

The Creditor Claims database – thisdatabase allows creditors toelectronically enter the exposures toLehman Brothers International (Europe)- in Administration, and their valuations.

Separation of the network

As described above, the legacy ITarchitecture was global. After businesssales to competing organisations, thesecompeting organisations were using thesame IT architecture.


In January 2009, we were informed thatnetworks between the UK and US were tobe separated. The Lehman AdministrationCompanies need to continue to access theUS applications until the migration to theTarget Architecture has been achieved. Toavoid potentially damaging consequences tothe Lehman Administration Companies, ajoint working group was formed to managethe separation.

A major project was initiated in January toperform the following:

Manage the interaction with those thirdparties required to help support LBLand LBIE during the separation;

Assess the impact of the separation onthe wind down processes;

Identify where there are potential issuesin terms of continued access beingrequired and identify solutions tomaintain that access;

Perform testing of the solutions prior tonetwork separation; and

Manage the impact of the separationover the separation weekend and thefollowing weeks.

Over 110 people from the IT function, otherAdministration work streams, activities andfunctions and TSA providers were involvedin the project including 4 weekends oftesting.

Network separation was achievedsuccessfully on the weekend of February21

stwith minimal impact on the Lehman

Administration Companies.

Future priorities for the IT function

Over the next few months, the IT functionwill be focussed on:

On-going day to day support of the ITarchitecture;

Continued customisation of tools tosupport the Administration including atool to track contact with counterparties;

Management of service from thirdparties;

Migration to the target IT architecture

o Including proof of concept withfront office valuation providers

o Completion of proof of conceptwith main frame replacement

o Rationalisation of applications.

Input into the project to investigateinfrastructure options by ensuring thatdependency on the in-house datacentre is removed.

The accomplishments of the IT Team havebeen critical to managing the ongoingposition and extracting and analysing data.It is likely to require considerable resourcesover the coming months to preservefunctionality and effectiveness.


Objectives

Some 5,500 personnel were deployed in theoperations of the Lehman AdministrationCompanies worldwide at 15 September2008. The majority of personnel working forthe Lehman Administration Companies haveemployment contracts with LBL, which wasthe central employing company. Theirpayroll costs are recharged to the relevantcompany.

The focus of the team was to:

Rapidly implement retention processesfor critical staff;

Ensure comprehensive and rigorousprocesses are implemented for themanagement of the remainingemployees;

Support the downsizing efforts requiredto match the skills and resources to theongoing business needs of theAdministration; and

Manage the operation of the residualHR function.

Progress to date

The position of remaining employees hasbeen stable for some time, following theeffectiveness of the early actions in theAdministration. Notable areas of progressare:

Identification of employees who are coreto the wind-down and the issuing ofcontracts for 2009 for c.360 employees;

The 2008 retention payment processhas been concluded. A robust exercisewas implemented to ensure thatemployees were retained and rewardedin an objective performance basedprocess;

A new operating model was developedto restructure existing teams intoworkstreams that would support theAdministrators. A thoroughcommunication strategy wasimplemented and re-enforced by the2009 performance managementprocess;

A rigorous performance managementprocess for 2009 has been implementedwhich aligns individual performance andreward to the achievement of specificobjectives. Written objectives have beengiven to retained employees;

Day-to-day HR support has continued tobe provided to employees;

All HR related issues are being activelyprogressed including: pension issues,benefit issues and day to day employeeissues;

A comprehensive recruitment processhas been implemented to replace anyemployees who resign during 2009and/or additional staff needed tooptimise the efficiency of theAdministration. Some 50 personnelhave been recruited to date. Furtherrecruitment is underway, whereverpossible through referrals to minimisecosts;

Resolved residual issues relating to thetransfer of staff to Nomura;

All employee claims received in respectof redundancy, holiday pay, arrears ofwages and notice payments have beensubmitted to the Redundancy PaymentsOffice for payment; and

The process of accumulating allemployee residual claims has alsocommenced.

