NEEDHAM FUNDS INC
485BPOS, 1996-04-26
Previous: RCM EQUITY FUNDS INC, PRE 14A, 1996-04-26
Next: REUNION INDUSTRIES INC, DEF 14A, 1996-04-26


<PAGE>   1
   
                                As filed with the
             Securities and Exchange Commission on April 26, 1996
    
                                                               File No. 33-98310
                                                                        811-9114
- --------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM N-1A

           REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/

   
                        Pre-Effective Amendment No. / /
                        Post-Effective Amendment No. 1 /x/
    

                                       and

       REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/

   
                               Amendment No. 3 /x/
    
                             THE NEEDHAM FUNDS, INC.
- --------------------------------------------------------------------------------
               (Exact name of Registrant as Specified in Charter)

                                 445 Park Avenue
                               New York, NY 10022
- --------------------------------------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's Telephone Number, including Area Code: (212) 371-8300

                                 Raj Rajaratnam
                             The Needham Funds, Inc.
                                 445 Park Avenue
                               New York, NY 10022
- --------------------------------------------------------------------------------
                     (Name and Address of Agent for Service)

                                    Copy to:
                            William H. Bohnett, Esq.
                           Fulbright & Jaworski L.L.P.
                                666 Fifth Avenue
                            New York, New York 10103

                  Approximate Date of Proposed Public Offering:
            As soon as practicable after this Registration Statement
                             is declared effective.

              It is proposed that this filing will become effective
                            (check appropriate box):

   
              /x/ immediately upon filing pursuant to paragraph (b)
    
              / / on (date) pursuant to paragraph (b)
              / / 60 days after filing pursuant to paragraph (a)(1) 
              / / on (date) pursuant to paragraph (a)(1) 
              / / 75 days after filing pursuant to paragraph (a)(2) 
              / / on (date) pursuant to paragraph (a)(2) of rule 485. 
              / / this post-effective amendment designates a new 
                  effective date for a previously filed post-effective 
                  amendment

   
        The Registrant has filed a declaration registering an indefinite amount
of securities pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. A Rule 24f-2 Notice for the fiscal year ended December 31, 1995 was
filed on April 22, 1996.
    

<PAGE>   2



                              CROSS-REFERENCE SHEET
                             PURSUANT TO RULE 481(a)

                           Items Required by Form N-1A

<TABLE>
<CAPTION>
  Part A                                                    Location
  ------                                                    --------
Item No.     Item Caption                                   Prospectus Caption
- --------     ------------                                   ------------------
<S>          <C>                                            <C>
   1.        Cover Page  . . . . . . . . . . . . . . . .    Cover Page

   2.        Synopsis  . . . . . . . . . . . . . . . . .    Fund Highlights; Shareholder and Fund Expenses and
                                                            Costs
   3.        Condensed Financial
             Information . . . . . . . . . . . . . . . .    *

   4.        General Description of
             Registrant  . . . . . . . . . . . . . . . .    Cover Page; Management of the Fund; Fund Highlights;
                                                            Investment Objective and Policies; Risks

   5.        Management of the Fund  . . . . . . . . . .    Management of the Fund; Organization of the Fund

   6.        Capital Stock and Other
             Securities  . . . . . . . . . . . . . . . .    Purchase of Shares; Redemption of Shares; Shareholder
                                                            Services; Automatic Reinvestment of Dividends and
                                                            Capital Gains Distributions; Dividends, Distributions
                                                            and Taxes; Administrator and Shareholder Servicing,
                                                            Dividend Paying and Transfer Agent; Organization of
                                                            the Fund; Statement of Additional Information
   7.        Purchase of Securities
             Being Offered . . . . . . . . . . . . . . .    Purchase of Shares; Redemption of Shares; Shareholder
                                                            Services; Determination of Net Asset Value;
                                                            Distribution and Services Agreement

   8.        Redemption or Repurchase  . . . . . . . . .    Redemption of Shares; Shareholder Services

   9.        Pending Legal Proceedings . . . . . . . . .    *
</TABLE>


 * Omitted since answer is negative or inapplicable.

                                      -iii-


<PAGE>   3

<TABLE>
<CAPTION>
  Part B                                                    Location
  ------                                                    --------
                                                            Statement of Additional
Item No.     Item Caption                                   Information Caption    
- --------     ------------                                   -----------------------
<S>          <C>                                            <C>
  10.        Cover Page  . . . . . . . . . . . . . . . .    Cover Page

  11.        Table of Contents . . . . . . . . . . . . .    Table of Contents

  12.        General Information and History . . . . . .    *

  13.        Investment Objectives and 
             Policies  . . . . . . . . . . . . . . . . .    Investment Objective and Policies; Investment Restrictions

  14.        Management of Fund  . . . . . . . . . . . .    Directors and Officers

  15.        Control Persons and Principal
             Holders of Securities . . . . . . . . . . .    Directors and Officers

  16.        Investment Advisory and
             Other Services  . . . . . . . . . . . . . .    Investment Advisory Services; Additional Information

  17.        Brokerage Allocation and Other 
             Practices . . . . . . . . . . . . . . . . .    Portfolio Transactions and Brokerage

  18.        Capital Stock and Other Securities  . . . .    The Distributor and Distribution of the Shares; Taxes

  19.        Purchase, Redemption and Pricing of
             Securities Being Offered  . . . . . . . . .    Valuation of the Shares

  20.        Tax Status  . . . . . . . . . . . . . . . .    Tax-Sheltered Retirement Plans; Taxes

  21.        Underwriters  . . . . . . . . . . . . . . .    The Distributor and Distribution of the Shares

  22.        Calculation of Performance Data . . . . . .    Performance Information

  23.        Financial Statements  . . . . . . . . . . .    Financial Statements
</TABLE>


* Omitted since answer is negative or inapplicable.

                                      -iv-


<PAGE>   4

[LOGO]
- --------------------------------------------------------------------------------

                               NEEDHAM GROWTH FUND

- --------------------------------------------------------------------------------

   
NEEDHAM GROWTH FUND (the "Fund") is a portfolio of THE NEEDHAM FUNDS, INC., an
open-end management investment company. The Fund seeks to provide long-term
capital appreciation through investment primarily in equity securities of growth
companies. The Fund is offered on a continuous, no-load basis. For a discussion
of the Fund's investment objective and policies, including the risks associated
with an investment in the Fund, see "Investment Objective and Policies" on page
5 and "Risks" on page 9.
    

   
The Fund's adviser is NEEDHAM INVESTMENT MANAGEMENT L.L.C. (the "Adviser"), 445
Park Avenue, New York, New York 10022, a registered investment adviser under the
Investment Advisers Act of 1940. The Adviser is an affiliate of NEEDHAM &
COMPANY, INC., a registered broker-dealer and member of the National Association
of Securities Dealers, Inc., which acts as the Fund's distributor (the
"Distributor").
    

- --------------------------------------------------------------------------------

This Prospectus sets forth concisely the information about the Fund that you
should know before investing. It should be read and retained for future
reference.

   
A Statement of Additional Information, dated April 26, 1996, about the Fund
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. A copy is available without charge by calling the Fund's
administrator, PFPC Inc. (the "Administrator"), at 1-800-625-7071.
    

- --------------------------------------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

   
                The date of this Prospectus is April 26, 1996.
    


<PAGE>   5

                                Table of Contents

   
<TABLE>
<CAPTION>
Caption                                                                    Page
<S>                                                                        <C>
Fund Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . .      2

Shareholder and Fund Expenses and Costs . . . . . . . . . . . . . . . .      3

Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . .      4

Management of the Fund  . . . . . . . . . . . . . . . . . . . . . . . .      5

Investment Objective and Policies . . . . . . . . . . . . . . . . . . .      5

Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . .      5

Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .      6

Foreign Securities  . . . . . . . . . . . . . . . . . . . . . . . . . .      6

Illiquid Investments  . . . . . . . . . . . . . . . . . . . . . . . . .      6

Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . .      7

Borrowing and Leverage. . . . . . . . . . . . . . . . . . . . . . . . .      7

Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      7

Short Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      7

Options, Futures and Forward Contracts. . . . . . . . . . . . . . . . .      7

Other Permitted Investments . . . . . . . . . . . . . . . . . . . . . .      8

Defensive Investments . . . . . . . . . . . . . . . . . . . . . . . . .      8

Non-Diversification and Investment in Market Sectors. . . . . . . . . .      8

Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      9

Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . .      9

Purchase of Shares  . . . . . . . . . . . . . . . . . . . . . . . . . .     10

Automatic Investment Program  . . . . . . . . . . . . . . . . . . . . .     11 

Certificates  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     11

Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . . . . .     12

Telephone Redemptions . . . . . . . . . . . . . . . . . . . . . . . . .     12

Additional Information on Redemptions . . . . . . . . . . . . . . . . .     13

Shareholder Services  . . . . . . . . . . . . . . . . . . . . . . . . .     13

Automatic Reinvestment of Dividends and Capital Gains Distributions . .     13

Dividends, Distributions and Taxes  . . . . . . . . . . . . . . . . . .     13

Determination of Net Asset Value  . . . . . . . . . . . . . . . . . . .     14

Performance Information . . . . . . . . . . . . . . . . . . . . . . . .     15

Administrator, Shareholder Servicing Agent and Transfer Agent . . . . .     15

Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     16

Legal Counsel and Independent Auditors  . . . . . . . . . . . . . . . .     16

Organization of the Fund  . . . . . . . . . . . . . . . . . . . . . . .     16

Distribution and Services Agreement . . . . . . . . . . . . . . . . . .     17
</TABLE>
    


                                        1



<PAGE>   6



FUND HIGHLIGHTS

                          The following summary is qualified in its entirety by
                          the detailed information appearing elsewhere in this
                          Prospectus.

The Fund:                         Needham Growth Fund (the "Fund") is a
                                  portfolio of The Needham Funds, Inc., an
                                  open-end management investment company
                                  organized as a Maryland corporation on October
                                  12, 1995, commonly referred to as a mutual
                                  fund. The Fund is offered on a continuous,
                                  no-load basis.

Investment Objective:             The Fund is designed to seek long-term capital
                                  appreciation through investment primarily in
                                  equity securities of growth companies.

Management:                       Needham Investment Management L.L.C., a
                                  registered investment adviser, is an affiliate
                                  of Needham & Company, Inc., a registered
                                  broker-dealer engaged in a variety of
                                  investment banking and institutional brokerage
                                  activities.

Risks:                            Investment in any mutual fund has inherent
                                  risks. In seeking to achieve its investment
                                  objective, the Fund may use certain futures
                                  and option strategies, principally for hedging
                                  purposes. These various hedging and income
                                  enhancement strategies may be considered
                                  speculative and may result in higher risks and
                                  costs to the Fund. The Adviser seeks to
                                  identify opportunities in various securities,
                                  market and economic sectors. The Adviser may
                                  then devote relatively more assets in
                                  exploiting those opportunities than many other
                                  mutual funds. See "Investment Objective and
                                  Policies" and "Risks."

Offering of Shares:               Shares of the Fund are offered at net asset 
                                  value. Purchases may be made through any
                                  authorized dealer, financial institution or
                                  directly from the Fund c/o PFPC Inc., by mail
                                  or by wire. See "Purchase of Shares" and
                                  "Redemption of Shares" for more information as
                                  to how shares may be purchased and redeemed.

   
Minimum Investment:               The minimum initial investment is $1,500; the
                                  minimum initial investment for IRAs is $2,000.
                                  There is a $100 minimum for subsequent 
                                  investments, except as indicated herein.  See 
                                  "Purchase of Shares."
    

Investor Profile:                 This Fund is best suited to an investor who is
                                  seeking higher returns and willing to accept a
                                  higher degree of risk than he or she would
                                  find in most mutual funds. Production of
                                  current income is not the Fund's focus.


                                      2
<PAGE>   7



SHAREHOLDER AND FUND EXPENSES AND COSTS

                              SHAREHOLDER TRANSACTION
                                     EXPENSES

<TABLE>
<CAPTION>
        <S>                                            <C>
        Maximum Sales Load Imposed on Purchases        None
        Maximum Sales Load Imposed on Reinvested
          Dividends and Capital Gains                  None
        Deferred Sales Load                            None
        Redemption Fees
              During first six months
              after purchase*                          0.50%
              Thereafter                               None
        Exchange Fee                                   None

        ANNUAL FUND OPERATING EXPENSES
        (as a percentage of average net assets)

        Management Fees                                1.25%
        12b-1 Fees                                     0.25
        Other Expenses (after expense
          reimbursement)                               1.00
                                                       ----
        TOTAL FUND OPERATING EXPENSES                  2.50%
                                                       =====
</TABLE>

 *        Redemption fee applies to shares redeemed or exchanged within six
          months of purchase.


EXAMPLE:

<TABLE>
<CAPTION>
<S>                                                    <C>          <C>
                                                       1 year       3 years

You would pay the following expenses on a $1,000 
investment, assuming (1) 5% annual return and 
(2) redemption at the end of each time period:            $25           $78
</TABLE>

The foregoing table is to assist you in understanding the various costs and
expenses that an investor in the Fund will bear directly or indirectly. The
Adviser has voluntarily agreed to waive its fee for, and to reimburse expenses
of, the Fund in an amount that operates to limit annual operating expenses for
the year ending December 31, 1996 to not more than 2.50% of average daily net
assets. The Adviser estimates that, absent the limitation, other expenses of the
Fund would be approximately 1.04% and the total annual expenses of the Fund
would be 2.54% (assuming an average first year Fund size of $25 million). A fee
of $7.50 is charged for each wire redemption. For a further discussion of fees,
see "Management of the Fund," "Administrator" and "Distribution and Services
Agreement" herein. The figures reflected in the foregoing Example should not be
considered a representation of past or future expenses. Actual expenses may be
greater or lesser than those shown.

                                      3



<PAGE>   8
   
FINANCIAL HIGHLIGHTS (unaudited)
    

   
The table below sets forth certain information covering the Fund's net
investment results for the period indicated. The information set forth in the
table has not been audited by Ernst & Young LLP, the Fund's independent
auditors. Further financial data and related notes are contained in the 
Statement of Additional Information, which is available upon request.
    


   
<TABLE>
<CAPTION>
                                                 For the period
                                                 January 1, 1996
                                                (commencement of
                                               operations) through
Per Share Operating Performance*                  March 31, 1996
- -------------------------------                ---------------------
<S>                                                <C>
Net Asset Value, Beginning of Period                  $10.00
Income from Investment Opeartions:
  Net Investment Income                                    0
  Net Unrealized Gains on Securities                    2.57
Total from Investment Operations                        2.57
Net asset value, end of period                        $12.57
                                                      ======

Total Return                                           25.70%**

Ration/Supplemental Data:

  Net Assets, End of Period (in 000's)                $5,243

  Ratio of Expenses to Average Net Assets               2.50%***

  Ratio of Net investment
    Loss to Average Net Assets                         (0.16)%***

  Portfolio Turnover Rate                             104.15%

  Average Commission Rate Paid                       $0.0696

</TABLE>
    

   
- --------------
*   Per share data based upon average monthly shares outstanding.
**  Not annualized.
*** Had certain waivers and reimbursements not been in effect, the ratio of
    expenses to average net assets for the period ended March 31, 1996 would
    have been 6.84% and the ratio of net investment loss to average net assets
    for the period ended March 31, 1996 would have been (4.50)%.
    


                                       4
<PAGE>   9

MANAGEMENT OF THE FUND

Needham Investment Management L.L.C. (the "Adviser") serves as the Adviser for
the Fund and directs investments of the Fund pursuant to an Investment Advisory
Agreement dated as of January 1, 1996 (the "Advisory Agreement"). The Fund pays
the Adviser a fee at the annual rate of 1.25% of the average daily net asset
value of the Fund. This fee is higher than that paid by most mutual funds. The
Adviser or persons employed by or associated with the Adviser are, subject to
the authority of the Fund's Board of Directors, responsible for the overall
management of the Fund's affairs.

The Adviser is an affiliate of Needham & Company, Inc., a registered
broker-dealer engaged in a variety of investment banking and institutional
brokerage activities. Needham & Company, Inc. was founded by its Chairman and
Chief Executive Officer, George A. Needham in 1985. The Adviser's President, Raj
Rajaratnam is also President and Chief Operating Officer of Needham & Company,
Inc. The principal business address of the Adviser is 445 Park Avenue, New York,
New York 10022.

   
Although the Adviser was recently formed and thus has no prior operating
history, Howard S. Schachter, the Fund's portfolio manager, has had a 25 year 
career in the securities industry where he has specialized in growth stocks.
Over that time, Mr. Schachter has served in a variety of positions including 
Senior Securities Analyst, Portfolio Manager, Director of Technology Research 
and Managing Director of Institutional Sales. Mr. Schachter is an Executive Vice
President of the Adviser and is primarily responsible for the day-to-day
management of the Fund's portfolio.
    

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is long-term capital appreciation through
investment primarily in equity securities of growth companies. There is
no assurance that the investment objective will be met. The Fund is not intended
to constitute a balanced investment program.

Under normal market conditions, the Fund intends to invest at least 65% of its
total assets in equity securities of domestic issuers listed on a nationally
recognized securities exchange or traded on the Nasdaq System. The balance of
the Fund's assets may be held in cash or invested in other securities, including
preferred stock, common stock equivalents (mainly securities exchangeable for
common stock), options, futures and various corporate debt instruments.

The Fund may invest in the following portfolio securities, may engage in the
following practices and will be subject to the following risks and limitations.
The Fund may engage in such investment strategies for hedging purposes or to
seek to increase its investment return. Each of the percentage limitations with
respect to investments in securities described below applies immediately after a
purchase and any subsequent change in the applicable percentage resulting from
market fluctuations does not require unwinding any part of the transaction.
Except as may be specifically stated, the Fund's investment objective and
investment policies described herein do not constitute fundamental policies and
may be changed or modified by the Fund's Board of Directors without shareholder
approval. Shareholders will receive written notice of any changes in the Fund's
investment objective.

EQUITY SECURITIES

The Fund emphasizes investments in common stocks which may include equity
securities of smaller companies. The Fund also may buy securities such as
convertible debt, preferred stock, warrants, or other securities exchangeable
for shares of common stock and other equity securities, including publicly
traded partnership interests. In selecting equity invest- 

                                      5



<PAGE>   10

ments for the Fund, the Adviser seeks to identify companies which it believes
will achieve superior growth rates, based on its market research and company
analysis. The Adviser will consider overall growth prospects, financial
condition, competitive position, technology, research and development,
productivity, labor costs, raw materials costs and sources, competitive
operating margins, return on investment, management and other factors.

Investments in smaller companies may offer greater opportunities for capital
appreciation than larger companies, but may also involve certain special risks.
Such companies may have limited product lines, markets, or financial resources
and may be dependent on a limited management group. Such securities may also
trade less frequently and at a lower volume than more widely held securities,
and may fluctuate in value more sharply than those of other securities. There
may be less available information about these issuers or less market interest
than is normally the case with respect to larger companies.

DEBT SECURITIES

The Fund may buy debt securities of all types issued by both domestic and
foreign issuers, including government securities, corporate bonds and
debentures, commercial paper, and certificates of deposit. It is the Fund's
intention to invest no more than 35% of total assets in debt securities.

No more than 10% of the Fund's total assets (such 10% also being included in the
35% limitation stated above) may be invested in non-investment grade debt
securities (commonly called "junk bonds" or "high yield bonds"). These
securities are considered to be highly speculative, may have poor prospects of
attaining investment standing and may be in default. Like those of other
fixed-income securities, the value of lower-rated securities fluctuate in
response to changes in interest rates. In addition, the values of such
securities are also affected by changes in general economic conditions and
business conditions affecting the specific industries of their issuers. Changes
by recognized rating services in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. See Statement of Additional Information.

FOREIGN SECURITIES

The Fund will invest primarily in securities of companies domiciled in the
United States, but the Fund may also invest up to 25% of its total assets,
measured at the time of investment, in securities of foreign issuers. Such
investments will be made either directly in such issuers or indirectly through
American Depository Receipts (ADRs) or closed-end investment companies. It is
possible that some material information about unsponsored ADRs will be
unavailable.

