Updated from 9 a.m. EDT

Lehman Brothers

(LEH)

, defying predictions that Wall Street earnings would suffer mightily in the second quarter, announced Tuesday that profits rose a better-than-expected 12% in the period.

In the quarter, Lehman earned $683 million, or $2.26 a share, compared with $609 million, or $2.01 a share, a year ago. Total revenue at Lehman reached $3.29 billion, also up 12%.

The firm beat the Thomson First Call consensus estimate of $2.22 a share. Revenue came in slightly ahead of the $3.2 billion consensus estimate.

Revenue from trading for the firm's customers and the firm's own account totaled $1.64 billion, down 25% from the first quarter of this year, but up 11% from a year ago.

Lehman is the first big Wall Street investment firm to report earnings, and investors were expected to pay close to attention to see any evidence of sharp fall-off in revenue from trading, especially trading for the firm's own account. In recent years, proprietary trading of stocks, bonds and commodities has become a major income producer for Wall Street firms.

Going into the second quarter, the expectation had been that proprietary trading would take a hit due to a combination of an overall weak market environment and rising short-term interest rates. A few weeks ago,

J.P. Morgan Chase

(JPM) - Get Report

warned it was experiencing a sharp slowdown in proprietary tidings and just yesterday

Morgan Stanley

(MWD)

said earnings could fall by as much as 20% because of the weak market.

But Lehman showed more strength in the second quarter on the trading front than many had predicted.

"Although we faced tougher markets this quarter, we are announcing our second-best quarter ever," said Chairman and CEO Richard Fuld.

Capital markets activity in bonds, a traditional strength of Lehman's, was the main driver in the quarter. Revenue from fixed-income businesses was $1.8 billion, up 23% from a year ago. But revenue from stock-related businesses fell 9% to $474 million. The firm blamed the slide on "challenging conditions" in the market for convertibles, the notes that convert into stock at a preset price.

Overall, the second quarter wasn't as good as the first quarter of 2005. Total revenue declined 13% on a sequential basis.

Investment banking revenue rose 6% to $579 million compared with a year ago, but was down 15% from the first quarter. Revenue from commissions on customer stock trading was up 3% from a year ago.

Revenue from interest and dividends rose 70% to $4.45 billion, largely due to the increase in short-term rates.

Also reporting earnings this week are

Bear Stearns

(BSC)

and

Goldman Sachs

(GS) - Get Report

.