Key Processes

Two key processes have been introduced tomaximise efficiency, control costs andsupport the achievement of the overallobjectives of the Administration:

Performance Management

All retained employees and all newemployees must have documentedperformance objectives set for 2009.

Section 3.4 Human Resources


Hiring

Where it is identified that additional orreplacement resources are required, arigorous process is undertaken toassess the business justification of thehire and to ensure that the mostappropriate and cost effective resourceis utilised.

Issues and challenges

Whilst the position of the employees iscurrently stable there are a number ofongoing challenges in preserving aneffective environment for the remainingemployees:

The operating model is fundamentallydifferent to the legacy business andoperating framework. This requirescontinuing support to employees duringthe transition;

It is imperative to ensure that employeesreceive regular communication anddetails of how their roles form part of theoverall operating model;

The key challenge will be matchinghuman resources to the changing needsof the Administrations going forward,including taking necessary steps toensure that appropriate resources are inplace at all times to ensure that businessdeliverables are not compromised; and

Retaining, assessing, rewarding andmotivating key employees will be crucialto the overall success of the wind down.

We are confident that the frameworkimplemented will allow these issues to beaddressed.


Background

LBL operated one main pension scheme forits employees, namely the Lehman BrothersPension Scheme (the “Scheme”). TheScheme is administered by its trustees, whohave their own professional advisers.

The principal employer of the Scheme isLBL, and in the period before theAdministration the vast majority of activeScheme members were employed by LBL.In addition to LBL, the Scheme had a smallnumber of other participating employers,which were not UK entities and did notemploy significant numbers of Schememembers.

The Scheme included both defined benefit(“DB”) and defined contribution (“DC”)sections. Accrual of DB pensions ceasedfor most members in 1999. As at 31December 2007 (the year end datepreceding the appointment of theAdministrators) the Scheme had around9,500 members, and assets of around£470m, of which some £282m related to theDB category and £188m to the DC category.

Effect of the Administration appointment

The effect of the Administration Order wasto start an assessment period for the LBLsection of the Scheme under the terms ofthe Pensions Act 2004, which contains thelegislation governing the operation of thePension Protection Fund (“PPF”). While anassessment period is in place, no furtherpension benefits are earned and no furthercontributions are payable, and cover fordeath in service benefits ceases. In theperiod after the Administration, we workedwith the Scheme trustees to ensure that theeffect of the assessment period wascommunicated to Scheme members.

The start of the Administration, combinedwith the fact that LBL cannot be rescued asa going concern, also meant that a debtbecame due from LBL to the Schemetrustees, equivalent to the deficit in the LBLDB section of the Scheme when measuredon an annuity buy-out basis. TheAdministrators have received an initial proofof debt from the Scheme trustees and thePPF for £148m. The Administrators expectto receive a final proof of debt, in which thedebt claimed is confirmed in a certificate

signed by the Scheme actuary, in duecourse.

Events after the start of theAdministration

The Scheme has given rise to a number ofcomplex issues since the start of theAdministration. Most of those issues havebeen the responsibility of the Schemetrustees, and the Administrators have notneeded to be involved. However, whereappropriate the Administrators haveresponded to requests made by the Schemetrustees, including executing deeds inrelation to the Scheme on behalf of LBL.

In October 2008 the Administrators receiveda formal notice from the PensionsRegulator, requiring information concerningLBL and other group companies to bedisclosed to the Regulator. TheAdministrators complied with this notice, andhave also maintained dialogue with theRegulator when necessary on otheroccasions.

There were small amounts (some £50,000)of outstanding pension contributions due tothe Scheme as at the Administration date, inrelation to certain DC members. Work isunderway to seek recovery of thoseoutstanding contributions from theRedundancy Payments Service.

In due course the DB part of the Schemewill either be accepted fully into the PPF or,if it has sufficient assets, wind up outside thePPF. Whilst the outcome for the Scheme isimportant for the Scheme trustees andmembers, it is less critical for LBL which islikely to have the same creditor claim fromthe Scheme in either event. We understandthat the trustees intend to wind up the DCpart of the Scheme.