Foreign securities involve certain inherent risks that are different from those
of domestic issuers, including political or economic instability of the issuer
or the country of issue, changes in foreign currency and exchange rates, and the
possibility of adverse changes in investment or exchange control regulations.
Currency fluctuations may affect the net asset value of the Fund irrespective of
the performance of the underlying investments in foreign issuers if and to the
extent the Fund invests in non-dollar denominated securities.

The Fund may seek to hedge its position in foreign securities and/or protect
against foreign currency fluctuations by investing in put or call options on
securities and foreign currencies and enter into forward foreign currency
exchange contracts. See "-- Options, Futures and Forward Contracts."

ILLIQUID INVESTMENTS

The Fund may not hold more than 15% of its net assets in securities for which 
market quotations are not readily available, in repurchase agree-

                                      6

<PAGE>   11

ments which have a maturity longer than seven days and in securities subject to 
restrictions on resale for which no adequate trading market exists. See 
Statement of Additional Information.

REPURCHASE AGREEMENTS

A repurchase agreement arises when a buyer, such as the Fund, purchases a
security and simultaneously agrees to resell it to the vendor at an agreed upon
future date, normally within seven days. Such agreements permit the Fund to keep
all of its assets at work while retaining overnight flexibility in pursuit of
investments of a longer-term nature. With respect to repurchase agreements, no
more than 15% of the Fund's net assets may be invested in illiquid investments,
which include repurchase agreements with maturities exceeding seven days. There
is no percentage restriction on the Fund's ability to enter into repurchase
agreements with maturities of seven days or less.

If the other party to a repurchase agreement becomes bankrupt, the Fund may
experience delays and costs in recovering its cash. To the extent that the value
of the security purchased has decreased in the meantime, the Fund could
experience a loss. The Fund's repurchase agreements are fully collateralized.
The Fund's Board of Directors has established procedures which enable the
Adviser to monitor the creditworthiness of the dealers with which the Fund
enters into a repurchase agreement transaction. The Fund may also invest in
reverse repurchase agreements. See Statement of Additional Information.

BORROWING AND LEVERAGE

As a fundamental policy, the Fund may borrow from banks up to 25% of its total
assets and may pledge its assets in connection with such borrowings. If the Fund
makes additional investments while borrowings are outstanding, this may be
construed as a form of leverage. This leverage may exaggerate changes in the
Fund's share value and the gains and losses on the Fund's investment. Leverage
also creates interest expenses that may exceed the return on investments made
with the borrowings.

LENDING

The Fund may lend securities to broker-dealers and other institutions as a means
of earning additional income. If the borrower becomes bankrupt, the Fund could
experience delays and costs in recovering its securities. To the extent that the
value of securities loaned increased under such circumstances, the Fund could
experience a loss. Security loans must be fully collateralized, and the Adviser
must find the creditworthiness of the other party to the transaction
satisfactory. As a fundamental policy, loans (which include repurchase
agreements), in the aggregate, may not exceed 20% of the Fund's total assets.

SHORT SALES

   
The Fund may sell securities short and borrow the same security from a broker or
other institution to complete the sale. The Fund may make a profit or loss
depending upon whether the market price of the security decreases or increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. All short sales must be fully collateralized and the Fund
will not sell short securities whose underlying value exceeds 25% of its net
assets. The Fund will also limit short sales in any one issuer's securities to
2% of the Fund's net assets and will not sell short more than 2% of any one
class of the issuer's securities. The Fund may also engage in a short sale if at
the time of the short sale the Fund owns or has the right to obtain without
additional cost an equal amount of the security being sold short, an investment
technique known as a short sale "against the box."
    

OPTIONS, FUTURES AND FORWARD CONTRACTS

The Fund may buy and sell options and futures contracts to manage its exposure
to changing interest rates, security prices, currency exchange rates and
precious metals prices. The Fund may enter into forward contracts as a hedge
against future fluctuations in foreign exchange rates. The Fund may buy and sell
stock index futures con-

                                      7

<PAGE>   12

tracts or related options in anticipation of general market or market sector
movements. The Fund may also invest in indexed securities or related options
whose value is linked to currencies, interest rates, commodities, indices, or
other financial indicators. Options and futures may be combined with each other
or with forward contracts in order to adjust the risk and return characteristics
of the overall strategy. The Fund may invest in options and futures based on any
type of security, index, or currency related to their investments, including
options and futures traded on foreign exchanges and options not traded on
exchanges.

Except as described below, the Fund will not engage in options, futures or
forward transactions, other than for hedging purposes, if as a result more than
5% of its total assets would be so invested. The Fund may engage in such
transactions to an unlimited extent for hedging purposes.

Options, futures and forward contracts can be volatile investments and involve
certain risks. The ability of the Fund to use these strategies successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. If the Fund makes a transaction at an inappropriate time or
judges market conditions incorrectly, options and futures strategies may
significantly lower the Fund's return. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. See Statement of Additional Information.

OTHER PERMITTED INVESTMENTS

The Fund may invest in securities issued by other investment companies within
the limits prescribed by the Investment Company Act of 1940 (the "1940 Act") and
applicable rules thereunder. As a shareholder of another investment company, the
Fund would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
thus would be in addition to the advisory and other expenses that the Fund bears
in connection with its own operations.

The Fund may also purchase or sell portfolio securities on a when-issued or
delayed delivery basis in compliance with applicable 1940 Act guidelines.
When-issued or delayed delivery transactions involve a commitment by the Fund to
purchase or sell securities with payment and delivery to take place in the
future in order to secure what is considered to be an advantageous price or
yield to the Fund at the time of entering into the transaction.

DEFENSIVE INVESTMENTS

The Fund may invest temporarily up to 100% of its assets in cash or cash
equivalents, investment grade debt securities or repurchase agreements for
defensive purposes. Consistent with the Fund's investment objective and
policies, its Adviser may make  changes in the portfolio consistent with the
Fund's policies whenever it believes doing so is in the best interest of the
Fund.

NON-DIVERSIFICATION AND INVESTMENT IN MARKET SECTORS

The Fund is "non-diversified" for purposes of the 1940 Act and so has the
flexibility to invest its assets in the securities of fewer issuers than if it
was "diversified." To the extent the Fund invests a significant portion of its
assets in a few issuers' securities, the performance of the Fund could be
significantly affected by the performance of those issuers. The Fund must,
however, meet certain diversification requirements under Federal tax law. See
Statement of Additional Information -- "Investment Restrictions."

As a fundamental policy, the Fund will not invest more than 25% of its net
assets in issuers conducting their principal business in the same industry.
However, the Fund at times may invest more than 25% of its total assets in
securities of issuers in one or more market sectors. A market sector may be made
up of companies in a number of 

                                      8

<PAGE>   13

related industries. Business and economic developments affecting that sector
likely would have greater effect on the Fund than those same developments would
have on a fund invested in a wider spectrum of market or industrial sectors.

RISKS

For additional risks associated with an investment in the Fund, this section
should be read in conjunction with "Investment Objective and Policies" herein
and the Statement of Additional Information. The Fund invests primarily in
equity and debt securities, which fluctuate in value. Therefore, shares of the
Fund will also fluctuate in value. The net asset value of the Fund's shares, to
the extent the Fund invests in debt securities, is affected by changes in the
general level of interest rates.

Certain investment techniques described in this Prospectus, such as short sales,
options and futures strategies, and leverage, may entail risks and may result in
significant capital loss. The Fund may engage in various strategies as described
above, to varying degrees, both to seek to increase its return and to hedge its
portfolio against movements in the securities markets and exchange rates. Use of
such strategies involves the risk of imperfect correlation in movements in the
price of options and futures and movements in the price of the securities or
currencies which are the subject of the hedge. There can be no assurance that a
liquid secondary market for options and futures contracts will exist at any
specific time. Options and futures contracts, and certain of the other
investments described above, may be considered "derivative" investments, and
entail certain risks described above and in the Statement of Additional
Information.

In addition, the Fund may invest in the securities of non-U.S. issuers, which
have risks that are different from the risks associated with investments in the
securities of U.S. issuers. See "Investment Objective and Policies -- Foreign
Securities" and Statement of Additional Information.

It is anticipated that under normal conditions the annual rate of portfolio
turnover of the Fund may exceed 200%. This rate of turnover will likely result
in higher brokerage commissions and higher levels of realized gains than if the
turnover rate was lower and may subject investors to higher levels of taxable
gains.

Because of the nature of its investments, the Fund is designed for long-term
investors who can bear the risk of market fluctuations. An investment in the
Fund should not be considered a complete investment program. See "Investment
Objective and Policies" and Statement of Additional Information.

INVESTMENT RESTRICTIONS

The Fund has adopted certain investment restrictions which are fundamental and
may not be changed without a shareholder vote. Except as specifically noted, the
Fund's investment objective and policies described in the preceding pages are
not fundamental policies and may be changed or modified by the Fund's Board of
Directors without shareholder approval. The Fund will not, however, change its
investment objective without first providing written notice to shareholders at
least 30 days in advance. A complete list of the Fund's fundamental investment
restrictions and certain other policies not described in the Prospectus may be
found in the Statement of Additional Information.

                                      9

<PAGE>   14




PURCHASE OF SHARES
<TABLE>
<CAPTION>
BY MAIL                INITIAL PURCHASE                        SUBSEQUENT INVESTMENT             
<S>                     <C>                                    <C>                               
                       Complete and sign the                   Make your check payable to        
                       Application. Make your check            Needham Growth Fund and           
                       payable to Needham Growth Fund          mail it to the address at the     
                       and send to:                            left.  Put your account name,     
                                                               address and Needham               
                                                               account number on your            
                                                               check.  Subsequent                
                       Needham Growth Fund                     investment forms will be          
                       c/o PFPC Inc.                           included with each                
                       P.O. Box 8916                           shareholder statement for         
                       Wilmington, DE  19899-8916              your convenience.                 
                                                               Alternatively, include a note     
                                                               giving your Needham account       
                                                               number, your name and your        
                                                               address.                          
                                                                                                 
BY OVERNIGHT COURIER   Needham Growth Fund                     Follow above directions and       
                       c/o PFPC Inc.                           forward to address at left.                                   
                       400 Bellevue Parkway                                                      
                       Wilmington, DE  19809                                                     
                                                               
BY TELEPHONE           Telephone transactions may not be       Presently, all subsequent            
                       used for initial purchases.  If you     investments to be made by           
                       want to make subsequent telephone       telephone must be paid by wire      
                       transactions, select this feature on    transfer.                           
                       your Application or call                                                       
                       1-800-625-7071 to request an                                              
                       authorization form to set up your                                         
                       account for this feature.                                                 
                       Purchases currently must be made                                          
                       by wire.                                        
                                                                       
                                                                       
By Wire                First, call the Administrator at        Please carefully follow                                     
                       1-800-625-7071 to notify them           instructions at left and        
                       that you intend to purchase             include the following   
                       shares by wire and to verify wire       information:                                  
                       instructions.                           Shareholder Account # ________                                   
                       Then, wire funds care of                Shareholder Name/Registration                                     
                       PNC Bank, N.A.,                         Taxpayer Identification Number.                                   
                       ABA#: 031-000-053                                                         
                       Credit: Needham Growth Purchase                                           
                       Account                                                                   
                       Bank Account#:  86-1108-2195                                              
                       Further credit: Needham Growth                                            
                       Fund                                                                      
AUTOMATIC              See description of Automatic            This feature must be set up by    
INVESTMENT             Investment Program below.               you in advance.                   
PROGRAM                                                        
</TABLE>

                                       10

<PAGE>   15



Shares of the Fund may be purchased at net asset value without any sales or
other charge by sending a completed application form to Needham Growth Fund, c/o
PFPC Inc. at P.O. Box 8916, Wilmington, DE 19899-8916. Applications sent by
overnight courier and all other correspondence should be sent to Needham Growth
Fund, c/o PFPC Inc. at 400 Bellevue Parkway, Wilmington, DE 19809. Telephone
transactions may not be used for initial purchases. If you want to make
subsequent telephone transactions, select this feature on your Application or
call 1-800-625-7071 to request an authorization form to set up your account for
this feature. See "Redemption of Shares -- Telephone Redemptions" for a
discussion of liability for telephone errors.

Shares of the Fund may also be purchased through authorized broker-dealers or
other institutions who may charge for their services. Such sales agents have the
responsibility of transmitting purchase orders and funds, and of crediting their
customers' accounts following redemptions in a timely manner and in accordance
with their customer agreements and this Prospectus.

   
The minimum initial investment for individuals, corporations, partnerships or
trusts is $1,500; the minimum initial investment for IRAs is $2,000. There is a
$100 minimum for subsequent investments. Shares of the Fund are offered on a
continuous basis. The Fund, however, reserves the right, in its sole discretion,
to reject any application to purchase shares. Applications will not be accepted
unless they are accompanied by a check drawn on a U.S. bank, savings and loan,
or credit union in U.S. funds for the full amount of the shares to be purchased.
    

After an account is opened, additional shares may be purchased by sending a
check payable to Needham Growth Fund and following the instructions given above.
All shares will be purchased at the net asset value per share next determined
after receipt of the shareholder's application in proper order and acceptance of
such application by the Fund. Subsequent investments may also be made by
telephone (electronic funds transfer) from a bank checking or money market
account. The transfer must specify account name, address and Needham account
number. This feature must be set up in advance according to the above
instructions.

The Fund will charge a $25.00 fee against a shareholder's account, in addition
to any loss sustained by the Fund, for any payment check returned for
insufficient funds. Shareholders should contact the Administrator at 1-800-
625-7071 to obtain the latest wire instructions for wiring funds to PFPC Inc.
for the purchase of Fund shares and to notify PFPC Inc. that a wire transfer is 
coming.

AUTOMATIC INVESTMENT PROGRAM

An eligible shareholder may also participate in the Fund's Automatic Investment
Program, an investment plan that automatically debits money from the
shareholder's bank account and invests it in the Fund through the use of
electronic funds transfers or automatic bank drafts. Shareholders may elect to
make subsequent investments by transfers of a minimum of $50 on the fifth or
twentieth day of each month into their established Fund account. Contact the
Administrator for more information about the Fund's Automatic Investment
Program.

CERTIFICATES

In the interest of economy and convenience, physical stock certificates
representing the Fund's shares will not be issued unless requested in writing
directly to the Fund's Administrator or to an account representative of an
eligible broker-dealer or bank. Wire and telephone redemptions of shares held in
certificate form are not permitted and the shares represented thereby will not
be reported on brokerage or bank statements sent to clients. See "Redemption of
Shares" below.

                                      11

<PAGE>   16

REDEMPTION OF SHARES

Shareholders may redeem their shares at any time. Fund shareholders will be
entitled to redeem all or any portion of the shares credited to their accounts
by submitting a written request for redemption by regular mail to: Needham
Growth Fund, c/o PFPC Inc. at P.O. Box 8916, Wilmington, DE 19899-8916.
Redemption requests sent by overnight courier should be sent to PFPC Inc. at 400
Bellevue Parkway, Wilmington, DE 19899.

Upon the receipt of a redemption request, the shareholder will receive a check
based on the net asset value next determined after the redemption request has
been received, which may be more or less than the amount originally invested. If
the shares to be redeemed represent an investment made by check, the Fund
reserves the right to withhold the proceeds until the check clears. It will
normally take up to three days to clear local checks and up to seven days to
clear other checks, but may take longer under some circumstances. Shares
redeemed or exchanged within six months of purchase will be charged a redemption
fee of 0.50%.

A written redemption request will be considered to have been received in "proper
order" if the following conditions are satisfied:

                          - the request is in writing, indicates the number of 
         shares to be redeemed and identifies the shareholder's account number;

                          - the request is signed by the shareholder(s) exactly 
         as the shares are registered;

                          - the request is accompanied by certificates, if any,
         issued representing the shares, which have been endorsed for transfer 
         (or are themselves accompanied by an endorsed stock power) exactly as
         the shares are registered; and

                          - if the redemption proceeds are requested to be sent
         other than to the address of record or if the proceeds of a requested
         redemption exceed $50,000, the signature(s) on the request is/are
         guaranteed by an eligible signature guarantor.

No written redemption request will become effective until all documents have
been received in "proper order" by PFPC Inc.

TELEPHONE REDEMPTIONS

The Fund permits individual shareholders (once within a thirty day period) or a
representative of record for an account to redeem shares by telephone in amounts
up to $10,000 by calling PFPC Inc. at 1-800-625-7071. In order to use this
service, the shareholder must have elected to do so in his or her Application or
complete an authorization form supplied by the Fund. Telephone redemptions must
be in amounts of $1,000 or more. Instructions must include the shareholder's
account number. Checks issued must be made payable to the owner of record and
may only be mailed to the address of record. The request cannot be honored if an
address change has been made for the account within 60 days of the telephone
redemption request.

If there are multiple account owners, PFPC Inc. may rely on the instructions of
only one owner. This account option is not available for retirement account
shares, or newly purchased (within the prior 15 days) shares. The Administrator
may record all calls.

The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Such procedures may include, among other
things, requiring some form of personal identification prior to acting upon
telephone instructions. The Fund reserves the right to refuse a telephone
redemption if it believes it advisable to do so. Assuming the Fund's security
procedures are followed, neither the Fund nor PFPC Inc. will be responsible for
the authenticity of redemption instructions 

                                      12

<PAGE>   17


received by telephone and believed to be genuine and any loss therefrom will be
borne by the investor. During periods of substantial economic or market change,
telephone redemptions may be difficult to complete. Shares may always be
redeemed by mail if a shareholder is unable to contact PFPC Inc. by telephone.

ADDITIONAL INFORMATION ON REDEMPTIONS

A shareholder who holds Fund shares in non-certificate form may elect to have
redemption proceeds of $5,000 or more wired to the shareholder's brokerage
account or a commercial bank account designated by the shareholder. The
administrative fee for this service is $7.50.

Shareholders who have an IRA or other retirement plan must indicate on their
redemption request whether or not to withhold Federal income tax. Redemption
requests failing to indicate an election not to have Federal tax withheld will
be subject to withholding.

Shareholders may also redeem Fund shares through broker-dealers holding such
shares who have made arrangements with the Fund permitting redemptions by
telephone or facsimile transmission. These broker-dealers may charge a fee for
this service.

If a shareholder's transactions at any time reduce the shareholder's account in
the Fund to below $500 in value, the Fund may notify the shareholder that,
unless the account is brought up to at least such minimum amount, the Fund may,
within a reasonable time, redeem all shares in the account and close it by
making payment to the shareholder.

SHAREHOLDER SERVICES

The Fund offers certain tax-sheltered retirement plans through which shares may
be purchased, including IRAs (and "rollovers" from existing retirement plans)
for individuals and their spouses and SEP-IRAs. Shares of the Fund may also be
purchased by Qualified Retirement Plans such as profit-sharing and money
purchase plans, 401(k) Plans and other Defined Contribution Plans, and by
Defined Benefit Plans.

These types of accounts may be established only upon receipt of a written
application form. See Statement of Additional Information.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS

Unless a shareholder elects to do otherwise, all dividends and capital gains
distributions from the Fund will be automatically reinvested in additional full
and fractional Fund shares. Shareholders who do not wish to have dividends and
distributions automatically reinvested in Fund shares, may choose between two
options:

(1)      automatic reinvestment of capital gains distributions in Fund shares
         and payment of dividends in cash; or

(2)      payment of all dividends and distributions in cash.

Shareholders may change this election at any time by notifying the Administrator
or their account representative if the account is maintained at an eligible
broker-dealer or bank. Dividends and distributions will be reinvested at the
Fund's per share net asset value on the reinvestment date established for the
dividend or distribution.

DIVIDENDS, DISTRIBUTIONS AND TAXES

   
The Fund intends to elect treatment as a regulated investment company under the
Internal Revenue Code of 1986, as amended, so as to be relieved of
Federal income tax on that part of its investment company taxable income
(consisting generally of net investment income, income from 
    

                                      13

<PAGE>   18

certain foreign currency transactions and any excess of net short-term capital
gains over net long-term capital loss) and net capital gain that is annually
distributed to its shareholders. The Fund will continue to elect treatment as a
regulated investment company so long as it remains in the best interests of its
shareholders to do so.

The Fund intends to make annual distributions to its shareholders of record of
substantially all of its realized net capital gains (the excess of realized net
long-term capital gains over realized net short-term capital losses), any
realized net gains from foreign currency transactions, net investment income and
the excess, if any, of realized net short-term capital gains over realized net
long-term capital losses. The Fund may make additional distributions, if
necessary, to avoid a 4% Federal excise tax on certain undistributed ordinary
income and capital gain net income. Certain distributions made to shareholders
of record as of a date in October, November or December of a given year which
are paid by the Fund in January of the immediately subsequent year will be
taxable to shareholders as if received on December 31 of such given year.

Dividends from the investment company's taxable income (whether paid in cash or
reinvested in additional Fund shares) are taxable to shareholders as ordinary
income. Distributions to shareholders properly designated as capital gain
dividends (whether paid in cash or reinvested in additional Fund shares) are
taxable to shareholders as long-term capital gains, regardless of how long they
have held their Fund shares. The maximum regular income tax rate for
non-corporate taxpayers is currently 39.6%, however, net capital gains of such
taxpayers currently are subject to a maximum income tax rate of 28%. The maximum
regular income tax rate for a corporate taxpayer currently is 35% for ordinary
income, net short-term capital gains and net capital gains.

The Fund is required to withhold as "backup withholding" 31% of all dividends,
capital gain distributions and redemption proceeds payable to any individuals
and certain other non-corporate shareholders who do not provide the Fund with a
correct taxpayer identification number and certain required certifications or
who are otherwise subject to backup withholding. Upon a redemption of Fund
shares, a shareholder will ordinarily recognize a taxable gain or loss, subject
to certain Federal tax rules. The Fund anticipates that it will be subject to
foreign withholding taxes for which it may, in certain years, be able to pass
through as a credit or deduction to its shareholders.

The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and shareholders. See the Statement
of Additional Information for a further discussion including a discussion of tax
considerations for foreign shareholders. In addition to those considerations,
there may be other Federal, state, local, or foreign tax considerations
applicable to a particular investor. Prospective shareholders are therefore
urged to consult their tax advisers with respect to the effects of the
investment on their own tax situations.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of the Fund will be determined on each day when
the New York Stock Exchange (the "Exchange") is open for business at the close
of the Exchange and will be computed by determining the aggregate market value
of all assets of the Fund less its liabilities, and then dividing by the total
number of shares outstanding. The determination of net asset value for a
particular day is applicable to all applications for the purchase of shares as
well as all requests for the redemption of shares received before the close of
trading on the Exchange on that day.

                                      14

<PAGE>   19

Portfolio securities and options positions for which market quotations are
readily available are stated at the last sale price reported by the principal
exchange for each such security as of the exchange's close of business.
Securities and options for which no sale has taken place during the day and
securities which are not listed on an exchange are valued at the mean of the
current closing bid and asked prices. All other securities and assets for which
market quotations are not readily available are valued at their fair value as
determined in good faith by the Board of Directors, although the actual
calculations may be made by persons acting pursuant to the direction of the
Board of Directors. The assets of the Fund may also be valued on the basis of
valuations provided by a pricing service approved by the Board of Directors.

PERFORMANCE INFORMATION

From time to time, in advertisements to prospective investors or reports to
shareholders, the Fund may compare its performance, in terms of its total return
to that of other mutual funds with similar investment objectives, and/or to
various published indices which are widely used as benchmarks. The Fund may also
compare its performance to rankings prepared by Lipper Analytical Services,
Inc., a widely recognized independent service which monitors and ranks the
performance of mutual funds, and to rankings prepared by other national
financial publications. The Fund's average annual total return is computed by
finding the average annual compounded rates of return for the most recently
completed fiscal year and the period since the  commencement of operations
through the most recently completed quarter. It is based on a hypothetical
$1,000 initial payment less any applicable sales charge, while assuming
reinvestment of all dividends and distributions, and with recognition of all
recurring charges. The Fund may also use a total return computed in the same
manner but for differing periods, without annualizing the total return. For
purposes of the yield calculation, yield to maturity of each debt obligation in
the Fund's portfolio is determined based on a modified market value method of
amortization. In computing net investment income all recurring charges are
recognized. In calculating performance results, initial sales charges, if any,
are taken into account, but other non-recurring charges are not. Total return or
yield information may be useful in reviewing the Fund's performance and for
providing a basis for comparison with other investment alternatives. However,
since the performance of the Fund changes in response to fluctuations in market
conditions, interest rates, currency fluctuations and Fund expenses, no
performance quotation should be considered a representation as to the Fund's
performance for any future period.

ADMINISTRATOR, SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT

The Fund employs PFPC Inc. as Administrator under an administration contract
dated January 2, 1996 (the "Administration Contract") to provide
administrative services to the Fund. The services provided by the Administrator
under the Administration Contract are subject to the supervision of the officers
and Directors of the Fund, and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of its records and
preparation of reports. For these services, the Fund pays a monthly fee at the
annual rate of 0.10% on the first $200 million of average daily net assets of
the Fund subject to a minimum annual fee of $100,000.

PFPC Inc. also provides various shareholder services made available to each
shareholder, including performance of transfer agency and registrar functions
and dividend paying agent. PFPC Inc., as Administrator, 

                                      15

<PAGE>   20

acts as the Fund's shareholder servicing agent. The principal address of PFPC
Inc. is 400 Bellevue Parkway, Wilmington, Delaware 19809.

CUSTODIAN

PNC Bank, National Association acts as custodian for the Fund. Rules adopted
under the 1940 Act permit the Fund to maintain its non-U.S. securities and cash
in the custody of certain eligible banks and securities depositories. Pursuant
to such rules, the Fund's non-U.S. securities and cash are held by its
sub-custodians who have been approved by the Board of Directors of the Fund in
accordance with the rules of the  Commission. Selection of the sub-custodians
has been made by the Directors following a consideration of a number of factors,
including, but not limited to, the reliability and financial stability of the
institution, the ability of the institution to perform capable custodial
services for the Fund, the reputation of the institution in its national market,
the political and economic stability of the countries in which the
sub-custodians will be located, and risks of potential nationalization or
expropriation of Fund assets. In addition, the 1940 Act requires that non-U.S.
sub-custodians, among other requirements, have shareholder equity in excess of
$200 million, have no lien on the assets of the Fund and maintain adequate
accessible records. The fees of sub-custodians holding assets outside the U.S.
are generally higher than those charged for assets held in the U.S.

LEGAL COUNSEL AND INDEPENDENT AUDITORS

Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, New York 10103, acts as
counsel to the Fund. Ernst & Young LLP acts as independent auditors to the Fund.

ORGANIZATION OF THE FUND

The Needham Funds, Inc. ("Needham Funds") was incorporated in Maryland on
October 12, 1995 and is registered with the Commission under the 1940 Act as an
open-end management investment company. Needham Funds may from time to time
issue shares of one or more of its portfolios. Only shares of one such
portfolio, the Fund, are being offered by this Prospectus. The business and
affairs of Needham Funds are managed under the direction of its Board of
Directors. Needham Funds is an affiliate of Needham & Company, Inc.

Needham Funds has an authorized capitalization of 1 billion shares of $0.001
par value common stock. Each share of Needham Funds entitles the shareholder to
participate equally in dividends and distributions declared and in net assets
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities, except expenses related to the distribution of the shares will be
borne solely by Needham Funds. Shares issued are fully-paid and non-assessable
by Needham Funds. Additional portfolios may be created by the Board of
Directors, without further action by the shareholders, in the future and any
one or more of such portfolios may have multiple classes of shares.

Maryland law does not require annual meetings of shareholders, except under
certain specified circumstances, and it is anticipated that shareholder meetings
will be held only when required by Federal or Maryland law. Shareholders do have
the right under the Articles of Incorporation to call a vote for the removal of
directors. Needham Funds will be required to call a special meeting of
shareholders in accordance with the requirements of the 1940 Act to seek
approval of new management and advisory arrangements, of a material increase in
distribution or account maintenance fees, or of a change in fundamental
policies, objectives or restrictions.

                                      16

<PAGE>   21

DISTRIBUTION AND SERVICES AGREEMENT

Needham & Company, Inc., an affiliate of the Adviser, acts as a distributor (the
"Distributor") for the Fund. Rule 12b-1 adopted by the Securities and Exchange
Commission under the 1940 Act permits an investment company to directly or
indirectly finance any activity associated with the distribution of its shares
(the "distribution expenses") in accordance with a plan adopted by the Fund's
Board of Directors ("12b-1 Plan"). Pursuant to such rule, the Directors of the
Fund have approved, and the Fund has entered into, a Distribution and Services
Agreement (the "Distribution Agreement") with Needham & Company, Inc. under
which the Fund may pay a distribution services fee to the Distributor or others
at an annual rate of up to 0.25 of 1% of the aggregate average daily net assets
of the Fund.

The Distribution Agreement provides that the Distributor will use the
distribution services fee received from the Fund, in part, for payments (i) to
compensate broker-dealers or other persons for providing distribution
assistance, (ii) to otherwise promote the sale of shares of the Fund such as by
paying for the preparation, printing and distribution of prospectuses for other
than current shareholders and sales literature or other promotional activities,
and (iii) to compensate banks and other qualified financial institutions for
providing administrative, accounting and shareholder liaison services with
respect to the Fund's shareholders. Some payments under the Distribution
Agreement are used to compensate broker-dealers based on assets maintained in
the Fund by their customers. Distribution services fees are accrued daily and
paid monthly, and are charged as expenses of the Fund as accrued. Distribution
services fees received from the Fund will not be used to pay any interest
expenses, carrying charges or other financial costs. In adopting the
Distribution Agreement, the Directors of the Fund determined that there was a
reasonable likelihood that the Distribution Agreement would benefit the Fund and
the shareholders.

   
The Fund and/or the Distributor may enter into related servicing agreements
appointing various firms, such as broker-dealers or banks, to provide all or
any portion of the foregoing services for their customers or clients through
the Fund. The Fund and/or the Distributor may enter into servicing agreements
with banks and others, including the Adviser or its affiliates, to provide such
services, except for certain underwriting or distribution services which banks
may be prohibited from providing under the Glass-Steagall Act for their clients
that desire to purchase any of the Fund's shares. If the Glass-Steagall Act
should prevent banks from acting in any capacity or providing any of the
described services, the Directors of  the Fund will consider what action, if
any, is appropriate to provide efficient servicing for Fund shareholders. It is
not anticipated that the termination of any bank relationship would result in a
financial loss to shareholders or affect the Fund's net asset value.
    

The administrative and accounting services provided by banks and other qualified
financial institutions may include, but are not limited to, establishing and
maintaining shareholder accounts, sub-accounting, processing of purchase and
redemption orders, sending confirmation of transactions, forwarding financial
reports and other communications to shareholders and responding to shareholder
inquiries regarding the Fund.

                                      17



<PAGE>   22
INVESTMENT ADVISER 
        Needham Investment Management L.L.C.
        445 Park Avenue 
        Newy York, N.Y. 10022


DISTRIBUTOR
        Needham & Company, Inc.
        445 Park Avenue 
        New York, N.Y. 10022
        (212) 371-8300


ADMINISTRATOR, SHAREHOLDER SERVICING AGENT
        and TRANSFER AGENT 
        PFPC Inc.
        400 Bellevue Parkway
        Wilmington, DE 19809
        (800) 625-7071


CUSTODIAN
        PNC Bank, N.A.
        Broad & Chestnut Streets 
        P.O. Box 7648
        Philadelphia, PA 19101
        (215) 585-5000


DIRECTORS
        George A. Needham
        Raj Rajaratnam
        George D. Gould 
        James P. Poitras
        F. Randall Smith


EXECUTIVE OFFICERS
        Raj Rajaratnam, President 
        Howard S. Schachter, Executive Vice President 


COUNSEL
        Fulbright & Jaworski L.L.P.
        666 Fifth Avenue
        New York, N.Y. 10103


INDEPENDENT AUDITORS
        Ernst & Young LLP
        787 Seventh Avenue 
        New York, N.Y. 10019


No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Statement 
of Additional Information incorporated herein by reference, in connection 
with the offering made by this Prospectus and, if given, or made, such 
information or representations must not be relied upon as having been 
authorized by the Fund or the Distributor. This Prospectus does not 
constitute an offering by the Fund or by the Distributor in any 
jurisdiction in which such offering may not lawfully be made.



           
              [LOGO]



                        
        NEEDHAM GROWTH FUND





              ADVISER
NEEDHAM INVESTMENT MANAGEMENT L.L.C.
           445 PARK AVENUE
       NEW YORK, NEW YORK 10022




For more information call the Fund's 
Administrator at 1-800-625-7071.



<PAGE>   23






                                                   1933 Act File Number 33-98310
                                                   1940 Act File Number 811-9114



                       STATEMENT OF ADDITIONAL INFORMATION



                               NEEDHAM GROWTH FUND
                                 445 Park Avenue
                            New York, New York 10022


                     A Portfolio of The Needham Funds, Inc.

   
                                April 26, 1996
    

   
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current Prospectus for Needham Growth Fund (the "Fund"),
dated April 26, 1996 (the "Prospectus"). Much of the information contained
in this Statement of Additional Information expands upon the subjects discussed
in the Prospectus. No investment in shares of the Fund (the "Shares") should be
made without first reading the Prospectus. A copy of the Prospectus for the Fund
may be obtained at no charge by writing the Fund's administrator, PFPC Inc. (the
"Administrator") or by calling the Administrator at 1-800-625-7071.
    

<PAGE>   24



                                TABLE OF CONTENTS
<TABLE>
<S>                                                         <C>
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . .     1
                                                           
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . .     1
                                                           
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . .    10
                                                           
INVESTMENT ADVISORY SERVICES  . . . . . . . . . . . . . .    12
                                                           
THE DISTRIBUTOR AND DISTRIBUTION OF THE SHARES  . . . . .    14
                                                           
TRANSFER AGENCY, ADMINISTRATION SERVICES AND FUND          
ACCOUNTING  . . . . . . . . . . . . . . . . . . . . . . .    15
                                                           
PORTFOLIO TRANSACTIONS AND BROKERAGE  . . . . . . . . . .    15

DIRECTORS AND OFFICERS  . . . . . . . . . . . . . . . . .    17
                                                           
DETERMINATION OF NET ASSET VALUE  . . . . . . . . . . . .    19
                                                           
TAX-SHELTERED RETIREMENT PLANS  . . . . . . . . . . . . .    20
                                                           
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . .    20
         Taxation of the Fund -- In General . . . . . . .    20
         Taxation of the Fund's Investments . . . . . . .    21
         Taxation of the Shareholders . . . . . . . . . .    22
                                                           
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . .    25
                                                           
ADDITIONAL INFORMATION  . . . . . . . . . . . . . . . . .    26
         Custodian  . . . . . . . . . . . . . . . . . . .    26
         Independent Auditors . . . . . . . . . . . . . .    26
                                                           
FINANCIAL STATEMENTS  . . . . . . . . . . . . . . . . . .    27
                                                           
APPENDIX  . . . . . . . . . . . . . . . . . . . . . . . .   A-1
</TABLE>
                                        i


<PAGE>   25



                               GENERAL INFORMATION

         The Needham Funds, Inc. is an open-end management investment company
organized as a corporation under the laws of the State of Maryland on October
12, 1995, which at present is comprised of one portfolio of securities, Needham
Growth Fund (the "Fund"). The Board of Directors has authority to create
additional portfolios, each of which may issue separate classes of shares. The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940 (the "1940 Act") and is offered on a no-load basis.

                        INVESTMENT OBJECTIVE AND POLICIES

         The investment objective and policies of the Fund are discussed in the
Prospectus. This portion of the Statement of Additional Information is designed
to supplement that discussion.

         Under normal market conditions, the Fund invests at least 65% of its
total assets in equity securities of domestic issuers listed on a nationally
recognized securities exchange or traded on the Nasdaq System. The balance of
the Fund's assets may be held in cash or invested in other securities, including
preferred stock, common stock equivalents, options, futures and various
corporate debt instruments.

         The Appendix to this Statement of Additional Information contains an
explanation of the rating categories of Moody's Investors Service and Standard &
Poor's Corporation relating to the fixed-income securities and preferred stocks
in which the Fund may invest, including a description of the risks associated
with each category.

         LOWER-RATED DEBT SECURITIES

         The Fund may purchase lower-rated debt securities, sometimes referred
to as "junk" or "high yield bonds" (those rated BB or lower by Standard & Poor's
Corporation ("S&P") or Ba or lower by Moody's Investors Service, Inc. 
("Moody's")). See Appendix A for a description of these ratings.

         The lower ratings of certain securities held by the Fund reflect the
greater possibility that adverse changes in the financial condition of the
issuer, or in general economic conditions, or both may impair the ability of the
issuer to make payments of interest and principal. A number of factors,
including ability of the issuer to make timely payments, could lessen liquidity
and limit the Fund's ability to sell at prices approximating the values the Fund
placed on such securities. In the absence of a liquid trading market for
securities held by the Fund, it may be difficult to establish the fair market
value of these securities. The rating assigned to a security by Moody's or
S&P does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.


<PAGE>   26



         Changes by recognized rating services in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments.

         Issuers of lower-rated securities are often highly leveraged and,
consequently, their ability to service their debt during an economic downturn or
during sustained periods of rising interest rates may be impaired. In addition,
such issuers may be unable to repay debt at maturity by refinancing. The risk of
loss due to default is significantly greater because such securities frequently
are unsecured and subordinated to senior indebtedness. Certain of the
lower-rated securities in which the Fund invests are issued to raise funds in
connection with the acquisition of a company. The highly leveraged capital
structure of such issuers may make them especially vulnerable to adverse changes
in economic conditions.

         In order to enforce its rights in the event of a default under such
securities, the Fund may be required to take possession of and manage assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net asset value. A
Fund may also be limited in its ability to enforce its rights and may incur
greater costs in enforcing its rights in the event an issuer becomes the subject
of bankruptcy proceedings.

         OTHER DEBT SECURITIES

         Zero-coupon securities are debt securities which are usually issued at
a deep discount and do not provide for payment of interest prior to maturity.
Even though zero-coupon securities do not pay current interest in cash, the Fund
is nonetheless required to accrue interest income on them and to distribute the
amount of that interest at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to satisfy its
distribution requirement.

         When other debt obligations are stripped of their unmatured interest
coupons by the holder, the stripped coupons are sometimes sold separately. The
principal or corpus is then sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic cash interest payments. Purchasers of stripped
principal obligations acquire, in effect, discount obligations that are
economically identical to zero-coupon bonds.

         INVESTING IN CONVERTIBLE SECURITIES

         The Fund may invest in convertible securities: that is, bonds, notes,
debentures, preferred stocks and other securities which are convertible into
common stocks. Investments in convertible securities may provide incidental
income through interest and dividend payments and/or an opportunity for capital
appreciation by virtue of their conversion or exchange features.

         Convertible debt securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities

                                        2


<PAGE>   27



tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. As the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock, although typically not as much as the underlying common stock. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.

         As debt securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.

         Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.

         INVESTING IN FOREIGN SECURITIES

         Certain of the Fund's investments may be of securities in issuers
located in countries having repatriation restrictions. Investment in securities
subject to repatriation restrictions of more than seven days will be considered
illiquid securities and will be subject to the Fund's overall 15% limitation on
investment in illiquid securities.

         Individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Further, a Fund investing in foreign securities may encounter
greater difficulties or be unable to pursue legal remedies or obtain judgments
in foreign courts.