Other pension schemes

In addition to the Scheme, LBL had alsoestablished a number of small definedcontribution pension schemes. LBL itselfacted as the trustee of a number of thoseschemes. An exercise is in progress to windup the pension schemes concerned.

Section 3.5: Pensions


Objectives

The key objectives of the tax function are asfollows:

Tax Strategy - to develop an optimal taxstrategy for the Administration, takinginto account the complexities of theGroup;

Corporation tax repayments - tocapture, maximise and preserve lossesand recover a refund of corporation tax;

Management of transactional matters -management of tax liabilities arising fromtransactions; and

Tax risk management - to developprocedures to ensure that tax risks aremanaged.

Progress to date

We have set processes in place toprepare and control the preparation ofcorporation tax returns to ensure thatcompliance obligations are met asnecessary;

We have established essentialrelationships with HMRC and theEnforcement Office and haveconducted meetings to discuss keyissues such as:

o group tax losses and the format andtime limits for group relief claims;

o clarifying the structure of the GroupPayment Arrangement (“GPA”) andimplications on the GPA and taxrecoveries as a consequence ofAdministration;

o negotiating with HMRC on on-goingenquiries to limit the areas of focusto key issues so that costs for theAdministration can be minimised;and

We have also provided advice on thetax implications of the sale of theSlough Data Centre by ODC3 Limited(of which LBL is a creditor).

VAT

We have reviewed and identified thestructure of the Lehman VAT group (ofwhich LBL is the representative member),and established the compliance status,payments position and the status of anyongoing HMRC enquiries.

We have prepared the VAT return for theperiod from the end of the last pre-appointment VAT period to the date ofappointment. This will be submitted shortly.

Key processes

Tax compliance

A robust and efficient process has beendeveloped for the preparation of corporationtax returns. In addition to ensuring that theLBL satisfies its tax compliancerequirements, it is necessary for a largenumber of corporation tax returns to be filedto realise the value of LBL tax losses andobtain a refund of corporation tax.


HMRC relationship

Various tax related aspects will potentiallybe affected or influenced by HMRC(including, in particular, successfullyobtaining a refund of corporation tax usingGroup tax losses).

The tax function has met and spokenregularly with senior inspectors withinHMRC to preserve the existing goodworking relationship and to reach quickagreement on matters that could potentiallydeplete the value of the estate or delay thetax reclaim process.

Availability of accounting information

In order to file corporation tax returns,accounting records of sufficient quality arerequired to be maintained. The tax teamhas worked with other work streams toensure the necessary information can bemade available for the corporation taxcompliance process.

Given the extensive demands on theaccounting resources within LBL and thelimited personnel and access to systems,this has been and remains a challengingobjective.

Section 3.6: Tax


Group Payment Arrangement

Group Payment Arrangements aim toreduce the administrative burden of payingtax liabilities in a large group of companiesand operate on an accounting period-by-accounting period basis. The Lehman GPAis a corporation tax payment arrangementbetween many Lehman UK entities andHMRC. GPAs are not drafted withinsolvency in mind. Once party to anagreement, a company must abide by thecontract for the whole of the accountingperiod. LBL is the 'Principal Entity'facilitating the Lehman GPA - prior to ourappointment GPAs have been establishedfor all Lehman accounting periods up to andincluding the 30 November 2008 year end.

As a general rule, corporation tax liabilities(or other UK tax liabilities) of a GPAparticipating entity may be assessable onany other member of the GPA. To assesswhether a corporation tax under or over-payment has arisen all GPA companiesmust first submit their tax returns for aperiod. Only then can an application bemade to HMRC to recover any taxoverpayment.

In summary, the tax issues to address arecomplex and voluminous – we haveimplemented a framework to ensure thatthese are systematically addressed.


Overview

The global nature of the Lehman business,with highly integrated trading and non-trading relationships across the group led toa complex series of intercompany positionsbeing outstanding at the date ofAdministration. These include approximately270 debtor and creditor balances betweenLBL and the rest of the group representing,by book value, $1.9 billion of receivablesand $1.2 billion of payables as at 15September 2008.

Progress to date

The primary focus at the outset of theAdministration was to ensure that theinterests of the Lehman AdministrationCompanies were preserved with LehmansGroup companies – in particular meeting theclaims filing bar dates set by LehmanBrothers entities in Japan and Switzerland.These claims were filed by the due dates.The intercompany team has continued tomake significant progress, including:

To date claims have been filed against11 group companies on behalf of all theLehman Administration Companies,including approximately $16m for LBL;

Active and regular communication is inplace with insolvency office holdersacross the globe;

Local representatives have beenappointed in key locations - Japan, HongKong, Australia and Korea;

Active dialogue is ongoing with the officeholders in Europe, including Switzerland,France, Holland, Luxembourg, Germanyand Italy;

Evidencing standards for both tradingand non trading balances have beendefined; and

A secure central repository for storingsupporting documentation and evidencefor claims has been established.

Key processes

Significant progress has been made as aresult of the intercompany team adoptingthe following approach:

A team is preparing evidence forintercompany claims;

A team has been set up to interact withall relevant overseas Insolvencypractitioners to progress claims postfiling;

Two specialist teams have been set up tofocus on non-trading and exceptionalitems, supported by an experiencedcross disciplined advisory group;

Creating standardised documentation;and

Leveraging the organisation to assist inthe trading elements of the intercompanyvalidation and claims filing.


The intercompany relationships are complexand subject to a multiplicity of legalagreements. They deal with many differingtypes of activities including financing,swaps, common cash and securitiesaccounts, staff and cost recharges.Although the last two activities are of mostobvious relevance to LBL, the resolution ofbalances relating to the other activitiesmentioned is also, indirectly, of importanceto LBL. The challenges inherent in filingclaims across the world for suchrelationships are many and include:

A significant volume of securities andnon-securities trading transactions;

Intercompany positions remain subject tomarket risk where agreements are stilllive;

Uncertainties over asset ownership withaffiliates and the risk that these entitiesseek to assert or deny trust claims; and

Uncertainty over the precise scope andimpact of various intercompanyguarantees and assignment agreements

Work is ongoing to address these issues.

Section 3.7 Intercompany


Background

As noted elsewhere in this report, LehmanGroup entities and operating systemsacross the world had a significant degree ofinterdependency. The various insolvenciesacross the world, including the appointmentof the UK Administrators and the Chapter 11proceedings in the US, have inevitablyresulted in many entities, being unable toaccess data and resources regarding theirfinancial position, business and operations.

In Europe the material entities with whichLBIE, supported by LBL, had a relationshipincluded Lehman Brothers Treasury Co BV(Holland), Lehman Brothers (Luxembourg)SA, Lehman Brothers (Luxembourg) EquityFinance SA, Lehman Brothers Finance SA(Switzerland) and Lehman BrothersBankhaus AG (Germany).

These and other European affiliates were, toa greater or lesser extent, reliant uponaccounting and IT systems maintainedprimarily by Lehman entities in London.Certain affiliates had their own staff locatedin London or had access to LBL staff inLondon. The fact that these variouscompanies have become subject toseparate local insolvency processes hasproven challenging for both the office-holders managing the separate Europeanaffiliates and the Administrators of theLehman Administration Companies.

LBL employed the majority of Lehman staffbased in the UK (and elsewhere in the LBIEbranches) and was the contracting party forkey infrastructure arrangements (such as ITand property). LBL seconded most of itsstaff to carry out duties for other groupcompanies. The majority of these were forthe benefit of LBIE but certain of theseindividuals provided day-to-day transactionaland technical support to a number of theEuropean entities.

In addition, certain staff arranged andmanaged transactions for other non-European Lehman entities, includingLehman Brothers Special Financing, Inc.(USA) and Lehman Commercial Paper Inc(USA).