         Because foreign securities typically will be denominated in foreign
currencies, the value of such securities to the Fund will be affected by changes
in currency exchange rates and in exchange control regulations, and costs will
be incurred in connection with conversions between currencies. A change in the
value of a foreign currency against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of the Fund's securities
denominated in the currency. Such changes will also affect the Fund's income and
distributions to shareholders. The Fund may be affected either favorably or
unfavorably by fluctuations in the relative rates of exchange between the

                                        3


<PAGE>   28



currencies of different nations, and the Fund therefore may engage in certain
foreign currency hedging strategies. Such hedging strategies may include the
purchase and sale of foreign currencies on a spot or forward basis, or the
purchase and sale of options or futures contracts with respect to foreign
currencies. Such strategies involve certain investment risks and transaction
costs to which the Fund might not otherwise be subject. These risks include
dependence on the Adviser's ability to predict movements in exchange rates, as
well as the difficulty of predicting, and the imperfect movements between,
exchange rates and currency hedges.

         Investments may be made from time to time in companies in developing
countries as well as in developed countries. Although there is no universally
accepted definition, a developing country is generally considered by the Adviser
to be a country which is in the initial state of industrialization. Shareholders
should be aware that investing in the equity and fixed income markets of
developing countries involves exposure to unstable governments, economies based
on only a few industries and securities markets which trade a small number of
securities. Securities markets of developing countries tend to be more volatile
than the markets of developed countries; however, such markets have in the past
provided the opportunity for higher rates of return to investors. There are
substantial risks involved in investing in securities issued by developing
country companies which are in addition to the usual risks inherent in foreign
investments. Some countries in which the Fund may invest may have fixed or
managed currencies. Further, certain currencies may not be traded
internationally. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund.

         With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument and foreign entities may not be subject
to accounting, auditing, and financial reporting standards and requirements
comparable to those of the U.S. There is generally less government supervision
and regulation for exchanges, financial institutions and issuers in foreign
countries than there is in the U.S. Moreover, certain foreign investments may be
subject to foreign withholding taxes. Foreign markets have different clearance
and settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended securities purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of Fund
securities due to settlement problems could also result either in losses to the
Fund due to subsequent declines in value of the Fund security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser.

         Foreign securities such as those purchased by the Fund may be subject
to foreign government taxes, higher custodian fees and dividend collection fees
which could reduce

                                        4


<PAGE>   29



the yield on such securities. Trading in futures contracts traded on foreign
commodity exchanges may be subject to the same or similar risks as trading in
foreign securities.

         FOREIGN CURRENCY TRANSACTIONS

         Under normal circumstances, consideration of the prospects for currency
exchange rates will be incorporated into the long-term investment decisions made
for the Fund with regard to overall diversification strategies. Although the
Fund values its assets daily in terms of U.S. dollars, it does not intend
physically to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may do so from time to time and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund may use forward contracts, along
with futures contracts and put and call options, to "lock in" the U.S. dollar
price of a security bought or sold and as part of its overall hedging strategy.
The Fund will conduct its foreign currency exchange transactions, either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through purchasing put and call options on, or by entering
into futures contracts or forward contracts to purchase or sell foreign
currencies. See "-- Forward Foreign Currency Exchange Contracts" and "-- Futures
and Options Transactions."

         It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.

         If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward currency contract prices. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.

         FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

         The Fund may enter into forward contracts as a hedge against future
fluctuations in foreign exchange rates. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a fixed
amount of U.S. dollars or foreign currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at the price set at the time of the contract. Unlike foreign currency futures
contracts, which are standardized exchange-traded contracts, forward currency
contracts are usually traded in the

                                        5


<PAGE>   30



interbank market conducted directly between currency traders (usually large
commercial banks) and their customers.

         The Fund may enter into forward contracts under various circumstances.
For example, the Fund may enter into a forward contract for the purchase or sale
of a security denominated in a foreign currency in order to lock in the price of
the security in U.S. dollars or some other foreign currency which the Fund is
holding. By entering into a forward contract for the purchase or sale of a fixed
amount of U.S. dollars or other currency for the amount of foreign currency
involved in the underlying security transactions, the Fund will be able to
protect itself against any adverse movements in exchange rates between the time
the security is purchased or sold and the date on which payment is made or
received. The Fund may also purchase a forward contract to hedge against an
anticipated rise in a currency versus the U.S. dollar or other currency, pending
investment in a security denominated in that currency.

         The Fund may enter into a forward contract to sell or purchase, for a
fixed amount of U.S. dollars or other currency, an amount of foreign currency
other than the currency in which the securities to be hedged or purchased are
denominated approximating the value of some or all of the portfolio securities
to be hedged or purchased. This method of hedging, called cross-hedging, will be
used when it is determined that the foreign currency in which the portfolio
securities are denominated has insufficient liquidity or is trading at a
discount as compared with some other foreign currency with which it tends to
move in tandem. The Fund is permitted to enter into forward contracts with
respect to currencies in which certain of its portfolio securities are
denominated and on which options have been written.

         In certain of the above circumstances the Fund may have realized fewer
gains than had the Fund not entered into the forward contracts. Moreover, the
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible, since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.

         The Fund's Custodian will place cash or liquid equity or debt
securities into a segregated account of the Fund in an amount equal to the value
of the Fund's total assets committed to the consummation of forward foreign
currency contracts. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts. At maturity of a forward
currency contract, the Fund may either sell the portfolio security and make
delivery of the foreign currency, or it may retain the security and terminate
its contractual obligation to deliver the foreign currency prior to maturity by
purchasing an "offsetting" contract with the same currency trade obligating it
to purchase, on the same maturity date, the same amount of the foreign currency.
There can be no assurance, however, that the Fund will be able to effect such a
closing purchase transaction.

                                        6


<PAGE>   31



         FUTURES AND OPTIONS TRANSACTIONS

         The use of financial futures contracts and options on such futures
contracts may reduce the Fund's exposure to fluctuations in the prices of
portfolio securities and may prevent losses if the prices of such securities
decline. Similarly, such investments may protect the Fund against fluctuation in
the value of securities in which the Fund is about to invest.

         The use of financial futures contracts and options on such futures
contracts as hedging instruments involves several risks. First, there can be no
assurance that the prices of the futures contracts or options and the hedged
security will move as anticipated. If prices do not move as anticipated, the
Fund may incur a loss on its investment. Second, investments in options, futures
contracts and options on futures contracts may reduce the gains which would
otherwise be realized from the sale of the underlying securities which are being
hedged. Third, the effective use of options and futures contracts also depends
on the Fund's ability to terminate options and futures positions as desired.
There can be no assurance there will be a sufficiently liquid market for the
Fund to effect closing transactions at any particular time or at an acceptable
price. If the Fund cannot close a futures position, or if limitations imposed by
an exchange or board of trade on which futures contracts are traded prevent the
Fund from closing out a contract, the Fund may incur a loss or may be forced to
make or take delivery of the underlying securities or currencies at a
disadvantageous time.

         In addition, the purchase or sale of futures contracts or sale of
options on futures contracts involve the risk that the Fund could lose more than
the original margin deposit required to initiate the transaction. The purchase
of options on futures contracts involves less potential risk than the purchase
or sale of futures contracts because the maximum amount at risk is the premium
paid for the options plus transaction costs. Although the maximum amount at risk
when the Fund purchases an option on a security, currency, index or futures
contract is the premium paid for the option plus transaction costs, there may be
circumstances when the purchase of an option would result in a loss to the Fund,
whereas the purchase of the underlying security, currency or futures contract
would not, such as when there is no movement in the level of the underlying
security, currency or futures contract. The value of an options or futures
position relating to a non-U.S. currency may vary with changes in the value of
either the currency involved or the U.S. dollar or both and has no relationship
to the investment merits of individual non-U.S. securities held in a hedged
investment portfolio.

         The Fund may write covered call options on its underlying portfolio
securities, whether equity or debt, on stock or bond indexes and on currencies
in which the Fund invests. Covered call writing may be used for hedging
purposes and for closing long call positions and for achieving incremental
income. A call option will be considered covered if the Fund (a) owns the
security or currency underlying the written option, (b) holds a call option on
the underlying security, currency or index with a similar exercise price or (c)
maintains sufficient cash, cash equivalents or liquid high grade securities
sufficient to cover the exercise price of the option.

                                        7

<PAGE>   32
   
         The Fund may also write covered put options. This technique will be
used when the Fund seeks to purchase a security, or group of securities in the
case of an index option, at a price equal to or less than the prevailing market
price at the time of the put sale. The Fund may also sell covered puts for
achieving incremental income. A put will be considered covered if a Fund (a)
maintains cash, cash equivalents or liquid, high grade debt obligations
sufficient to cover the exercise price of the option, (b) holds a put option on
the underlying security with an exercise price equal to or greater than the
exercise price of the written put or (c) where the exercise price of the
purchased put is lower than that of the written put, the Fund maintains
sufficient cash, cash equivalents or liquid high grade debt obligations equal to
the difference. Puts may also be written in order to close long put positions.
In calculating the 5% limitation on options, futures and forward transactions,
other than for hedging purposes, the Fund shall include the premiums paid on
options and options on futures (excluding in-the-money amounts on such options)
and the initial margin deposits on the Fund's futures positions.
    

         In order to fix the cost of future purchases, the Fund may purchase
calls on equity and debt securities that the Adviser intends to include in the
Fund's portfolio. Calls may also be used to participate in an anticipated price
increase of a security without taking on the full risk associated with actually
purchasing the underlying security. The Fund may purchase puts to hedge against
a decline in the market value of portfolio securities.

         REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS

         The Fund will only enter into a repurchase agreement where (i) the
underlying securities are of the type which the Fund's investment policies would
allow it to purchase directly, (ii) the market value of the underlying security,
including accrued interest, will be at all times equal to or exceed the value of
the repurchase agreement, and (iii) payment for the underlying securities is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. The Fund will not enter into
a repurchase agreement with a maturity of more than seven business days if, as a
result, more than 15% of the value of the Fund's net assets would then be
invested in such repurchase agreements and other illiquid securities.

         The Fund may enter into reverse repurchase agreements in which the Fund
sells securities and agrees to repurchase them at a mutually agreed date and
price. Generally, the Fund will be able to keep the interest income associated
with those portfolio securities while the securities reside with the other party
to the agreement. Such transactions are advantageous if the interest cost to the
fund of the reverse repurchase transaction is less than the cost of otherwise
obtaining the cash raised through the transaction.

         Reverse repurchase agreements involve the risk that the market value of
the Securities that the Fund is obligated to repurchase under the agreement may
decline below the repurchase price. In the event the other party under reverse
repurchase agreement becomes bankrupt or insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities.


                                       8
<PAGE>   33

         SECURITIES LENDING

         The Fund may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have a market value at least equal
to the current market value of the securities loaned; (2) the Fund may at any
time call the loan and regain the securities loaned; (3) the Fund will receive
any interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed such percentage of
the total assets of the Fund as the Directors may establish. In addition, it is
anticipated that the Fund may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan.

         Before the Fund enters into a loan, the Adviser considers the relevant
facts including the creditworthiness of the borrower. The risks in lending
portfolio securities consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.

         INDEXED SECURITIES

         The Fund may purchase securities whose prices are indexed to the prices
of other securities, securities indices, currencies, commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. The performance of indexed
securities largely depends on the performance of the security, currency,
commodity or other instrument to which they are indexed, as well as general
economic factors in the U.S. or abroad. At the same time, indexed securities are
subject to the credit risks associated with the issuer of the security and their
values may decline substantially if the issuer's creditworthiness deteriorates.
Indexed securities may be more volatile than the underlying instrument itself.

   
         SHORT SALES
    

   
         The Fund does not intend to engage in short sales against the box for
investment purposes. The Fund may, however, make such a sale as a hedge, when
it believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund (or a security convertible or
exchangeable for such security). The Fund also may use such technique when it
wants to sell the security at an attractive current price but also wishes to
defer recognition of gain or loss for U.S. Federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code of 1986, as amended (the "Code"). In
either case, any future losses in the Fund's long position should be offset by
a gain in the short position and, conversely, any gain in the long position
should be reduced by a loss in the short position. The extent to which such
gains or losses are reduced will depend upon the amount of the security sold
short relative to the amount the Fund owns.
    


         ADDITIONAL RISKS ASSOCIATED WITH HEDGING INSTRUMENTS

         The Fund's ability to hedge effectively all or a portion of its
securities depends upon the ability of the Adviser to predict correctly the
degree to which price movements of securities held in the Fund's portfolio
correlate to the price movements of the relevant hedging instruments. In
addition, the effectiveness of any hedging strategy using index options, index
futures, interest rate options or interest rate futures depends upon the
correlation between the components of the underlying index and the securities
held by the Fund.

                                       9
<PAGE>   34
                            INVESTMENT RESTRICTIONS

         As matters of fundamental policy, the Fund may not:

         1. Make investments for the purpose of exercising control or
management;

         2. Purchase or sell real estate or real estate mortgage loans (provided
that such restriction shall not apply to securities secured by real estate or an
interest therein or issued by companies which invest in real estate or interests
therein), commodities or commodity contracts (except that the Fund may deal in
forward foreign exchange between currencies and the Fund may purchase and sell
interest rate and currency options, futures contracts and related options and
indexed notes and commercial paper), or interests or leases in oil, gas or other
mineral exploration or development programs (provided that such restriction
shall not apply to securities issued by companies which invest in oil, gas or
other mineral exploration or development programs);

         3. Except as described in the Prospectus, purchase any securities on
margin, except for use of short-term credit necessary for clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of initial
or variation margin in connection with futures contracts or options transactions
is not considered the purchase of a security on margin);

         4. Borrow amounts and pledge assets in connection therewith in excess
of 25% of its total assets taken at market value (including the amount
borrowed), and then only from banks as a temporary measure, including to meet
redemptions or to settle securities transactions and provided further that no
additional investments shall be made while borrowings exceed 5% of total assets;

         5. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from making any
otherwise permissible borrowings, mortgages or pledges, short sales, or entering
into permissible reverse repurchase agreements, and options and futures
transactions;

         6. Underwrite any issue of securities (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in the disposition of restricted securities);

         7. Make loans of its securities exceeding 20% of its total assets; and

         8. Invest 25% or more of its net assets in one or more issuers
conducting their principal business in the same industry.

         The foregoing restrictions are fundamental policies which may only be
changed by vote of a majority of the Fund's outstanding shares. The term
"majority of the Fund's outstanding shares" means the vote of (i) 67% or more of
the Fund's shares present at a meeting, if more than 50% of the outstanding
shares of the Fund are

                                       10
<PAGE>   35
present or represented by proxy, or (ii) more than 50% of the Fund's outstanding
shares, whichever is less.

         As matters of non-fundamental policy, the Fund may not:

         1. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or if
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of any one such company is owned by the Fund, (ii) 5% of the Fund's total
assets, taken at market value, would be invested in any one such company, or
(iii) 10% of the Fund's total assets, taken at market value, would be invested
in such companies' securities. Any purchase by the Fund of securities of other
investment companies, except in connection with a merger, consolidation,
acquisition or reorganization, shall be made in the open market where no
commission results other than customary brokerage commissions;

         2. Purchase or retain a security of any issuer if any of the officers
or Directors of the Fund or its investment adviser owns beneficially more than
1/2 of 1% of the securities of such issuer, and all such persons taken together
own more than 5% of the securities of such issuer;

         3. With respect to 50% of the value of its total assets, invest more
than 25% of the value of its total assets in the securities of one issuer, and
with respect to the other 50% of the value of its total assets, invest more than
5% of the value of its total assets in the securities of one issuer or acquire
more than 10% of the outstanding voting securities of a single issuer.
This restriction shall not apply to U.S. Government securities;

         4. With respect to 75% of the value of its total assets, purchase more
than 10% of the outstanding voting securities of any issuer;

         5. Invest more than 15% of the value of its total assets, in the
aggregate, in the securities of issuers which, together with any predecessors,
have a record of less than three years continuous operations;

         6. Invest in oil, gas or mineral exploration or development programs or
leases;

         7. Purchase or sell real estate or make real estate mortgage loans or
invest in real estate limited partnerships not traded on a national securities
exchange, except that the Fund may purchase or sell securities issued by
entities engaged in the real estate industry or instruments backed by real
estate; and

         8. Invest in warrants (other than warrants acquired by the Fund as a
part of a unit or attached to securities at the time of purchase) if, as a
result, such investment (valued at the lower of cost or market value) would
exceed 5% of the value of the Fund's net assets, provided that not more than 2%
of the Fund's net assets may be invested in warrants not listed on the New York
Stock Exchange or the American Stock Exchange.


                                       11
<PAGE>   36

         These restrictions are not fundamental policies and may be changed by
the Board of Directors without a shareholder vote, to the extent permitted by
applicable law including rules of the Commission. Except as otherwise may be
specifically stated herein, the Fund's other investment policies stated in this
Statement of Additional Information and in the Prospectus are not considered
fundamental and may be changed by the Board of Directors at any time without a
shareholder vote if and to the extent any such changes are consistent with the
requirements of the 1940 Act.

         If a percentage restriction is adhered to at the time of the
investment, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or amount of net assets will not be considered
a violation of any of the foregoing restrictions. The Fund shall, however,
reduce its holdings of illiquid securities in an orderly fashion in order to
maintain adequate liquidity.

         In order to permit the sale of the Fund's shares in certain states, the
Fund may make commitments with respect to the Fund more restrictive than the
investment policies listed above and in the Prospectus. Should the Fund
determine that any commitment made to permit the sale of the Fund's shares in
any state is no longer in the best interests of the Fund, it may revoke the
commitment by terminating sales of the Fund's shares in the state involved.

                          INVESTMENT ADVISORY SERVICES

         The investment adviser of the Fund is Needham Investment Management
L.L.C. (the "Adviser"), a Delaware limited liability company, pursuant to an
Investment Advisory Agreement with the Fund dated as of January 1, 1996 (the
"Advisory Agreement"). The Adviser furnishes an investment program for the Fund
and determines, subject to the overall supervision and review of the Board of
Directors, what investments should be purchased, sold and held.

         Under the terms of the Advisory Agreement, and at the direction of the
Board of directors, the Adviser maintains records and furnishes or causes to be
furnished all required reports or other information concerning the Fund to the
extent such records, reports and other information are not maintained by the
Administrator, Shareholder Servicing Agent, Custodian or other agents.

         The Adviser provides the Fund with office space, facilities and certain
business equipment and provides the services of consultants, executive and
clerical personnel for administering the affairs of the Fund. The Adviser
compensates all executive and clerical personnel and Directors of the Fund if
such persons are employees or affiliates of the Adviser or its affiliates. The
advisory fee is computed daily and paid monthly.

         The expenses borne by the Fund include: the charges and expenses of the
shareholder servicing and dividend disbursing agent; custodian fees and
expenses; legal, auditors' and auditors' fees and expenses; brokerage
commissions for portfolio transactions; taxes, if any; the advisory fee;
extraordinary expenses (as determined by the Directors of the Fund); expenses of
shareholder and Director meetings, and of preparing, printing and mailing proxy
statements, reports and other communications

                                       12
<PAGE>   37
to shareholders; expenses of preparing and setting in type prospectuses and
periodic reports and expenses of mailing them to current shareholders; expenses
of registering and qualifying shares for sale (including compensation of the
Adviser's employees in relation to the time spent on such matters); expenses
relating to the Plan of Distribution (Rule 12b-1 Plan); fees of Directors who
are not "interested persons" of the Adviser; membership dues of the Investment
Company Institute; fidelity bond and errors and omissions insurance premiums;
the cost of maintaining the books and records of the Fund; and any other charges
and fees not specifically enumerated as an obligation of the Distributor (as
hereinafter defined) or Adviser.

   
         The Advisory Agreement provides that the fee payable to the Adviser
will be reduced to the extent expenses of the Fund exceed certain limits as
specified in the Prospectus and those expenses are in excess of certain expense
limitations required by state regulation, and further that the Adviser will make
any other necessary arrangements to limit expenses in accordance with applicable
expense limitations unless the Fund has obtained an appropriate waiver of such
expense limitations or expense items from a particular state authority. Under
the Advisory Agreement, the maximum annual expenses which the Fund may be
required to bear, inclusive of the advisory fee but exclusive of interest,
taxes, brokerage fees, Rule 12b-1 Plan distribution payments and extraordinary
items, may not exceed the lowest expense limitation imposed by any state in
which the Fund is registered or the specified Prospectus expense limit,
whichever is lower. The amount of the advisory fee to be paid to the Adviser
each month will be reduced by the amount, if any, by which the annualized
expenses of the Fund for that month exceed the foregoing limitations. From
January 1, 1996 through the fiscal quarter ended March 31, 1996, the Fund
accrued advisory fees of $8,030. At the end of the fiscal year, if the aggregate
annual expenses of a Fund exceed the amount permissible under the foregoing
limitations, then the Adviser will be required promptly to return to such Fund
monthly advisory fees previously received during such fiscal year equal to the
total amount by which expenses exceed the amount of the limitations, and, if
necessary, make any other arrangements necessary to maintain the Fund's
expenses within such limitations. If aggregate annual expenses are within the
limitations, however, any excess amount previously withheld will be paid by the
Adviser.
    

         The Advisory Agreement has been approved by the Board of Directors of
the Fund, including a majority of the Directors who are not parties to the
Advisory Agreement or interested persons of any such party, and by the initial
shareholder on December 21, 1995. The Advisory Agreement provides that it
shall have an initial two year term and shall continue in effect from year to
year with respect to the Fund as long as it is approved at least annually (i) by
a vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act or (ii) by a vote of a majority of the Directors of the
Fund including a vote of a majority of the Directors who are not parties to the
Advisory Agreement or "interested persons" of any party thereto, cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated on 60 days' written notice by either party and will
terminate automatically if it is assigned within the meaning of the Act.

         Raj Rajaratnam is President of the Adviser as well as President of the
Fund; Howard S. Schachter is Executive Vice President of the Adviser as well as
Executive Vice President of the Fund.

                                       13
<PAGE>   38
                 THE DISTRIBUTOR AND DISTRIBUTION OF THE SHARES

         Shares of the Fund are offered on a continuous basis and are currently
distributed through Needham & Company, Inc. 445 Park Avenue, New York, New York
10022 (the "Distributor"). The Board of Directors of the Fund has approved a
Distribution and Services Agreement (the "Distribution Agreement") appointing
the Distributor as a distributor of shares of the Fund.

      The Distribution Agreement provides that the Distributor will bear the
cost and expense of printing and distributing any materials not prepared by the
Fund and other materials used by the Distributor in connection with its offering
shares of the Fund. The Fund will pay all fees and expenses in connection with
registering and qualifying its shares under federal and state securities laws.

   
         To compensate the Distributor for the services which it provides and
for the expenses it bears under the Distribution Agreement, the Fund has adopted
a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. Fees
paid by the Fund under the Plan will be used for promotional and distribution
expenses incurred only during the applicable year. Pursuant to the Plan, the
Distributor provides the Fund at least quarterly with a written report of the
amounts expended under the Plan and the purpose for which such expenditures were
made. The Board of Directors reviews such reports on a quarterly basis.
From January 1, 1996 through the fiscal quarter ended March 31, 1996, the Fund
accrued distribution expenses of $1,623. The entire amount for the period was
spent on the printing and mailing of prospectuses to other than current
shareholders.
    

         The Plan has been approved by the Board of Directors of the Fund,
including a majority of the Directors who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan, on December 21, 1995. The Plan continues in effect as to the Fund,
provided such continuance is approved annually by a vote of the Directors in
accordance with the Act. Information with respect to distribution revenues and
expenses will be presented to the Directors each year for their consideration in
connection with their deliberations as to the continuance of the Plan. In the
review of the Plan, the Directors will be asked to take into consideration
expenses incurred in connection with the distribution of shares. The Plan may
not be amended to increase materially the amount to be spent for the services
described therein without approval of the shareholders of the Fund, and all
material amendments of the Plan must also be approved by the Directors in the
manner described above. The Plan may be terminated at any time, without payment
of any penalty, by vote of a majority of the Directors who are not "interested
persons" of the Fund and who have no direct or indirect financial interest in
the operation of the Plan, or by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the Act) on not more than 30 days' written
notice to any other party to the Plan. The Plan will automatically terminate in
the event of its assignment (as defined in the Act). So long as the Plan is in
effect, the election and nomination of Directors who are not "interested
persons" of the Fund shall be committed to the discretion of the Directors who
are not "interested persons." The Directors have determined that, in their
judgment, there is a reasonable likelihood that the Plan will benefit the Fund
and its shareholders. The Fund will preserve copies of the Plan and any
agreement or

                                       14
<PAGE>   39
report made pursuant to Rule 12b-1 under the Act, for a period of not less than
six years from the date of the Plan or such agreement or report, the first two
years in an easily accessible place.

                    TRANSFER AGENCY, ADMINISTRATION SERVICES
                               AND FUND ACCOUNTING

   
         PFPC Inc. has been retained by the Fund to perform shareholder
servicing, registrar and transfer agent functions for the Fund pursuant to an
agreement with the Fund. PFPC Inc. has also been retained pursuant to a separate
agreement to perform certain Fund and shareholder accounting and administrative
functions. From January 1, 1996 through the fiscal quarter ended March 31,
1996, the Fund accrued $1,425 in transfer agency, administration and accounting
fees.
    

                      PORTFOLIO TRANSACTIONS AND BROKERAGE

         The Adviser is responsible for decisions to buy and sell securities and
other investments for the Fund, the selection of brokers and dealers to effect
the transactions and the negotiation of brokerage commissions, if any. In
transactions on stock and commodity exchanges in the U.S., these commissions are
negotiated, whereas on foreign stock and commodity exchanges these commissions
are generally fixed and are generally higher than brokerage commissions in the
U.S. In the case of securities traded on the over-the-counter markets, there are
generally no stated commissions, but the price usually includes an undisclosed
commission or markup. In underwritten offerings, the price includes a disclosed,
fixed commission or discount. The Fund may invest in obligations which are
normally traded on a "principal" rather than agency basis. This may be done
through a dealer (e.g., securities firm or bank) who buys or sells for its own
account rather than as an agent for another client, or directly with the issuer.
A dealer's profit, if any, is the difference, or spread, between the dealer's
purchase and sale price for the obligation.

         In purchasing and selling the Fund's portfolio investments, it is the
Adviser's policy to obtain quality execution at the most favorable prices
through responsible broker-dealers. In selecting broker-dealers, the Adviser
will consider various relevant factors, including, but not limited to: the size
and type of the transaction; the nature and character of the markets for the
security or asset to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer's firm; the
broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions.

         The Adviser may cause the Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission that is in excess of the
commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services as defined in Section
28(e) of the Securities Exchange Act of 1934 which have been provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to the

                                       15
<PAGE>   40
Adviser is considered to be in addition to and not in lieu of services required
to be performed by the Adviser under its Advisory Agreement with the Fund. The
research services provided by broker-dealers can be useful to the Adviser in
serving its other clients or clients of the Adviser's affiliates.

         The Board of Directors periodically reviews the Adviser's performance
of its responsibilities in connection with the placement of portfolio
transactions on behalf of the Fund and reviews the commissions paid by the Fund
over representative periods of time to determine if they are reasonable in
relation to the benefits to the Fund.

         Investment decisions for the Fund are made independently from those of
the other investment accounts managed by the Adviser or affiliated companies.
Occasions may arise, however, when the same investment decision is made for more
than one client's account. It is the practice of the Adviser to allocate such
purchases or sales insofar as feasible among its several clients or the clients
of its affiliates in a manner it deems equitable. The principal factors which
the Adviser considers in making such allocations are the relative investment
objectives of the clients, the relative size of the portfolio holdings of the
same or comparable securities and the then availability in the particular
account of funds for investment. Portfolio securities held by one client of the
Adviser may also be held by one or more of its other clients or by clients of
its affiliates. When two or more of its clients or clients of its affiliates are
engaged in the simultaneous sale or purchase of securities, transactions are
allocated as to amount in accordance with formulae deemed to be equitable as to
each client. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.

   
         Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Board may determine, the
Adviser may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund. From January 1,
1996 through the fiscal quarter ended March 31, 1996, the Fund paid brokerage
commissions of $3,178.32. None of that amount was paid to the Distributor.
    

   
         While it is the policy of the Fund generally not to engage in trading
for short-term gains, the Fund will effect portfolio transactions without regard
to the holding period (subject to compliance with certain tax requirements for
qualification as a regulated investment company) if, in the judgment of the
Adviser, such transactions are advisable in light of a change in circumstances
of a particular company, within a particular industry or country, or in general
market, economic or political conditions. The Fund anticipates that its annual
portfolio turnover rate may in some years exceed 200%. From January 1, 1996
through the fiscal quarter ended March 31, 1996, the Fund's portfolio turnover
rate was 104%. The Fund may pay a greater amount in brokerage commissions than
similar size funds with a lower turnover rate. In addition, since the Fund may
have a high rate of portfolio turnover, the Fund may realize capital gains or
losses. Capital gains will be distributed annually to the shareholders. Capital
losses cannot be distributed to shareholders but may be used to offset capital
gains at the Fund level and carried forward for up to eight years to the extent
there are no gains to offset for a particular year. See "Taxes" both in the
Prospectus and in this Statement of Additional Information. The portfolio
turnover rate of the Fund may vary significantly from year to year.
    

                                       16
<PAGE>   41
                             DIRECTORS AND OFFICERS

         The Directors and officers of the Fund, their addresses, ages,
positions with the Fund and principal occupations during the past five years are
set forth below.

   
<TABLE>
<CAPTION>
                                                    Position with Registrant and
 Name and Address                           Age     Occupation(s) During Past 5 Years
 ----------------                           ---     ---------------------------------
<S>                                         <C>     <C>
 GEORGE A. NEEDHAM*                         53      Chairman and Director of the Fund; Chairman of the
 445 Park Avenue                                    Board and Chief Executive Officer of Needham & Company
 New York, NY 10022                                 Inc. since 1985.


 RAJ RAJARATNAM*                            38      President and Director of the Fund; President of the Adviser;
 445 Park Avenue                                    President and Chief Operating Officer of Needham &
 New York, NY 10022                                 Company, Inc. since 1989.

 GEORGE GOULD                               68      Director of the Fund; Vice Chairman of Klingenstein, Fields & Co., L.P.
                                                    (a registered investment adviser) since 1989; Director
                                                    of Illinois Central Corp. and Federal Home Loan Moartgage
                                                    Corp. (Freddie Mac); Trustee of DBL Liquidating Trust.

 JAMES POITRAS                              54      Director of the Fund; Chairman, President and Chief Executive
                                                    Officer of Integrated Silicon Systems (a computer
                                                    software company) since 1985.

 F. RANDALL SMITH                           57      Director of the Fund; Co-Founder and Managing Partner of Train, Smith
                                                    Counsel (a registered investment adviser) since 1975.

</TABLE>
    
- ------------------------
* An "interested person" as defined in the 1940 Act.

                                       17
<PAGE>   42

   
<TABLE>
<S>                                          <C>    <C>
 HOWARD S. SCHACHTER                         52     Executive Vice President of the Fund; Executive Vice
 445 Park Avenue                                    President of the Adviser; Managing Director of Needham
 New York, New York 10022                           & Company, Inc. since October 1992; Executive Vice
                                                    President, Cramer & Co., from October 1991 to October
                                                    1992; Principal, Sanford C. Bernstein & Co., from March
                                                    1989 to October 1991.

 ROGER C. COTTA                              57     Treasurer of the Fund; Managing Director of Needham &
                                                    Company, Inc. since 1992; prior to 1992, a General 
                                                    Partner at David J. Greene & Company (a registered
                                                    investment adviser).

 WILLIAM H. BOHNETT                          47     Secretary of the Fund; Partner of Fulbright & Jaworski L.L.P 
                                                    (law firm), counsel to the Fund since February  1991.
</TABLE>
    


        The fees for non-interested directors, $5,500 per year and $ 500 for    
each meeting attended in person or by telephone, are paid by the Fund. The Board
of Directors has established an audit committee, comprised of the Fund's
non-interested directors, which will review the audits of the Fund and recommend
firms to serve as independent auditors of the Fund. As of the date of this
Statement of Additional Information, all of the Fund's outstanding shares were
owned by Needham & Company, Inc. and George A. Needham.   

         For the fiscal year ending December 31, 1996, the Fund estimates it
will pay the following in directors' compensation:

                               COMPENSATION TABLE
            (estimates for the fiscal year ending December 31, 1996)
<TABLE>
<CAPTION>
                          Aggregate           Pension or Retirement     Estimated         Total Compensation
                          Compensation        Benefits Accrued as       Annual Benefits   from Registrant &
 Name of Director         from Registrant     Part of Fund Expenses     upon Retirement   Fund Complex
 ----------------         ---------------     ---------------------     ---------------   ------------------
<S>                       <C>                 <C>                       <C>               <C>
 George A. Needham        $   0                  $0                        $0                $    0
 Raj Rajaratnam               0                   0                         0                     0
 George Gould             7,500                   0                         0                 7,500
 James Poitras            7,500                   0                         0                 7,500
 F. Randall Smith         7,500                   0                         0                 7,500
</TABLE>

                                       18

<PAGE>   43
         Directors and employees of the Fund and the Adviser are permitted to
engage in personal securities transactions subject to the restrictions and
procedures contained in the Fund's Code of Ethics, which was approved by the
Boards of Directors of the Fund and the Adviser.

                        DETERMINATION OF NET ASSET VALUE

         The net asset value per share of the Fund will be determined on each
day when the New York Stock Exchange (the "Exchange") is open for business at
the close of the Exchange and will be computed by determining the aggregate
market value of all assets of the Fund less its liabilities, and then dividing
by the total number of shares outstanding. The determination of net asset value
for a particular day is applicable to all applications for the purchase of
shares as well as all requests for the redemption of shares received before the
close of trading on the Exchange on that day. Shares of the Fund are sold at the
public offering price which is determined once each day the Fund is open for
business and is the net asset value per share.

         Portfolio securities positions for which market quotations are readily
available are stated at the last sale price reported by the principal exchange
for each such security as of the exchange's close of business. Securities for
which no sale has taken place during the day and securities which are not listed
on an exchange are valued at the mean of the current closing bid and asked
prices. Foreign market closing prices are translated into U.S. dollar values at
the mean of the bid and asked prices for the particular foreign currency as
quoted on the valuation date. The value of a financial futures contract equals
the unrealized gain or loss on the contract that is determined by marking it to
the current settlement price for a like contract acquired on the day on which
the commodity futures contract is being valued. A settlement price may not be
used if the market makes a limit move with respect to the financial futures
contract. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market.

         Short-term investments denominated in U.S. dollars that will mature in
60 days or less are stated at amortized cost; short-term investments denominated
in foreign currencies are stated at amortized cost as determined in the foreign
currency, translated to U.S. dollars at the current day's exchange rate. All
other securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors, although the actual calculations may be made by persons
acting pursuant to the direction of the Board of Directors. The assets of the
Fund may also be valued on the basis of valuations provided by a pricing service
approved by the Board of Directors.

         Generally, trading in foreign securities and futures contracts, as well
as corporate bonds, United States Government securities and money market
instruments, is substantially completed each day at various times prior to the
close of the Exchange. The values of such securities used in determining the net
asset value of the shares of the Fund may be computed as of such times. Foreign
currency exchange rates are also generally determined prior to the close of the
Exchange. Occasionally, events affecting the value of such securities and such
exchange rates may occur between such times and the close of the Exchange which
will not be reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur during 

                                       19

<PAGE>   44

such period, then these securities will be valued at their fair market value as
determined in good faith by the Directors.

                         TAX-SHELTERED RETIREMENT PLANS

         The Fund offers certain tax-sheltered retirement plans through which
shares may be purchased, including IRAs (and "rollovers" from existing
retirement plans) for individuals and their spouses and SEP-IRAs. Shares of the
Fund may also be purchased by Qualified Retirement Plans such as profit-sharing
and money purchase plans, 401(k) Plans and other Defined Contribution Plans, and
by Defined Benefit Plans. Persons who wish to establish a tax-sheltered
retirement plan should consult their own tax advisers or attorneys regarding
their eligibility to do so and the laws applicable thereto, such as the
fiduciary responsibility provisions and diversification requirements and the
reporting and disclosure obligations under the Employee Retirement Income
Security Act of 1974. The Fund is not responsible for compliance with such laws.
Further information regarding the retirement plans, including applications and
fee schedules, may be obtained upon request to the Fund.

                                     TAXES

TAXATION OF THE FUND -- IN GENERAL

         The Fund is a separate entity for federal income tax purposes and the
Fund intends to has qualify and elect to be treated for each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). The Fund intends to continue to so qualify and
elect to be treated as a regulated investment company so long as to do so is in
the best interests of its shareholders. To so qualify, the Fund, among other
things, must (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
(b) derive less than 30% of its gross income from the sale or other disposition
of any of the following which was held less than three months (the "30% test"):
(i) stock or securities; (ii) options, futures or forward contracts (other than
on foreign currencies) or (iii) foreign currencies (or options, futures or
forward contracts on foreign currencies) but only if such currencies (or
options, future or forward contracts) are not directly related to the Fund's
principal business of investing in stock or securities; and (c)(i) have at least
50% of the market value of the Fund's assets represented by cash, government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not have more than 25% of the value
of its assets invested in the securities of any one issuer (other than
government securities).

         In addition, the Fund must satisfy the distribution requirements of the
Code, including the requirement that it distribute at least 90% of its
investment company taxable income annually. By qualifying (and electing to be
treated) as a regulated investment company, the Fund will not be subject to
federal income tax on its investment company taxable income and net capital gain
that it distributes to shareholders. However, if for any taxable year the Fund
does not satisfy the requirements of Subchapter M of the Code, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, 

                                       20

<PAGE>   45

and such distributions will be taxable to shareholders as ordinary income to
the extent of that Fund's current or accumulated earnings or profits.

         The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute (i) at least 98% of its ordinary income realized during such
calendar year, (ii) at least 98% of its capital gain net income for the twelve
month period ending on October 31 (or December 31, if the Fund so elects), and
(iii) any income or gain from the prior year that was neither distributed to
shareholders nor taxed to the Fund for such year. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.

         As long as the Fund qualifies as a regulated investment company for
U.S. federal income tax purposes and distributes all of its investment company
taxable income and net capital gain, it will not be subject to any corporate
income or excise taxes in the State of Maryland.

TAXATION OF THE FUND'S INVESTMENTS

         Ordinarily, gains and losses realized from portfolio transactions are
treated as capital gain or loss. However, all or a portion of the gain or loss
from the disposition of non-U.S. dollar denominated securities (including debt
instruments, certain financial forward, futures and option contracts, and
certain preferred stock) may be treated as ordinary income or loss under Section
988 of the Code. In addition, all or a portion of the gain realized from the
disposition of market discount bonds is treated as ordinary income under Section
1276 of the Code. Generally, a market discount bond is defined as any bond
bought by the Fund after its original issuance, at a price below its face or
accredited value. Finally, all or a portion of the gain realized from engaging
in "conversion transactions" is treated as ordinary income under Section 1258 of
the Code. "Conversion transactions" are defined to include certain forward,
futures, option and straddle transactions, transactions marketed or sold to
produce capital gains, or transactions described in applicable Treasury
regulations.

         Under Section 1256 of the Code, any gain or loss the Fund realizes from
certain futures or forward contracts and options transactions is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Gain or
loss arises upon exercise or lapse of such contracts and options as well as from
closing transactions. In addition, any such contracts or options remaining
unexercised at the end of the Fund's taxable year are treated as sold for their
then fair market value, resulting in additional gain or loss to the Fund
characterized in the manner described above.