Progress to date

Early in the case it was apparent that bothLBL and LBIE’s support would be requiredby various affiliates and bi-lateraldiscussions were commenced in lateSeptember 2008 with a view to collaboratingin areas which would mutually benefit thevarious estates.

US affiliates

The initial concern of the UK Administratorswas the relationship with LBHI, the ultimateUS holding company. LBL and the other UKaffiliates were themselves at least partlydependent upon the US for systemssupport. This dependency ran both ways,and a Transitional Services Agreement wasnegotiated by LBL and agreed with LBHIand certain of its affiliates during November2008.

Since that date considerable support hasbeen provided to LBHI under the TSA on acost indemnified basis. This has allowedLBHI to further its objectives with LBL andLBIE’s support and has ensured that variouscomplex risk and conflict issues aremanaged. Extensive dealings continue withthe team managing LBHI, including dailyinteractions on issues where LBL or LBIEprovides support.

European Affiliates

The UK Administrators, including thosemanaging LBL have offered certain supportto various European affiliates. These effortshave included:

The formation of a dedicated team tomanage dealings with affiliates;

Active dialogue from the inception ofthe case;

Meetings in the UK and elsewhere;

Regular, focussed communication toaddress specific requests of affiliates;

Specific proposals for the provision ofservices and support; and

Discussion on the manner in whichclaims will be admitted and proved inthe various estates, respecting localrequirement of the debtor affiliate.

Section 3.8: Affiliate company relationships


The provision of services to the affiliates isprovided on a cost indemnity basis and canonly be provided where there is sufficient,available appropriate human resource orinformation systems capacity.

As the business models of the individualaffiliate companies vary widely the serviceneeds are different. Tailored agreementsare being negotiated with affected affiliates.

Other matters

Creditors may be aware that LBHI iscurrently promoting a far reaching multi-lateral agreement between Lehman legalentities requiring entities to provide rights ofaccess and information to each other. Atthis time the Administrators do not considerit to be in the best interests of LBL and itscreditors to be party to or bound by such abroad arrangement, which could potentiallyplace a very significant burden on LBL, tothe cost of its general body of creditors. Wewill continue to manage LBL’s affairsefficiently and effectively, in the interests ofits creditors and will continue to provideappropriate levels of professionalcooperation with affiliate company officeholders dealing with the specific matterswhich affect LBL’s interface with each ofthem in a tailored manner and LBL’s costsof doing so are appropriately recovered.


Court details for theAdministration:

High Court of Justice, Chancery Division, Companies Court -case 7945 of 2008

Full name: Lehman Brothers Limited

Trading name: Lehman Brothers Limited

Registered number: 846922

Registered address: 25 Bank Street, London E14 5LE

Company directors: D Gibb, CL Heiss, IM Jameson, AJ Rush, PR Sherratt

Company secretary: M Smith, P Dave, ESE Upton

Shareholdings held by thedirectors and secretary:

None of the directors own shares in LBL

Date of the Administrationappointment:

15 September 2008

Administrators’ names andaddresses:

AV Lomas, SA Pearson, DY Schwarzmann & MJA Jervis, ofPricewaterhouseCoopers LLP, Plumtree Court, London EC4A4HT

Appointer’s name andaddress:

High Court of Justice, Chancery Division, Companies Court

Objective being pursued bythe Administrators:

Achieving a better result for LBL’s creditors as a whole thanwould be likely if LBL were wound up (without first being inAdministration)

Division of the Administrators’responsibilities:

In relation to paragraph 100(2) Sch.B1 IA86, during the periodfor which the Administration is in force, any act required orauthorised under any enactment to be done by either or all ofthe Joint Administrators may be done by any or one or more ofthe persons for the time being holding that office.

Proposed end of theAdministration:

The Administrators are not yet in a position to determine themost likely exit route from the Administration and wish to retainthe options available to them.

Section 4: Statutory and other Information


Estimated dividend forunsecured creditors:

It is too early to estimate the likely dividend for unsecuredcreditors.