         Offsetting positions held by the Fund involving certain financial
forward, futures or options contracts (including certain foreign currency
forward contracts or options) may constitute "straddles." "Straddles" are
defined to include "offsetting positions" in actively traded personal property.
The tax treatment of "straddles" is governed by Sections 1092 and 1258 of the
Code, which, in certain circumstances, override or modify the provisions of
Sections 1256 and 988. If the Fund were treated as entering into "straddles" by
reason of its engaging in certain forward contracts or options transactions,
such "straddles" would be characterized as "mixed straddles" if the forward
contracts or options transactions comprising a part of such "straddles" were
governed by Section 1256. The Fund may make one or more elections with respect
to "mixed straddles." Depending on which election is made, if any, the results
to the Fund may 

                                       21

<PAGE>   46

differ. If no election is made to the extent the "straddle" rules apply to
positions established by the Fund, losses realized by the Fund will be deferred
to the extent of unrealized gain in the offsetting position. Moreover, as a
result of the "straddle" rules, short-term capital loss on "straddle" positions
may be recharacterized as long-term capital loss, and long-term capital gains
may be treated as short-term capital gains.

         In order to qualify as a regulated investment company, the Fund must
derive less than 30% of its annual gross income as gain from the sale or other
disposition of securities or other investments held less than three months and
will limit its activities in options, futures contracts, options on futures,
forward contracts and transactions subject to Section 988 of the Code to the
extent necessary to comply with this requirement.

         If the Fund invests in any non-U.S. corporation that either satisfies
(i) the "passive income test" (e.g., receives at least 75% of its annual gross
income from passive sources, such as sources that produce interest, dividend,
rental, royalty or capital gain income) or (ii) the "passive asset test" (e.g.,
at least 50% of its assets consist of assets which produce passive income)
("passive foreign investment company" or "PFIC") and that does not distribute
its income on a regular basis, the Fund could be subject to federal income tax
and additional interest charges on "excess distributions" received from such
company or gain from the sale of stock in such company, even if all income or
gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. If the Fund were to invest in the stock of a passive
foreign investment company and elect to treat such company as a "qualified
electing fund" under the Code (and the company agreed to adhere to certain
information reporting requirements), in lieu of the foregoing requirements, the
Fund would be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts would be subject to the 90% and
calendar year distribution requirements described above even if the Fund
received no money to distribute. To satisfy those distribution requirements, the
Fund would have to use cash from other sources, including proceeds from the
disposition of its assets. Finally, under certain proposed Treasury regulations,
the Fund may be able to employ a mark-to-market approach in dealing with shares
of PFICs and thereby avoid the application of the excess distribution rules in
the case of PFICs as to which a qualified electing fund election is not
available. However, the gain realized under such approach would impact upon the
amount of distributions required by the Fund so as to avoid the imposition of
the 4% excise tax (even though no cash would be available from such
mark-to-market transaction with which to make any such distribution).
Accordingly, the Fund will limit its investments in such passive foreign
investment companies and will undertake appropriate actions to limit its tax
liability, if any, with respect to such investments.

TAXATION OF THE SHAREHOLDERS

         Distributions of net investment income and the excess of net short-term
capital gain over net long-term capital loss are taxable as ordinary income to
shareholders. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital loss) are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the Fund
have been held by such shareholders. Any loss realized upon a taxable
disposition of shares within six months from the date of 

                                       22

<PAGE>   47

their purchase is treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by shareholders during such
period.

         Distributions of net investment income and capital gain net income are
taxable as described above whether received in cash or reinvested in additional
shares. A shareholder's tax basis in each share received from the Fund is equal
to the fair market value of such share on the payment date.

         Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's tax basis, such distribution nevertheless is taxable to the
shareholder as ordinary income or long-term capital gain as described above,
even though, from an investment standpoint, it may constitute a partial return
of capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a distribution receive a return
of investment upon such distribution which is nevertheless taxable to them.

         Upon a redemption of Fund shares, a shareholder ordinarily recognizes a
taxable gain or loss depending upon the difference between the amount realized
and his tax basis in his Fund shares. Such gain or loss is treated as a capital
gain or loss if the shares are held as capital assets and is long-term or
short-term depending upon whether the shareholder's holding period exceeds one
year. A sales load paid in purchasing shares of the Fund cannot be taken into
account for purposes of determining gain or loss on the redemption or exchange
of such shares within 90 days after their purchase to the extent shares of the
Fund are subsequently acquired without payment of a sales load pursuant to the
30-day reinvestment privilege. Such load results in an increase in the
shareholder's tax basis in the shares subsequently acquired. Moreover, any loss
realized upon a taxable disposition of shares within six months from the date of
their purchase is treated as a long-term capital loss to the extent of long-term
capital gain distributions received from the Fund during such six-month period.
Finally, all or a portion of any loss realized upon a taxable disposition of
Fund shares may be disallowed if other shares of the same Fund are purchased
(including a purchase by automatic reinvestment) within 30 days before or after
such disposition. In such a case, the tax basis of the shares acquired is
adjusted to reflect the disallowed loss.

         Income received by the Fund may give rise to withholding and other
taxes imposed by foreign countries. If more than 50% of the value of the Fund's
assets at the close of a taxable year consists of securities of foreign
corporations, the Fund may make an election that will permit shareholders to
take a credit (or, if more advantageous, a deduction) for foreign income taxes
paid by the Fund, subject to limitations contained in the Code. Investors would
then include in gross income both dividends paid to the shareholders and the
foreign taxes paid by the Fund on its foreign investments. The Fund cannot
assure investors that they will be eligible for the foreign tax credit. The Fund
will advise the shareholders annually of their share of any creditable foreign
taxes paid by the Fund.

         Taxation of a shareholder who, as to the U.S., is a nonresident alien
individual, foreign trust or estate, foreign corporation or foreign partnership
(a "Foreign Shareholder") depends, in part, on whether the Foreign Shareholder's
income from the 

                                       23

<PAGE>   48

Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.

         If the Foreign Shareholder is a non-resident alien and the income from
the Fund is not effectively connected with a U.S. trade or business carried on
by the Foreign Shareholder, Fund distributions other than net capital gains
distributions and distributions not out of earnings and profits are subject to
a 30% (or lower treaty rate) U.S. withholding tax. Furthermore, such Foreign
Shareholders are subject to an increased U.S. tax on their income if the Fund
elects (as described above) to "pass through" amounts of foreign taxes paid by
the Fund due to the fact that such Foreign Shareholders are not able to claim a
credit or deduction with respect to the foreign taxes treated as having been
paid by them. Net capital gain distributions to, and capital gains realized by,
such a Foreign Shareholder upon the sale of shares or receipt of distributions
which are in excess of its tax basis and not made from earnings and profits are
not subject to U.S. tax unless the Foreign Shareholder is an individual and is
present in the U.S. for 183 days or more during the taxable year in which the
gain was realized. Foreign Shareholders may also be subject to 31% backup
withholding unless appropriate certification is provided.

         If a shareholder is a resident alien or if dividends or distributions
from the Fund are effectively connected with a U.S. trade or business carried on
by the shareholder, then Fund distributions and any gains realized with respect
to the shares are subject to U.S. federal income tax at the rates applicable to
U.S. citizens or domestic corporations, as appropriate.

         The value of shares held by an individual Foreign Shareholder, even
though he is a nonresident at his death, is includible in his gross estate for
U.S. federal estate tax purposes.

         The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
above. Such shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign
Shareholders are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is or is not effectively connected with a
U.S. trade or business carried on by them, (b) whether they may claim the
benefits of an applicable tax treaty, and (c) any other tax consequences to them
of an investment in the Fund.

         The foregoing discussion is a general summary of certain of the current
federal income tax laws affecting the Fund and investors in the shares. The
discussion does not purport to deal with all of the federal income tax
consequences applicable to the Fund, or to all categories of investors, some of
which may be subject to special rules. Investors should consult their own
advisors regarding the tax consequences, including state and local tax
consequences to them of investment in the Fund. Foreign investors should also
consult their tax advisers with respect to the applicability of a 30%
withholding tax (which may be reduced or eliminated under certain income tax
treaties) upon Fund distributions of ordinary income.

                                       24
<PAGE>   49
                             PERFORMANCE INFORMATION

         The Fund may advertise its performance in terms of average annual total
return for 1, 5 and 10 year periods, or for such lesser periods as the Fund has
been in existence. Average annual total return is computed by finding the
average annual compounded rates of return over the periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:

                                  P(1+T)n = ERV

Where:   P       =    a hypothetical initial payment of $1,000
         T       =    average annual total return
         n       =    number of years
         ERV     =    ending redeemable value of a hypothetical $1,000 payment
                      made at the beginning of the 1, 5 or 10 year periods at
                      the end of the year or period.

         The calculation assumes an initial $1,000 payment and assumes all
dividends and distributions by the Fund are reinvested at the price stated in
the Prospectus on the reinvestment dates during the period, and includes all
recurring fees that are charged to all shareholder accounts.

         The Fund may also advertise performance in terms of aggregate total
return. Aggregate total return for a specified period of time is determined by
ascertaining the percentage change in the net asset value of shares of the Fund
initially acquired assuming reinvestment of dividends and distributions and
without giving effect to the length of time of the investment according to the
following formula:

                               100 [(B-A)/A] = ATR

Where:   A       =    initial investment
         B       =    value at end of specified period
         ATR     =    aggregate total return.

         The calculation assumes all distributions by the Fund are reinvested at
the price stated in the Prospectus on the reinvestment dates during the period,
and includes all recurring fees that are charged to all shareholder accounts.

                                       25
<PAGE>   50
                             ADDITIONAL INFORMATION

CUSTODIAN

         PNC Bank, National Association is the custodian of the Fund's portfolio
securities, cash, coins and bullion. The Custodian is authorized, upon the
approval of the Fund, to establish credits or debits in dollars or foreign
currencies with, and to cause portfolio securities of the Fund to be held by,
its overseas branches or subsidiaries, and foreign banks and foreign securities
depositories which qualify as eligible foreign custodians under the rules
adopted by the Securities and Exchange Commission.

INDEPENDENT AUDITORS

         Ernst & Young LLP serves as the Fund's independent auditors.

                                       26
<PAGE>   51
                              FINANCIAL STATEMENTS

                             THE NEEDHAM FUNDS, INC.


                       Statement of Assets and Liabilities

                               December 18, 1995

<TABLE>
<CAPTION>                                                                         Needham
                                                                                Growth Fund
                                                                                -----------
<S>                                                                              <C>     
Assets:
      Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $100,000
      Deferred organization expenses (Note 1)  . . . . . . . . . . . . . .        130,500
                                                                                 --------
         Total Assets  . . . . . . . . . . . . . . . . . . . . . . . . . .       $230,500          
                                                                                 ========

Liabilities:
      Organization expenses payable (Note 1) . . . . . . . . . . . . . . .       $130,500
                                                                                 --------
                                                                                 $130,500          
                                                                                 ========

Net Assets:
      Common Stock, $0.001 par value, 1,000,000,000 shares authorized;
      10,000 shares issued and outstanding . . . . . . . . . . . . . . . .             10
      Capital surplus  . . . . . . . . . . . . . . . . . . . . . . . . . .         99,990         
                                                                                 --------
      Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $100,000
                                                                                 ========

      Net Asset value per share  . . . . . . . . . . . . . . . . . . . . .         $10.00         
                                                                                 ========
</TABLE>


NOTE 1

         The Needham Funds, Inc. was incorporated in the State of Maryland on
October 12, 1995 and is registered under the Investment Company Act of 1940, 
as amended, as an open-end management investment company. The Needham Funds, 
Inc. may offer one or more portfolios of its shares; at present only shares of
Needham Growth Fund (the "Fund") are being offered. Costs incurred and to be
incurred in connection with the organization of The Needham Funds, Inc. and the
Fund will be paid or advanced by Needham & Company, Inc. (the "Distributor") and
reimbursed by the Fund. Organizational and initial registration costs will be
deferred and amortized on a straight line basis over five years from the
commencement of the Fund's operations. These expenses will be advanced by
the Distributor and will be a payable to the Distributor and are to be 
reimbursed by the Fund over a period of not more than 5 years. If any of the 
10,000 initial shares (the "Initial Shares") of the Fund are redeemed 

                                      27
<PAGE>   52
by a holder thereof during the amortization period, the redemption proceeds
will be reduced by the pro rata share of the unamortized organizational
expenses in the same ratio as the number of Initial Shares being redeemed bears
to the number of Initial Shares outstanding at the time of redemption.

NOTE 2

         The Fund intends to enter into an Investment Advisory Agreement with
Needham Investment Management L.L.C. (the "Adviser") for day-to-day portfolio
management services to be provided by the Adviser to the Fund. The Investment
Advisory Agreement provides for the Adviser to receive a fee computed weekly and
payable monthly at an annual rate of 1.25%, such fee being based upon the Fund's
average daily net assets. The Investment Advisory Agreement will initially be
effective for a two-year period and thereafter will be approved on an annual
basis.

         PFPC Inc. (the "Administrator") will provide administrative,
accounting, transfer agency and shareholder services to the Fund. Under the
Administration and Accounting Services Agreement, the Administrator will 
receive a fee payable monthly at an annual rate of 0.10% of the Fund's net 
assets on the first $200 million of average daily net assets of the Fund, 
subject to a minimum annual fee of $100,000. Under the Transfer Agency 
Services Agreement, PFPC Inc. will receive a minimum monthly fee of $3,000.


        The Fund has also entered into a Distribution and Services Agreement
with the Distributor, an affiliate of the Adviser, under which the Fund may 
pay a distribution services fee to the Distributor or others at an annual rate
of up to 0.25% of the aggregate average daily net assets of the Fund.




                                      28
<PAGE>   53
                         REPORT OF INDEPENDENT AUDITORS

Shareholder and Board of Directors
Needham Growth Fund

We have audited the accompanying statement of assets and liabilities of Needham 
Growth Fund, a portfolio of The Needham Funds, Inc., as of December 18, 1995. 
This statement of assets and liabilities is the responsibility of the Fund's 
management. Our responsibility is to express an opinion on this statement of 
assets and liabilities based on our audit.

We conducted our audit in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether this statement of assets and liabilities is 
free of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the statement of assets and 
liabilities. An audit also includes assessing the accounting principles used 
and significant estimates made by management, as well as evaluating the overall 
statement of assets and liabilities presentation. We believe that our audit of 
the statement of assets and liabilities provides a reasonable basis for our 
opinion. 

In our opinion, the statement of assets and liabilities referred to above 
presents fairly, in all material respects, the financial position of Needham 
Growth Fund at December 18, 1995 in conformity with generally accepted 
accounting principles.

                                             By: /s/ Ernst & Young LLP
                                                 ---------------------
                                                 ERNST & YOUNG LLP

New York, New York
December 19, 1995

<PAGE>   54

                            THE NEEDHAM FUNDS, INC.
                              NEEDHAM GROWTH FUND
                            STATEMENT OF NET ASSETS
                                 MARCH 31, 1996
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                        SHARES                            VALUE
                                                        ------                            -----
 COMMON STOCK (56.7%)
 --------------------
    <S>                                                  <C>                          <C>
 Biotechnology  - (2.3%)
    Arthrocare Corp.                                      1,500                       $    33,000
    Athena Neurosciences, Inc.                            1,500                            27,938
    Cygnus Therapeutic Systems, Inc.                      2,000                            41,750
    Ergo Science Corporation                              1,000                            20,250
                                                                                      -----------
                                                                                          122,938
                                                                                      -----------
 Business Services - (0.8%)
    Caribiner International, Inc.                           500                            12,875
    Data Processing Resources Corporation                 1,000                            27,500
                                                                                      -----------
                                                                                           40,375
                                                                                      -----------
 Chemicals - (0.6%)
    Landec Corp.                                          1,800                            29,250
                                                                                      -----------

 Computers - Hardware - (3.9%)
    Hewlett Packard Co.                                   1,000                            94,000
    International Business Machines Corp.                 1,000                           111,125
                                                                                      -----------
                                                                                          205,125
                                                                                      -----------
 Computer Software - (14.9%)
    Applied Microsystems Corp.                            2,000                            18,750
    CSG Systems International, Inc.                       1,000                            23,000
    Cybercash, Inc.                                       1,000                            34,000
    Cylink Corp.                                          1,000                            17,750
    Documentum, Inc.                                      2,000                            70,500
    F.Y.I., Inc.                                          1,000                            16,750
    Forte Software, Inc.                                  2,000                            81,000
    IKOS Systems, Inc.                                    2,500                            41,875
    Indus Group, Inc.                                     1,200                            23,400
    Oracle Systems Corporation                            1,000                            47,125
    Platinum Technology, Inc.                             2,500                            37,812
    Powercerv Corporation                                 1,100                            16,380
    Prism Solutions, Inc.                                 1,500                            39,750
    Raptor Systems, Inc.                                  1,000                            29,875
    Red Brick Systems, Inc.                               1,500                            64,500
    Smartflex Systems, Inc.                               2,500                            36,875
    Software 2000, Inc.                                   1,500                            25,687
    Systemsoft Corporation                                2,500                            40,000
    Xylan Corporation                                     2,200                           114,400
                                                                                      -----------
                                                                                          779,429
                                                                                      -----------
 Cosmetics - (0.4%)
    Revlon, Inc., Class A                                   800                            22,000
                                                                                      -----------

 Electrical Equipment - (0.7%)
    Berg Electronics Corporation                          1,500                            35,250
                                                                                      -----------

 Financial Services  - (2.6%)
    Capital One Financial Corp.                           2,000                            55,000
    First USA Paymentech, Inc.                            1,000                            35,250
    RAC Financial Group, Inc.                             2,000                            45,000
                                                                                      -----------
                                                                                          135,250
                                                                                      -----------
</TABLE>



<PAGE>   55

<TABLE>
<CAPTION>
                                                        SHARES                            VALUE
                                                        ------                            -----
 COMMON STOCK (56.7%) (Continued)
 --------------------            
    <S>                                                 <C>                          <C>
 Health Care - (2.0%)
    Pediatric Services of America                       1,000                        $    25,375
    Phymatrix, Inc.                                     1,000                             22,750
    Rotech Medical Corp.                                1,500                             55,500
                                                                                     -----------
                                                                                         103,625
                                                                                     -----------
Hospital Management  - (3.6%)
    Home Health Corp. of America                        2,500                             28,437
    Medpartners Mullikin, Inc.                          2,500                             71,250
    NCS Healthcare, Inc., Class A                       1,000                             24,500
    Quantum Health Resources, Inc.                      3,000                             31,500
    Sterling Healthcare Group                           2,500                             35,625
                                                                                     -----------
                                                                                         191,312
                                                                                     -----------
 Hotel/Restaurants - (0.5%)
    Studio Plus Hotels, Inc.                            1,000                             27,750
                                                                                     -----------

Medical Devices - (1.7%)
    ESC Medical Systems Ltd.                            1,000                             34,500
    Fischer Imaging Corporation                         2,500                             36,250
    Physician Support Systems                           1,500                             25,688
                                                                                     -----------
                                                                                          96,438
                                                                                     -----------
 Medical Institution Supplies - (2.3%)
    Intelligent Medical Imaging                         2,000                             23,500
    NABI, Inc.                                          2,500                             32,969
    Vivus, Inc.                                         2,000                             62,000
                                                                                     -----------
                                                                                         118,469
                                                                                     -----------
 Networking - (3.1%)
    Cisco Sytems                                        1,500                             69,563
    Newbridge Networks Corp.                            1,000                             56,250
    Xircom, Inc.                                        2,500                             34,687
                                                                                     -----------
                                                                                         160,500
                                                                                     -----------
 Pharmaceuticals - (3.4%)
    Intercardia, Inc.                                   1,000                             25,250
    Johnson & Johnson                                     500                             46,125
    Medimmune, Inc.                                     1,000                             15,750
    Nextar Pharmaceuticals, Inc.                        1,500                             29,625
    Rhone Poulenc Rorer, Inc.                           1,000                             61,000
                                                                                     -----------
                                                                                         177,750
                                                                                     -----------
 Retail - (9.0%)
    Autozone, Inc.                                      2,000                             67,750
    Baby Superstore, Inc.                               2,500                            113,750
    Barnes & Noble, Inc.                                1,500                             52,125
    Borders Group, Inc.                                 1,500                             42,750
    Cannondale Corporation                              2,000                             36,750
    Donnkenny, Inc.                                     2,500                             40,312
    Mossimo, Inc.                                       1,650                             53,419
    Pep Boys - Manny, Moe, & Jack                       2,000                             67,000
                                                                                     -----------
                                                                                         473,856
                                                                                     -----------
  Semi-Conductors - (0.8%)
    ETEC Systems, Inc.                                  1,500                             21,000
    Oak Technology, Inc.                                1,000                             21,500
                                                                                     -----------
                                                                                          42,500
                                                                                     -----------
</TABLE>