Estimated values of theprescribed part and LBL’s netproperty:

There is no qualifying floating charge holder, so there will beno prescribed part

Whether and why theAdministrators intend to applyto court under Section 176A(5)IA86:

Not applicable as there is no prescribed part

The European Regulation onInsolvency Proceedings(Council Regulation(EC) No.1346/2000 of 29 May 2000):

The European Regulation on Insolvency Proceedings appliesto this Administration and the proceedings are the mainproceedings.


The Administrators have granted theDirectors an extension of time in which toprepare a Statement of Affairs, due to thecomplexity of the task. Interim submissionshave been received from the Directors,which have allowed the Administrators toprioritise and focus their activities on assetrecovery and claims management.

The Administrators do not believe it is in theinterests of creditors to provide analternative financial analysis at this time as itcould potentially provide a misleading viewof the recovery prospects for creditors. Tothe extent that this report has includedextracts from the information provided, suchextracts are not comprehensive and noreliance should be placed upon them informing any view of the dividend prospectsfor unsecured creditors.

Whilst the directors have provided details onthe value and identity of creditors at 15September 2008, according to the booksand records at that date, actual claims bycreditors will differ materially.

As covered previously in this report, LBL is ashareholder of Lehman BrothersInternational (Europe) – in Administration,an unlimited company and is therefore liablefor any shortfall to creditors of that estate.This would further increase the eventuallevel of claims in LBL.

Section 4.1: Statement of Affairs


Background

This section sets out the process for settingand monitoring the Administrators’remuneration.

In this case, the Committee is responsiblefor agreeing the basis and quantum of theAdministrators’ remuneration.

Insolvency Rules 1986

By way of context, the manner in whichAdministrators’ remuneration is determinedand approved is set out in the InsolvencyRules 1986 (2.106-2.109).

There are two alternative bases under theInsolvency Rules 1986, either

A percentage of the value of the propertywith which the Administrator has to deal;or

By reference to the time properly givenby the Insolvency Practitioner and hisstaff in attending to matters arising in theAdministration.

The Insolvency Rules also provide that inarriving at its decision on remuneration theCommittee is required to consider thefollowing matters:

The complexity (or otherwise) of the case;

Any responsibility of an exceptional kindor degree which falls on theAdministrators;

The effectiveness with which theAdministrators appear to be carrying out,or to have carried out, their duties; and

The value and nature of the propertywhich the Administrators have to dealwith.

Statement of Insolvency Practice No. 9(“SIP9”)

In addition to the Insolvency Rules, SIP9provides guidance to insolvencypractitioners and creditors’ committees inrelation to the remuneration of, inter alia,Administrators. The purpose of SIP9 is to:

Ensure that Administrators are familiarwith the statutory provisions relating tooffice holders' remuneration;

Set out best practice with regard to theobservance of the statutory provisions;

Set out best practice with regard to theprovision of information to thoseresponsible for the approval of fees toenable them to exercise their rightsunder the insolvency legislation; and

Set out best practice with regard to thedisclosure and drawing of disbursements.

The Committee members have each beenprovided with a copy of SIP9.

When seeking agreement for remuneration,the Administrators are required to providesufficient supporting information to enablethose responsible for approving theirremuneration ('the approving body') to forma judgement as to whether the proposedremuneration is reasonable having regard toall the circumstances of the case. Thenature and extent of the supportinginformation which should be provided willdepend upon:

The nature of the approval being sought;

The stage during the Administration ofthe case at which it is being sought; and

The size and complexity of the case.

Remuneration review and approvalprocess

In accordance with SIP9 the Committee hasbeen provided with details of the charge-outrates of all grades of staff which are involvedon the case.

As the remuneration is based on time coststhe Committee has been provided with thetime spent and the charge-out value,together with additional information settingout the approach to the project.

SIP9 guidance suggests the following areasof activity as a basis for the analysis of timespent:

Administration and planning Investigations

Section 5: Joint Administrators’ Remuneration


Realisation of assets Trading Creditors Any other case-specific matters

The following categories are suggested bySIP9 as a basis for analysis by grade of staff:

Partner Manager Other senior professionals Assistants and support staff

In both cases the level of analysis anddisclosure to the Committee has met orexceeded these standards.

SIP9 also suggest that an explanation ofwhat has been done should include anoutline of the nature of the assignment andthe Administrator's own initial assessment,including the anticipated return to creditors.To the extent applicable it should alsoexplain:

Any significant aspects of the case,particularly those that affect theamount of time spent;

The reasons for subsequentchanges in strategy;

Any comments on any figures in thesummary of time being spentaccompanying the request theAdministrator wishes to make;

The steps taken to establish theviews of creditors, particularly inrelation to agreeing the strategy forthe assignment, budgeting, timerecording, fee drawing or feeagreement;

Any existing agreement about fees;and

Details of how other professionals,including subcontractors, werechosen, how they were contractedto be paid, and what steps havebeen taken to review their fees.

Each of these matters has been covered insome length in the sessions we have heldwith your Committee.

Members of the Committee are bound by aconfidentiality undertaking as some of the

matters we have covered with them arecommercially sensitive and could impact thelevel of recoveries by creditors if disclosed.

Resolutions of the Creditors’ Committee

To pay costs on a “time properly given”basis

Given the fundamental uncertainties aboutthe value of the property with which theAdministrators have to deal with theCommittee resolved to use the “timeproperly given” basis –i.e. an hourly billingbasis.

Fee rates

Details of the hourly fee rates have beenprovided to the committee, together with anyavailable market benchmarks.

Cost approvals to date

To date the Committee has approvedremuneration of £1,178,138 whichcomprises 2,986 hours at an average hourlyrate of £394.55.

The table below provides an analysis of thetotal hours and cost by grade of staff:

Global GradeTotal

HoursTotal

£

Partner 204 163,049Director 272 179,494Senior Manager 589 304,009Manager 575 209,445Senior Associate 717 201,025Associate 629 121,116

Grand Total 2,986 1,178,138

The Committee has also resolved that theAdministrators may draw 75% of their timecosts on account to assist with thesmoothing of working capital. All such costsare subject to detailed reporting to theCommittee and ultimately subject to theirapproval. We have drawn an additional£171,752, which represents 75% of ouroutstanding time costs for February 2009.

It is likely that current levels of activity will besustained for some time and we thereforeexpect that these costs will continue toaccrue at a similar rate over the comingmonths.


Section 6: Receipts and Payments to 14 March 2009

As at 14 Mar 09

GBP EUR USD

Total (USD

Equivalent)

mil mil mil mil

Receipts

Payroll recharge receipts 138.5 - 36.6 230.0

Building recharge receipts 49.4 - - 69.0

Loan from LBIE 17.8 2.6 14.2 42.4

Receipts from third party purchaser and LBHI 24.8 - - 34.6

Other 4.9 0.3 4.0 11.5

VAT received 0.9 - - 1.2

Total receipts for period 236.3 2.9 54.8 388.7

Payments

Payroll and employee costs (155.6) (2.5) (12.8) (233.5)

Building and occupancy cost (38.4) (0.1) (3.5) (57.3)

Payments to LBIE in respect of loan and other items (23.8) - (34.1) (67.3)

Legal fees (2.2) - - (3.1)

Payments for group companies (1.7) - - (2.3)

Administrators' remuneration (1.3) - - (1.9)

Other advisors' costs (0.4) - - (0.6)

Other cost (2.6) - - (3.6)

VAT paid (3.4) - (0.4) (5.1)

Total payments for period (229.4) (2.6) (50.8) (374.7)

Net position 6.9 0.3 4.0 14.0

Bank balances

Bank of England 2.4 0.3 1.5 5.1

HSBC 4.5 - 2.4 8.8

Barclays 0.0 0.0 0.1 0.1Balance 6.9 0.3 4.0 14.0

Documents

Lehman Brothers Limited – In Administration investment management and private equity. The Lehman Group’s headquarters were in New York, with regional headquarters in London and