<PAGE>   56

<TABLE>
<CAPTION>
                                                        SHARES                            VALUE
                                                        ------                            -----
 COMMON STOCK (56.7%) (Continued)
 --------------------            
<S>                                                    <C>                            <C>
 Telecommunications - (3.3%)
    DIGI International, Inc.                             2,500                        $   68,750
    Omnipoint Corporation                                1,000                            25,500
    Orange PLC (ADR)                                       500                             8,563
    Premiere Technologies, Inc.                            500                            11,625
    Sterling Commerce, Inc.                              1,400                            43,050
    Trescom International, Inc.                          1,000                            14,750
                                                                                      ----------
                                                                                         172,238
                                                                                      ----------
 Toys - (0.8%)
    Galoob (Lewis) Toys, Inc.                            2,000                            40,500
                                                                                      ----------

 TOTAL COMMON STOCK
  (Cost $2,483,594)                                                                    2,974,555
                                                                                      ----------

                                                          PAR
                                                         (000)
                                                         -----

SHORT TERM INVESTMENTS (45.0%)
- ------------------------------
Time Deposits - (35.0%)
    PNC BANK N.A. (Time Deposits), 04/01/96
           4.50% (Cost $1,837,308)                      $1,837                         1,837,308
                                                                                      ----------


Money Market Funds - (10.0%)                           SHARES
                                                       ------

    Temporary Investment Fund, Inc. -
      TempCash Portfolio                               260,479                           260,479
    Temporary Investment Fund, Inc. -
      TempFund Portfolio                               260,479                           260,479
                                                                                      ----------
      (Cost $520,958)                                                                    520,958
                                                                                      ----------


TOTAL SHORT TERM INVESTMENTS                                                           2,358,266
                                                                                      ----------
(Total Cost $2,358,266)

                                                          PAR
CORPORATE BONDS (2.1%)                                   (000)
- ----------------------                                   -----

The Men's Wearhouse, Inc. Conv. Deb.,
 03/01/03 5.25% (Cost $100,000)                           $100                           108,000
                                                                                      ----------
</TABLE>

<PAGE>   57

INVESTMENTS IN OPTIONS PURCHASED (0.6%)

<TABLE>
<CAPTION>
                                                           CONTRACTS
                                                           ---------
<S>                                                             <C>                    <C>
Put Option on Oak Technology, Inc.
     Strike Price $27.50, Expiring 06/22/96                     10                     $    7,375
Put Option on S&P 400 Midcap Index
     Strike Price $225.00, Expiring 06/22/96                    50                         25,314 
                                                                                       ----------

TOTAL INVESTMENTS IN OPTIONS PURCHASED                                                     32,689
                                                                                       ----------
     (Cost $28,228)

TOTAL INVESTMENTS - (104.4%)                                                            5,473,510
                                                                                       ----------
     (Cost $4,970,088)

OTHER ASSETS, NET OF LIABILITIES - (-4.4%)
     Other Assets                                                                         262,565
     Payable for Securities Purchased                                                    (265,547)
     Other Liabilities                                                                   (227,092)
                                                                                       ----------
                                                                                         (230,074)
                                                                                       ---------- 

NET ASSETS - (100%), (applicable to 417,070 shares
 outstanding, $.001 par value, 1,000,000,000
 shares authorized)                                                                    $5,243,436
                                                                                       ==========

NET ASSET VALUE PER SHARE                                                                  $12.57
                                                                                       ==========
</TABLE>



SCHEDULE OF OPTION CONTRACTS WRITTEN


<TABLE>
<CAPTION>
                              Number of          Exercise               Expiration
Name of Issuer                Contracts          Price                  Date                Value
- --------------                ---------          -----                  ----                -----
<S>                                                                      <C>                <C>
Baby Superstore                   25              $45.00                 06/22/96           $12,969
Cisco Systems                     10               45.00                 07/20/96             6,000
Galoob (Lewis) Toys, Inc.         20               20.00                 08/17/96             6,750
Hewlett Packard                   10              100.00                 08/17/96             6,750
IBM                               10              120.00                 07/20/96             5,625
Newbridge Networks                10               55.00                 06/22/96             5,625
Oak Technology, Inc.              10               27.50                 06/22/96             1,375
Oracle Corp.                      10               55.00                 06/22/96             1,563
Pep Boys                          20               35.00                 07/20/96             5,125
Rhone Poulenc Rorer               10               65.00                 07/20/96             2,688
Rotech Medical                    15               45.00                 09/21/96             3,563
                                                                                            -------
Total Covered Call Options (Premiums Received $48,691)                                      $58,033
                                                                                            =======
</TABLE>
                                    
<PAGE>   58

                              NEEDHAM GROWTH FUND

                            STATEMENT OF OPERATIONS

      JANUARY 1, 1996 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1996

                                  (UNAUDITED)


<TABLE>
<S>                                                                  <C>
INVESTMENT INCOME
    Dividends                                                        $    590
    Interest                                                           14,692
                                                                     --------

      Total Investment Income                                          15,282
                                                                     --------

EXPENSES
    Advisory fees                                                       8,030
    Accounting  fees                                                    1,125
    Transfer Agent fees                                                   300
    Custodian fee                                                       2,841
    Legal fees                                                          9,863
    Audit fees                                                          5,548
    Directors fees                                                      6,411
    Shareholders' reports                                               2,466
    12b-1 plan fees                                                     1,623
    Other expenses                                                      6,585
                                                                     --------

             Total Expenses                                            44,792

    Expenses Waived and Reimbursable                                  (28,464)
                                                                     -------- 

             Net Expenses                                              16,328
                                                                     --------

            NET INVESTMENT LOSS                                        (1,046)
                                                                     --------

NET REALIZED AND UNREALIZED GAIN
  ON INVESTMENTS

Net Realized Gain on Investment Securities                             45,528

Change in Unrealized Appreciation (Depreciation)
of Investment Securities                                              494,080
                                                                     --------


NET GAIN ON INVESTMENT SECURITIES                                     539,608
                                                                     --------


             NET INCREASE IN NET ASSETS
             RESULTING FROM OPERATIONS                               $538,562
                                                                     ========

</TABLE>

<PAGE>   59


                              NEEDHAM GROWTH FUND

                       STATEMENT OF CHANGES IN NET ASSETS

      JANUARY 1, 1996  (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1996

                                  (UNAUDITED)


<TABLE>
<S>                                                                <C>
INCREASE (DECREASE) IN NET ASSETS

Operations:
    Net investment loss                                            $   (1,046)
    Net realized gain on investment securities                         45,528
    Change in unrealized appreciation (depreciation)
       of investment securities                                       494,080
                                                                   ----------

 Net Increase in Net Assets Resulting from Operations                 538,562
                                                                   ----------

Distributions from:
    Net investment income                                                   0
                                                                   ----------

Capital Share Transactions (1):
    Shares issued                                                   4,164,874
    Shares redeemed                                                         0
                                                                   ----------

    Net increase from capital share transactions                    4,164,874
                                                                   ----------

Total increase                                                      4,703,436


NET ASSETS

Beginning of period                                                   540,000
                                                                   ----------

End of period                                                      $5,243,436
                                                                   ==========

(1) Shares Issued and Redeemed
     Shares Issued                                                    363,070
     Shares Redeemed                                                        0
                                                                   ----------
                                                                      363,070
                                                                   ==========
</TABLE>

<PAGE>   60



                              NEEDHAM GROWTH FUND

                              FINANCIAL HIGHLIGHTS

                 FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                January 1, 1996
                                                                (Commencement
                                                                of operations)
                                                                   through
                                                                 March 31, 1996
                                                                               
- -------------------------------------------------------------------------------
<S>                                                             <C>
Net Asset Value, Beginning of Period                                   $10.00
                                                                       ------

Income From Investment Operations

     Net Investment Income                                               0.00

     Net Unrealized Gains on Securities                                  2.57

     Total From Investment Operations                                    2.57

                                                                             
- -----------------------------------------------------------------------------

Less Distributions
- ------------------

     Net Investment Income                                               0.00
                                                                         ----  
- -----------------------------------------------------------------------------

Net Asset Value, End of Period                                         $12.57

                                                                             
=============================================================================

Total Return                                                           25.70%#

                                                                              
- -----------------------------------------------------------------------------

Net Assets, End of Period                                          $5,243,436

Ratio of Expenses to Average
  Net Assets                                                           2.50%*(a)

Ratio of Net Investment Loss to
  Average Net Assets                                                 (0.16%)*(a)

Portfolio Turnover Rate                                               104.14%#

Average Commision Rate Paid                                           $0.0696
                                                                                 
- -----------------------------------------------------------------------------
</TABLE>
*  Annualized
#  Not Annualized

(a)  Had certain waivers and reimbursements not been in effect, the ratio of
expenses to average net assets for the period ended  March 31, 1996, would have
been 6.84% and the ratio of net investment loss to average net assets for the
period ended March 31, 1996 would have been (4.50%).

<PAGE>   61

                            THE NEEDHAM FUNDS, INC.

                              NEEDHAM GROWTH FUND

                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)


1.      ORGANIZATION:

        Needham Growth Fund (the "Fund") is a portfolio of The Needham Funds,
Inc. and is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company.  The Needham Funds,
Inc. was organized as a Maryland corporation on October 12, 1995.


2.      SIGNIFICANT ACCOUNTING POLICIES

        Security Valuation: Investments in securities listed or traded on a
nationally recognized securities exchange are valued at the last quoted sales
price on the date the valuations are made. Securities regularly traded in the
over-the-counter market are valued at the last quoted sales price on the NASDAQ
System.  If no sales price is available for a listed or NASDAQ security, or if
the security is not listed on NASDAQ, such security is valued at a price equal
to the mean of the latest bid and ask prices.  All other securities and assets
for which market quotations are not readily available are valued at their fair
value as determined in good faith by the Board of Directors.

        Federal Income Taxes: The Fund's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies and to distribute all its taxable income to its
shareholders. Therefore, no federal income tax provision is required.

        Distributions to Shareholders: Dividends to shareholders are recorded on
the ex-dividend date.

        Organizational Expenses: Organizational expenses are being amortized on
a straight line basis over a period not exceeding 60 months beginning at the
Fund's commencement of operations.

        Other: Security transactions are recorded on the trade date. Dividend
income is recorded on the ex-dividend date.  Interest income is recorded on the
accrual basis.


3.      INVESTMENT ADVISOR

        The Fund has engaged Needham Investment Management L.L.C. ("the
Advisor") to manage its investments. The Fund pays the Advisor a fee at the
annual rate of 1.25% of the average daily net asset value of the Fund.

        Needham Investment Management L.L.C. has voluntarily agreed to waive its
fee for, and to reimburse expenses of, the Fund in an amount that operates to
limit annual operating expense for the year ending December 31, 1996 to not more
than 2.50% of average daily net assets.  For the period ended March 31, 1996,
the Advisor has waived its fee of $8,030 and has agreed to reimburse other
expenses in the amount of $20,434. 

        Certain officers and directors of the Fund are also officers and
directors of the Advisor.





<PAGE>   62


4.      DISTRIBUTIONS TO SHAREHOLDERS

        The Fund had no distributions to shareholders for the period January 1,
1996 through March 31, 1996.


5.      DISTRIBUTION PLAN

        The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940. Under the plan in effect for the fiscal year
ending December 31, 1996, the Fund will pay Needham & Company, Inc. and any
other distributor or financial institution with which the Fund has an agreement,
a fee at an annual rate of 0.25 of 1% of the Fund's daily net assets.   For the
period ended March 31, 1996, the Fund incurred $1,623 of distribution fees.


6.      INVESTMENT TRANSACTIONS

        For the period January 1, 1996 through March 31, 1996, the Fund made
purchases of $22,340,492  and  sales of $1,984,605 in investment securities.


        At March 31, 1996, gross unrealized appreciation and depreciation for
financial reporting and federal income tax purposes of investment securities
were $540,310 and ($46,230), respectively. The Federal income tax basis of
investments is the same as the book basis.


7.      OPTIONS TRANSACTIONS

        For hedging purposes, the Fund may purchase and write (sell) put and
call options.  Put and call options give the holder the right to sell or
purchase, respectively, a specified amount of a security at a specified price
on a certain date.

        The risk with purchasing an option is that the Fund pays a premium
whether or not the option is exercised.  Additionally, the Fund bears the risk
of loss of premium and change in market value should the counterparty not
perform under the contract.  Put and call options purchased are accounted for
in the same manner as portfolio securities.  The cost of securities acquired
through the exercise of call options is increased by the premium paid.  The
proceeds from securities sold through the exercise of put options are decreased
by the premiums paid.

        When the Fund writes an option, the premium received by the Fund is
recorded as a liability and is subsequently adjusted to the current market
value of the option written.  Premiums received from writing options which
expire unexercised are recorded by the Fund on the expiration date as realized
gains from option transactions.  The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also treated as a realized gain, or if the premium is less than
the amount paid for the closing purchase transaction, as a realized loss.  If a
call option is exercised, the premium is added to the proceeds from the sale of
the underlying security in determining whether the Fund has a realized gain or
loss.  If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund.  In writing an option, the Fund bears the
market risk of an unfavorable change in the price of the security underlying
the written option.  Exercise of an option written by the Fund could result in
the Fund selling or buying a security at a price different from the current
market value.





<PAGE>   63


A summary of put and call options written by the Fund for the period ended
March 31, 1996 is as follows:


<TABLE>
<CAPTION>
                                                   NUMBER OF            PREMIUM
OPTIONS WRITTEN                                    CONTRACTS            RECEIVED
- ---------------                                    ---------            --------
<S>                                                     <C>               <C>
Options outstanding at
 beginning of period  . . . . . . . . . .                 -                     -
Options written . . . . . . . . . . . . .               150               $48,690
Options expired . . . . . . . . . . . . .                 -                     -
Options exercised . . . . . . . . . . . .                 -                     -
Options terminated in
 closing transactions . . . . . . . . . .                 -                     -
                                                        ---               -------
Options outstanding at
 March 31, 1996 . . . . . . . . . . . . .               150               $48,690
                                                        ===               =======
</TABLE>




8.    COMPONENTS OF NET ASSETS


      At March 31, 1996 net assets consisted of:

<TABLE>
         <S>                                                                 <C>
         Paid-in Capital                                                     $4,704,874
         Accumulated Net Investment Loss                                         (1,046)
         Accumulated Realized Net Gains                                          45,528
         Net Unrealized Appreciation (Depreciation)
          of Investment Securities                                              494,080
                                                                             ----------
                 Total Net Assets                                            $5,243,436
                                                                             ==========
</TABLE>





<PAGE>   64
                                    APPENDIX

CORPORATE BOND RATINGS

         Moody's Investors Service, Inc. Corporate Bond Ratings:

         Aaa -- Bonds which are rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

         Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be greater or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.

         A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.

         Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

         Ba -- Bonds rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

         B -- Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.

         Caa -- Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

                                      A-1
<PAGE>   65
         Ca -- Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

         C -- Bonds rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

         Moody's applies the numerical modifiers 1, 2 and 3 to each generic
rating classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.

         Standard & Poor's Corporate Bond Ratings:

         AAA -- Bonds rated AAA have the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.

         AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small degree.

         A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.

         BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.

         BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.

         B -- Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.

         The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB- rating.

         CCC -- Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial and economic
conditions to meet

                                      A-2
<PAGE>   66
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, they are not likely to have the
capacity to pay interest and repay principal.

         CC -- Bonds rated CC are typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC bond rating.

         C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- bond rating.

         The C rating may be used to cover a situation where a bankruptcy
petition has been filed but debt service payments are continued.

         CI -- The rating CI is reserved for income bonds on which no interest
is being paid.

         D -- Bonds rated D are in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating will also be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

         S&P modifies ratings AA to CCC by the addition of a plus
or minus to show relative standing within the major rating categories.

         Fitch Corporate Bond Ratings

         AAA -- Bonds and notes rated AAA are regarded as being of the highest
quality, with the obligor having an extraordinary ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.

         AA -- Bonds and notes rated AA are regarded as high quality
obligations. The obligor's ability to pay interest and repay principal, while
very strong, is somewhat less than for AAA rated securities and more subject to
possible change over the term of the issue.

         A -- Bonds and notes rated A are regarded as being of good quality. The
obligor's ability to pay interest and repay principal is strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.

         BBB -- Bonds and notes rated BBB are regarded as being of satisfactory
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds and notes with higher
ratings.

                                       A-3
<PAGE>   67
         BB -- Bonds and notes rated BB are considered speculative. The
obligor's ability to pay interest and repay principal may be affected over time
by adverse economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.

         B -- Bonds and notes rated B are considered highly speculative. While
bonds and notes in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and interest reflects
the obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.

         CCC -- Bonds and notes rated CCC have certain identifiable
characteristics which, if not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic environment.

         CC -- Bonds and notes rated CC are minimally protected. Default in
payment of interest and/or principal seems probable over time.

         C -- Bonds and notes rated C are in imminent default in payment of
interest or principal.

         DDD, DD and D -- Bonds and notes rated DDD, DD and D are in default on
interest and/or principal payments. Such bonds and notes are extremely
speculative and should be valued on the basis of their ultimately recovery value
in liquidation or reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds and notes, and "D" represents the lowest
potential for recovery.

         Note: Fitch ratings (other than the AAA, DDD, DD or D categories) may
be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories. These are refinements more closely
reflecting strengths and weaknesses, and are not to be used as trend indicators.

COMMERCIAL PAPER RATINGS

         Standard & Poor's Commercial Paper Ratings:

         A is the highest commercial paper rating category utilized by S&P,
which uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.

                                      A-4
<PAGE>   68
         Moody's Investors Service, Inc. Commercial Paper Ratings:

         Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well established access to
a range of financial markets and assured sources of alternate liquidity.

         Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

         Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.

         Fitch-1, Fitch-2, Duff 1 and Duff 2 Commercial Paper Ratings:

         Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for timely
payment. "Fitch-2" is considered very good grade paper and reflects an assurance
of timely payment only slightly less in degree than the strongest issue.

         Commercial paper issues rated "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment; excellent
liquidity factors supported by strong fundamental protection factors; and risk
factors which are very small. Issues rated "Duff 2" have a good certainty of
timely payment, sound liquidity factors and company fundamentals, small risk
factors and good access to capital markets.

                                      A-5
<PAGE>   69
PREFERRED STOCK RATINGS

         Moody's Investors Service, Inc. Preferred Stock Ratings:

         aaa -- An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of convertible preferred stocks.

         aa -- An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.

         a -- An issue which is rated a is considered to be an upper
medium-grade preferred stock. While risks are judged to be somewhat greater than
in the aaa and aa classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.

         baa -- An issue which is rated baa is considered to be medium-grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.

         ba -- An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.

         b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.

         caa -- An issue which is rated caa is likely to be in arrears on
dividend payments. This rating classification does not purport to indicate the
future status of payment.

         ca -- An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.

         c -- This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

                                      A-6
<PAGE>   70
         Standard & Poor's Preferred Stock Ratings:

         AAA -- This is the highest rating that may be assigned by S&P
to a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.

         AA -- A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.

         A -- An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effect of changes in circumstances and economic conditions.

         BBB -- An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.

         BB, B, CCC -- Preferred stocks rated BB, B and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

                                      A-7
<PAGE>   71
PART C.  OTHER INFORMATION


Item 24.    Financial Statement and Exhibits

            (a)      Financial Statements:

                     Included in Prospectus:

                     Financial Highlights (unaudited)

                     Included in the Statement of Additional Information:

                     (1)     Statement of Assets and Liabilities dated December
                             18, 1995
                                     
                     (2)     Report of Independent Auditors dated December 19, 
                             1995

                     (3)     Statement of Net Assets (unaudited) dated March
                             31, 1996

                     (4)     Statement of Operations (unaudited) for the
                             period ended March 31, 1996

                     (5)     Statement of Changes in Net Assets (unaudited) for
                             the period ended March 31, 1996

                     (6)     Financial Highlights (unaudited)

                     (7)     Notes to Financial Statements (unaudited)
    
            (b)      Exhibits:

   
<TABLE>
<CAPTION>
           Exhibit
           Number            Description
           -------           -----------
<S>                          <C>
              1      --      Articles of Incorporation of Registrant.
                             (Previously filed as Exhibit 1 to the Registration 
                             Statement.)

              2      --      By-Laws of Registrant. (Previously filed as
                             Exhibit 2 to the Registration Statement.)

              3      --      Not applicable.

              4      --      Form of Specimen Certificate of Shares of Needham
                             Growth Fund. (Previously filed as Exhibit 4 to 
                             Pre-Effective Amendment No. 1 to the Registration 
                             Statement.)

              5(a)   --      Form of Investment Advisory Agreement between
                             Registrant and Needham Investment Management 
                             L.L.C. (Previously filed as Exhibit 5(a) to the 
                             Registration Statement.)

              5(b)   --      Form of Investment Advisory Agreement Supplement
                             between Needham Growth Fund and Needham Investment
                             Management L.L.C. (Previously filed as Exhibit 5(b)
                             to the Registration Statement.)

              6      --      Distribution and Services Agreement between
                             Registrant and Needham & Company, Inc. (Previously
                             filed as Exhibit 6 to Pre-Effective Amendment No. 1
                             to the Registration Statement.)
</TABLE>
    


                                       C-1
<PAGE>   72
   
<TABLE>
<S>                          <C>
              7      --      Not applicable.

              8      --      Form of Custodian Services Agreement between
                             Registrant and PNC Bank, National Association. 
                             (Previously filed as Exhibit 8 to Pre-Effective 
                             Amendment No. 1 to the Registration Statement.)

              9(a)   --      Form of Administration and Accounting Services
                             Agreement between Registrant and PFPC Inc. 
                             (Previously filed as Exhibit 9(a) to Pre-Effective
                             Amendment No.1 to the Registration Statement.)

              9(b)   --      Form of Transfer Agency Services Agreement between
                             Registrant and PFPC Inc. (Previously filed as 
                             Exhibit 9(b) to Pre-Effective Amendment No. 1 to 
                             the Registration Statement.)

             10      --      Opinion and consent of Fulbright & Jaworski
                             L.L.P., Counsel to Registrant.

             11      --      Consent of Ernst & Young LLP, Independent
                             Auditors.

             12      --      Not applicable.

             13      --      Form of Initial Subscription Agreement between the
                             Fund and Needham Investment Management L.L.C. 
                             (Previously filed as Exhibit 13 to Pre-Effective 
                             Amendment No.1 to the Registration Statement.)

             14      --      Prototype of Individual Retirement Account Plan
                             (IRA). (Previously filed as Exhibit 14 to 
                             Pre-Effective Amendment No. 1 to the Registration 
                             Statement.)

             15      --      Plan of Distribution Pursuant to Rule 12b-1.
                             (Previously filed as Exhibit 15 to Pre-Effective 
                             Amendment No. 1 to the Registration Statement.)

             16      --      Not applicable.

             17      --      Financial Data Schedule.

             18      --      Not applicable.
</TABLE>
    

- ---------------------
         *       Previously filed.

                                       C-2
<PAGE>   73
Item 25. Persons Controlled by or Under Common Control with Registrant

         The Registrant and Needham Investment Management L.L.C. (the
"Adviser"), a Delaware limited liability company, may be deemed to be under the
common control of Needham & Company, Inc. a Delaware corporation.

Item 26. Number of Holders of Securities

   
         195 as of March 31, 1996.
    

Item 27. Indemnification

         Section 2-418 of the General Corporation Law of the State of Maryland,
the state in which the Registrant was organized, empowers a corporation, subject
to certain limitations, to indemnify its directors, officers, employees and
agents against expenses (including attorneys' fees, judgments, penalties, fines
and settlements) actually and reasonably incurred by them in connection with any
suit or proceeding to which they are a party so long as they acted in good faith
or without active and deliberate dishonesty, or they received no actual improper
personal benefit in money, property or services, if, with respect to any
criminal proceeding, so long as they had no reasonable cause to believe their
conduct to have been unlawful.

   
         The Fund's directors and officers are insured against losses arising
from any claim against them as such for wrongful acts or omissions, subject to
certain limitations.
    


         Article Eight of the Fund's Articles of Incorporation and Article X of
the Fund's Bylaws provide for indemnification.

         The Registrant will comply with applicable indemnification requirements
as set forth in releases under the Investment Company Act.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

                                       C-3
<PAGE>   74
Item 28. Business and Other Connections of Investment Adviser

         The investment adviser to the Fund is Needham Investment Management
L.L.C., 445 Park Avenue, New York, New York 10022, a registered investment
adviser under the Investment Advisers Act of 1940. Additional information
regarding the Adviser is included in its Form ADV filed with the Securities and
Exchange Commission (SEC File No. 801-50449).

         The following information is provided with respect to each executive
officer of the Adviser:

   
    Raj Rajaratnam, President of the Adviser and the Fund, and President and 
    Director of Needham & Company, Inc., 445 Park Avenue, New York, New York, 
    a registered broker-dealer engaged in a variety of investment banking and 
    institutional brokerage activities.
    

   
    Howard S. Schachter, Executive Vice President of the Adviser and the Fund, 
    and Managing Director of Needham & Company, Inc., 445 Park Avenue, New York,
    New York, a registered broker-dealer engaged in a variety of investment 
    banking and institutional brokerage activities.
    

Item 29. Principal Underwriters

         (a)      Not applicable.

         (b)      Officers and Directors:

<TABLE>
<CAPTION>
                                         Positions and              Positions and
         Name and Principal              Offices with               Offices with
          Business Address                Underwriter                 Registrant  
         ------------------              -------------              ------------- 
<S>                              <C>                                 <C>
 George A. Needham               Chief Executive Officer and         Chairman
                                 Chairman of the Board
 Raj Rajaratnam                  President and Chief Operating       President
                                 Officer and Director
 John C. Michaelson              Managing Director and Director      None
 Edgar F. Heizer, Jr.            Director                            None
 Joseph H. Reich                 Director                            None
 Eugene R. White                 Director                            None
 Roger C. Cotta                  Managing Director                   None
 Chad W. Keck                    Managing Director                   None
 A. Churchill Lewis              Managing Director                   None
 Bernard Lirola                  Managing Director                   None
 Gary S. Rosenbach               Managing Director                   None
</TABLE>

                                      C-4
<PAGE>   75
<TABLE>
<S>                              <C>                                 <C>
 Stuart W. Sanderson             Managing Director                   None
 Howard S. Schachter             Managing Director                   Executive Vice President
 Krishen K. Sud                  Managing Director                   None
 Byron Walker                    Managing Director                   None
</TABLE>                                                

         The principal business address for all such persons is 445 Park Avenue,
New York, New York 10022.

         (c)     Not applicable.

Item 30. Location of Accounts and Records

         All accounts, books and other documents required to be maintained by
         Section 31(a) of the 1940 Act and the rules thereunder are maintained
         at the offices of PFPC Inc.

Item 31. Management Services

         Not applicable.

Item 32. Undertakings

    Registrant hereby undertakes

    (a)  Not applicable.

   
    (b)  Not applicable.
    

    (c)  The Registrant undertakes to provide each person to whom a copy of the
         prospectus is given with a copy of the Fund's Annual Report, which
         contains the information required by Item 5A of Form N-1A, upon request
         by such person and free of charge.

    (d)  The Registrant undertakes to call a meeting of shareholders for the
         purpose of voting upon the question of removal of a director or
         directors when requested in writing to do so by the holders of at least
         10% of the Registrant's outstanding shares and in connection with such
         meeting to comply with the provisions of Section 16(c) of the
         Investment Company Act of 1940 relating to shareholder communications.

                                       C-5
<PAGE>   76
                                   SIGNATURES

   
         Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of New York, State of New York, on the
26th day of April, 1996.
    

                                  THE NEEDHAM FUNDS, INC.


                                  By: /s/ Raj Rajaratnam     
                                      -------------------------
                                      Raj Rajaratnam
                                      President

         Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

   
<TABLE>
<CAPTION>
         Signature                    Title                        Date
         ---------                    -----                        ----
<S>                         <C>                               <C>
  /s/ George A. Needham     Director and Chairman             April 26, 1996   
- -----------------------     (Principal Executive Officer)
 George A. Needham


  /s/ Raj Rajaratnam        Director and President            April 26, 1996
- -----------------------     (Principal Financial and
 Raj Rajaratnam             Accounting Officer)


  /s/ George Gould          Director                          April 26, 1996   
- -----------------------                                       
 George Gould 


  /s/ James Poitras         Director                          April 26, 1996   
- -----------------------
 James Poitras


  /s/ F. Randall Smith      Director                          April 26, 1996   
- -----------------------
 F. Randall Smith 
</TABLE>
    

                                       C-6
<PAGE>   77
                                  EXHIBIT INDEX

   
<TABLE>
<CAPTION>
Exhibit
Number           Description                                                     Page
- -------          -----------                                                     ----
<S>              <C>
1    --          Articles of Incorporation of Registrant.*

2    --          By-Laws of Registrant.*

3    --          Not applicable.

4    --          Form of Specimen Certificate of Shares of
                 Needham Growth Fund.*

5(a) --          Form of Investment Advisory Agreement between
                 Registrant and Needham Investment Management L.L.C.*

5(b) --          Form of Investment Advisory Agreement Supplement
                 between Needham Growth Fund and Needham
                 Investment Management L.L.C.*

6    --          Distribution and Services Agreement between
                 Registrant Needham & Company, Inc.*

7    --          Not applicable.

8    --          Form of Custodian Services Agreement between Registrant
                 and PNC Bank, National Association.*

9(a) --          Form of Administration and Accounting Services Agreement between 
                 Registrant and PFPC Inc.*

9(b) --          Form of Transfer Agency Agreement between Registrant
                 and PFPC Inc.*

10   --          Opinion and consent of Fulbright & Jaworski L.L.P.,
                 counsel to Registrant.

11   --          Consent of Ernst & Young LLP, Independent Auditors.

12   --          Not applicable.

13   --          Form of Initial Subscription Agreement between the Fund and
                 Needham Investment Management L.L.C.*

14   --          Prototype of Individual Retirement Account Plan (IRA).*

15   --          Plan of Distribution Pursuant to Rule 12b-1.*

16   --          Not applicable.

17   --          Financial Data Schedule.

18   --          Not applicable.
</TABLE>
    

- ---------------------
         *    Previously filed.

                                       C-7

<PAGE>   1
                                                                      EXHIBIT 10


                       [FULBRIGHT & JAWORSKI LETTERHEAD]

                                                                      
                                                                  April 26, 1996


The Needham Funds, Inc.
445 Park Avenue
New York, NY  10022

            Re:  Registration Statement on Form N-1A
                 1933 Act File No. 33-98310
                 1940 Act File No. 811-9114

Dear Sir or Madam:

         This will refer to the Registration Statement under the Securities Act
of 1933 (File No. 33-98310) and Investment Company Act of 1940 (File No.
811-9114), filed by The Needham Funds, Inc. (the "Fund"), an open-end 
management investment company, with the Securities and Exchange Commission and 
the further amendments thereto (the "Registration Statement"), covering the 
registration under the Securities Act of 1933 of an indefinite number of 
shares of beneficial interest of the Fund (the "Shares").

         As counsel to the Fund, we have examined such documents and reviewed
such questions of law as we deem appropriate. On the basis of such examination
and review, it is our opinion that the Shares have been duly authorized and,
when issued, sold and paid for in the manner contemplated by the Registration
Statement, will be legally issued, fully paid and non-assessable.

         We consent to the use of this opinion as an exhibit to the Registration
Statement and the references to this firm in the Registration Statement. This
consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Securities Act of 1933.

                                                 Very truly yours,

                                                 /s/ Fulbright & Jaworski L.L.P.




<PAGE>   1
                                                                     Exhibit 11


                        CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Legal Counsel and
Independent Auditors" in the prospectus and "Independent Auditors" in the
Statement of Additional Information and to the use of our report dated December
19, 1995, in this Registration Statement in (Form N-1A 33-98310) of The Needham
Funds, Inc.




                                        /s/ ERNST & YOUNG LLP
                                        ---------------------------------------
                                            ERNST & YOUNG LLP


New York, New York
April 25, 1996

<TABLE> <S> <C>

<ARTICLE> 6
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1995
<PERIOD-END>                               DEC-31-1995
<INVESTMENTS-AT-COST>                        4,970,088
<INVESTMENTS-AT-VALUE>                       5,473,510
<RECEIVABLES>                                  102,520
<ASSETS-OTHER>                                 160,045
<OTHER-ITEMS-ASSETS>                                 0
<TOTAL-ASSETS>                               5,736,075
<PAYABLE-FOR-SECURITIES>                       265,547
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                      227,092
<TOTAL-LIABILITIES>                            492,639
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                     4,704,874
<SHARES-COMMON-STOCK>                          363,070
<SHARES-COMMON-PRIOR>                           54,000
<ACCUMULATED-NII-CURRENT>                      (1,046)
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                         45,528
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                       494,080
<NET-ASSETS>                                 5,243,436
<DIVIDEND-INCOME>                                  590
<INTEREST-INCOME>                               14,692
<OTHER-INCOME>                                       0
<EXPENSES-NET>                                  16,328
<NET-INVESTMENT-INCOME>                        (1,046)
<REALIZED-GAINS-CURRENT>                        45,528
<APPREC-INCREASE-CURRENT>                      494,080
<NET-CHANGE-FROM-OPS>                          538,562
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                            0
<DISTRIBUTIONS-OF-GAINS>                             0
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                      4,164,874
<NUMBER-OF-SHARES-REDEEMED>                          0
<SHARES-REINVESTED>                                  0
<NET-CHANGE-IN-ASSETS>                       4,703,436
<ACCUMULATED-NII-PRIOR>                              0
<ACCUMULATED-GAINS-PRIOR>                            0
<OVERDISTRIB-NII-PRIOR>                              0
<OVERDIST-NET-GAINS-PRIOR>                           0
<GROSS-ADVISORY-FEES>                            8,030
<INTEREST-EXPENSE>                                   0
<GROSS-EXPENSE>                                 44,792
<AVERAGE-NET-ASSETS>                         2,632,752
<PER-SHARE-NAV-BEGIN>                            10.00
<PER-SHARE-NII>                                    .00
<PER-SHARE-GAIN-APPREC>                           2.57
<PER-SHARE-DIVIDEND>                                 0
<PER-SHARE-DISTRIBUTIONS>                            0
<RETURNS-OF-CAPITAL>                                 0
<PER-SHARE-NAV-END>                              12.57
<EXPENSE-RATIO>                                   2.50
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                                 0
        

</TABLE>

Top Judgements:
Saskatoon Co-operative Association Limited v United Food and Commercial Workers | Aug 15, 2022
Old Lakeshore Inc. v City of Burlington | Sep 2, 2022
Tietz v. Affinor Growers Inc. | Sep 13, 2022
Efficiencyone (E1) | Sep 6, 2022
President's Choice Bank v. The Queen | Jul 19, 2022
First Global Data Ltd | Sep 15, 2022
Rayonier v Unifor, Locals 256 and 89 | Aug 11, 2022
Alberta Workers’ Compensation Appeals Commission | Decision No. 2021-0334 | Jul 14, 2022
Metrowest Developments Ltd v Flynn Canada Ltd | Sep 14, 2022
R. v. Cameron | Jul 15, 2022
Functional Servicing and Stormwater Management | Jul 28, 2022
101034761 Saskatchewan Ltd. v Mossing | Aug 24, 2022
Waste Control Services Inc. v International Union of Operating Engineers, Local No. 115 | Aug 12, 2022
RJM56 Holdings Inc. c. Bazinet | Aug 17, 2022
Sherwood v The Owners, Strata Plan VIS 1549 | Aug 9, 2022
WCAT Decision A2001487 | Aug 8, 2022
City of Hamilton v Ontario Water Employees’ Association | Sep 12, 2022
Century Services Corp. v. LeRoy | Jul 8, 2022
United Food and Commercial Workers, Local 175 v Metro Ontario Inc. | Jul 4, 2022
Langmaid’s Island Corporation v Lake of Bays | Sep 12, 2022
WCAT Decision A2102416 | Jul 22, 2022
Inquiry about McAbee Fossil beds | Jul 14, 2022
1088558 Ontario Inc. v. Musial | Sep 16, 2022
Biogen Canada Inc. v. Pharmascience Inc. | Aug 8, 2022
CIC Management Services Inc. v City of Toronto | Jul 21, 2022
Bonterra Energy Corp v Rosells’ Enterprises Ltd | Aug 31, 2022
WCAT Decision A2100606 | Aug 17, 2022
Leffler v Aaron Behiel Legal Professional Corporation | Jun 30, 2022
Espartel Investments v. MTCC No. 993 | Aug 19, 2022
Onespace Unlimited Inc. v. Plus Development Group Corp. | Sep 19, 2022
Professional Institute of the Public Service of Canada v. Canada Revenue Agency | Jun 23, 2022
Community Savings Credit Union v. Bodnar | Jul 29, 2022
Galperti SRL v F.I.A.L. Finanziaria Industrie Alto Lario S.P.A | Jun 30, 2022
WCAT Decision A2102352 | Jul 6, 2022
WCAT Decision A2102306 | Jul 25, 2022
Thrive Capital Management Ltd. v. Noble 1324 Queen Inc. | Jul 12, 2022
Questor Technology Inc v Stagg | Sep 8, 2022
MediPharm v. Hexo and Hwang | Jul 25, 2022
Immunization rates & vaccine hesitancy | Aug 17, 2022
Morabito v. British Columbia Securities Commission | Aug 12, 2022
Killeleagh v Mountain View County (Development Authority) | Aug 24, 2022
Quality Control Council v Stanley Inspection Canada Ltd. | Sep 9, 2022
British Columbia Investment Management Corporation | Aug 17, 2022
Abbeylawn Manor Living Inc. v Sevice Employees International Union, Local 1 Canada | Jul 5, 2022
Windrift Adventures Inc. et al. v. Chief Animal Welfare Inspector | Aug 18, 2022
Irani and Khan v. Registrar, Motor Vehicle Dealers Act | Jul 14, 2022
CP REIT Ontario Properties Limited v City of Toronto | Aug 12, 2022
Potash Corporation of Saskatchewan Inc. v. The Queen | Jul 7, 2022
Wong v. Pretium Resources Inc. | Jul 22, 2022
Labourers' International Union of North America, Local 183, Union v Mulmer Services Ltd. | Aug 5, 2022
City of Mississauga v. Hung | Sep 22, 2022
Secretary of the Ministry of Health v The New South Wales Nurses and Midwives' Association (28 September 2022)
Orewa Community Church v Minister for Covid-19 Response (16 August 2022)
Yeshiva College Bondi Limited v NSW Education Standards Authority (15 August 2022)
Moreland Planning Scheme Amendment C208more | Heritage Nominations Study | Panel Report | 15 July 2022
New Zealand Tegel Growers Association Incorporated | 2 August 2022
Farrow-Smith and Comcare (Compensation) | 26 September 2022
Evolution Fleet Services Pty Ltd v Allroads Plant Pty Ltd | 14 September 2022
656621 B.C. Ltd. v David Moerman Painting Ltd. | Sep 27, 2022
Fraser Valley Packers Inc. v Raiwal Holdings Ltd | Sep 26, 2022
Parmar v Tribe Management Inc. | Sep 26, 2022
DES Studio inc. c. Shuchat | Sep 26, 2022
Van-Kam Freightways Ltd. v Teamsters Local Union No. 31 | Sep 28, 2022
Rogers Communication Inc. v British Columbia | Sep 28, 2022
Alderbridge Way GP Ltd. | Sep 28, 2022

© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission