LEHMAN BROTHERS FUNDS INC, 485BPOS, 1994-11-28

LEHMAN BROTHERS FUNDS INC
485BPOS, 1994-11-28

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<PAGE> 1

As filed with the Securities and Exchange Commission on November 28, 1994
Securities Act File No. 33-62312
Investment Company Act File No. 811-7706
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

Pre-Effective Amendment No. ____
Post-Effective Amendment No. 5 /X/

and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 7 /X/

LEHMAN BROTHERS FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)

3 WORLD FINANCIAL CENTER
NEW YORK, N.Y. 10285
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (212) 526-7000

ANDREW D. GORDON
Lehman Brothers Funds, Inc.
3 World Financial Center, New York, New York 10285
(Name and Address of Agent for Service)

Copies to:

PATRICIA L. BICKIMER, ESQ. GARY S. SCHPERO, ESQ.
The Shareholder Services Group, Inc. Simpson Thacher & Bartlett
Exchange Place 425 Lexington Avenue
Boston, Massachusetts 02109 New York, New York 10017
(Name and Address of Agent for Service)

*Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.

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

/X/ immediately upon filing pursuant to paragraph (b), or
/ / on _________ pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a), or
/ / on _________ pursuant to paragraph (a) of Rule 485

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

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite number of shares of Common Stock, $0.001 par value
per share, of all series and classes of the Registrant, then existing or
thereafter created, and has filed a Rule 24f-2 Notice, for the fiscal year
ended July 31, 1994, on September 22, 1994.

================================================================================
<PAGE> 2

LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
under the Securities Act of 1933

<TABLE>
<CAPTION>
Form N-1A
LOCATION
ITEM IN
NO. PROSPECTUS
- ---- ----------
<S> <C>
Item 1. Cover Page . . . . . . . . . . . . . . . . . . . . . Cover Page

Item 2. Synopsis . . . . . . . . . . . . . . . . . . . . . . Background and Expense
Information

Item 3. Condensed Financial
Information . . . . . . . . . . . . . . . . . . . . Not Applicable

Item 4. General Description of
Registrant . . . . . . . . . . . . . . . . . . . . . Investment
Objective and Policies;
Additional Information

Item 5. Management of the Fund . . . . . . . . . . . . . . . Management of the Fund;
Additional Information

Item 5A. Management's Discussion
of Fund Performance . . . . . . . . . . . . . . . Not Applicable

Item 6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . . . . Dividends; Taxes; Additional
Information

Item 7. Purchase of Securities Valuation of Shares;
Being Offered . . . . . . . . . . . . . . . . . . . Purchase of Shares;
Exchange Privilege

Item 8. Redemption or Repurchase Redemption of Shares

Item 9. Legal Proceedings . . . . . . . . . . . . . . . . . . Not Applicable

</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
N-1A

ITEM STATEMENT OF ADDITIONAL
NO. INFORMATION
- ----- -----------------------
<S> <C>
Item 10. Cover Page . . . . . . . . . . . . . . . . . . . . . Cover Page

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

Item 12. General Information and
History . . . . . . . . . . . . . . . . . . . . . . Not Applicable

Item 13. Investment Objectives and
Policies . . . . . . . . . . . . . . . . . . . . . Investment Objectives and
Policies

Item 14. Management of the Fund . . . . . . . . . . . . . . . Management of the Fund

Item 15. Control Persons and Principal
Holders of Securities . . . . . . . . . . . . . . .

Management of the Fund

Item 16. Investment Advisory and
Other Services . . . . . . . . . . . . . . . . . . Management of the Fund; Auditors

Item 17. Brokerage Allocation . . . . . . . . . . . . . . . . Investment Objective and
and Other Practices Policies; Additional Purchase
and Redemption Information

Item 18. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . . . Investment Objective and
Policies

Item 19. Purchase, Redemption and
Pricing of Securities . . . . . . . . . . . . . . . Additional Purchase and
Redemption Information

Item 20. Tax Status . . . . . . . . . . . . . . . . . . . . . Additional Information
Concerning Taxes

Item 21. Underwriters . . . . . . . . . . . . . . . . . . . . Additional Purchase and
Redemption Information

Item 22. Calculation of Performance Data . . . . . . . . . . Performance Data

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

Part C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

<PAGE> 4

LEHMAN BROTHERS FUNDS, INC.
LEHMAN BROTHERS DAILY INCOME FUND

Prospectus begins on page one.

DATED NOVEMBER 28, 1994

<PAGE> 5
LEHMAN BROTHERS DAILY INCOME FUND

________________________________________________________________________________

PROSPECTUS NOVEMBER 28, 1994
________________________________________________________________________________

This Prospectus describes LEHMAN BROTHERS DAILY INCOME FUND (the "Fund"), a
separate, diversified money market portfolio of Lehman Brothers Funds, Inc.
(the "Company"), an open-end management investment company. This Prospectus
relates to Select Shares and CDSC Shares, two classes of shares offered by the
Fund.

[Continued on next page.]

Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency. Shares of the Fund involve certain investment risks,
including the possible loss of principal. There can be no assurance that the
Fund will be able to maintain a net asset value of $1.00 per share.

LEHMAN BROTHERS INC. sponsors the Fund and acts as distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
investment adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Yield and other information regarding the Fund may be obtained through a Lehman
Brothers Investment Representative or by calling 800-861-4171.

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated November 28,
1994, as may be amended or supplemented from time to time, has been filed with
the Securities and Exchange Commission and is available to investors without
charge by calling 800-861-4171. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

_____________

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.

_____________

LEHMAN BROTHERS

<PAGE> 6
[Continued from previous page.]

The Fund's investment objective is to provide investors with as high a level of
current income as is consistent with stability of principal. The Fund invests
in a portfolio consisting of a broad range of U.S. dollar-denominated
short-term instruments, including U.S. government and U.S. and non-U.S. bank
and commercial obligations and repurchase agreements relating to such
obligations. Under normal market conditions, at least 25% of the Fund's total
assets will be invested in obligations of issuers in the banking industry and
repurchase agreements relating to such obligations.

_____________

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Benefits to Investors 3
Background and Expense Information 3

Financial Highlights 4

Investment Objective and Policies 5
Purchase of Shares 10
Redemption of Shares 11
Exchange Privilege 13
Valuation of Shares 14
Management of the Fund 15
Dividends 17
Taxes 17
Yields 18
Additional Information 18
</TABLE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S 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 ITS 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.

- 2 -

<PAGE> 7
________________________________________________________________________________

BENEFITS TO INVESTORS
________________________________________________________________________________

The Fund offers investors several important benefits:

/ / A professionally managed portfolio of high quality money market
instruments, providing investment diversification that is otherwise
beyond the means of many individual investors.

/ / Investment liquidity through convenient purchase and redemption
procedures.

/ / Stability of principal through maintenance of a constant net asset
value of $1.00 per share (although there is no assurance that it can
do so on a continuing basis).

/ / A convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct ownership of
securities.

________________________________________________________________________________

BACKGROUND AND EXPENSE INFORMATION
________________________________________________________________________________

The Fund is authorized to offer multiple classes of shares. As of the date of
this Prospectus, the Fund offers two classes of shares, Select Shares and CDSC
Shares, each of which is offered by this Prospectus. The Fund contemplates
that it will in the future also offer an additional class of shares, Global
Clearing Shares. Each share of the Fund accrues income in the same manner, but
certain expenses differ based upon the class. See "Additional Information."
The following Expense Summary lists the costs and expenses that a shareholder
can expect to incur as an investor in Select Shares and CDSC Shares of the Fund
based upon, in the case of Select Shares, the Fund's operating expenses for the
most recent fiscal year, restated to reflect current fee waivers, and, in the
case of CDSC Shares, estimated operating expenses for the current fiscal year.
The Expense Summary for CDSC Shares assumes payment of the maximum contingent
deferred sales charge ("CDSC").

<TABLE>
EXPENSE SUMMARY
=====================================================================================================
<CAPTION>
SELECT CDSC
SHAREHOLDER TRANSACTION EXPENSES SHARES SHARES
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum CDSC
(as a percentage of proceeds)* None 2.00%
- -----------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
- -----------------------------------------------------------------------------------------------------
Advisory Fees (after waivers)** 0.28% 0.28%
- -----------------------------------------------------------------------------------------------------
Rule 12b-1 Fees (after waivers)*** 0.18% 0.18%
- -----------------------------------------------------------------------------------------------------
Other Expenses - including Administration Fees (after waivers)+ 0.29% 0.29%
- -----------------------------------------------------------------------------------------------------
Total Fund Operating Expenses (after waivers)++ 0.75% 0.75%
=====================================================================================================

</TABLE>

* The Fund's CDSC Shares are subject to a maximum CDSC of 2% of redemption
proceeds during the first year after the date of purchase, 1% of redemption
proceeds during the second year, and no

- 3 -

<PAGE> 8

CDSC thereafter. The Fund's CDSC Shares will be deemed to have been
purchased on the same date as the shares of the funds which have been
exchanged through a CDSC Fund Exchange. The CDSC set forth in the
table above is the maximum charge imposed on redemptions of CDSC
Shares, and investors may pay an actual CDSC of less than 2%. See
"Redemption of Shares."

** Reflects voluntary waivers of advisory fees which are expected to
continue in effect until at least one year from the date of this
Prospectus. Absent such voluntary waivers, the ratio of advisory fees
to average net assets would be 0.30%.

*** Reflects voluntary waivers of Rule 12b-1 fees which are expected to
continue in effect until at least one year from the date of this
Prospectus. Absent such voluntary waivers, the ratio of Rule 12b-1
fees to average net assets would be 0.25%.

+ Reflects voluntary waivers of administration fees which are expected
to continue in effect until at least one year from the date of this
Prospectus. Absent such voluntary waivers, the ratio of other
expenses to average net assets would be 0.31%.

++ Absent the voluntary waivers referred to above, the ratio of total
fund operating expenses to average net assets would be .86%.

EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:

<TABLE>
===============================================================================================
<CAPTION>
1 3
YEAR YEARS
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Select Shares:
(assuming complete redemption at the end of each time period) $ 8 $24
- -----------------------------------------------------------------------------------------------
CDSC Shares:
Assuming complete redemption at end of each time period* $28 $24
Assuming no redemption $ 8 $24
===============================================================================================

</TABLE>

* Assumes deduction at the time of redemption of the maximum CDSC applicable
for that period.

THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATE OF RETURN, WHICH MAY BE GREATER OR LESS THAN THOSE SHOWN. The foregoing
table has not been audited by the Fund's independent auditors.

________________________________________________________________________________

FINANCIAL HIGHLIGHTS
________________________________________________________________________________

The following financial highlights for the fiscal year ended July 31, 1994 are
derived from the Fund's financial statements audited by Ernst & Young LLP,
independent auditors, whose report thereon appears in the Company's Annual
Report dated July 31, 1994. This information should be read in conjunction
with the financial statements and notes thereto that also appear in the
Company's Annual Report, which are incorporated by reference into the Statement
of Additional Information.

- 4 -

<PAGE> 9

Selected data for a Select Share outstanding throughout the period:

<TABLE>
<CAPTION>
Period Ended
7/31/94*
<S> <C>
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . $ 1.00
--------
Income from investment operations:
Net investment income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0297
Dividends from net investment income . . . . . . . . . . . . . . . . . . . . . (0.0297)
--------
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 1.00
========
Total return (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.03%
========

Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) . . . . . . . . . . . . . . . . . . . . $818,555
Ratio of net investment income to average net assets (3). . . . . . . . . . . 3.01%
Ratio of operating expenses to average net assets (3)(4) . . . . . . . . . . 0.66%

</TABLE>
_________________
* The Fund commenced selling Select Shares to the public on August 2,
1993. As of the date of this Prospectus, the Fund had not yet sold
any CDSC Shares to the public.

(1) Net investment income before waiver of fees by the Investment Adviser,
Administrator and Distributor was $0.0269.

(2) Total return represents aggregate total return for the period
indicated.

(3) Annualized.

(4) Annualized expense ratio before waiver of fees by the Investment
Adviser, Administrator and Distributor was 0.95%.

________________________________________________________________________________

INVESTMENT OBJECTIVE AND POLICIES

________________________________________________________________________________

The Fund's investment objective is to provide investors with as high a level of
current income as is consistent with stability of principal. In pursuing its
investment objective, the Fund, which operates as a diversified investment
company, invests in a broad range of U.S. dollar-denominated short-term
instruments, including U.S. government and U.S. and non-U.S. bank and
commercial obligations. There can be no assurance that the Fund will achieve
its investment objective.

The Fund invests only in securities which are purchased with and payable in
U.S. dollars and which have (or, pursuant to regulations adopted by the
Securities and Exchange Commission (the "SEC"), will be deemed to have)
remaining maturities of thirteen months or less at the date of purchase by the
Fund. The Fund maintains a dollar-weighted average portfolio maturity of 90
days or less. The Fund follows these policies to maintain a constant net asset
value of $1.00 per share, although there is no assurance that it can do so on a
continuing basis.

- 5 -

<PAGE> 10

The Fund will limit its portfolio investments to securities that are determined
by its Investment Adviser to present minimal credit risks pursuant to
guidelines established by the Company's Board of Directors and which are
"Eligible Securities" at the time of acquisition by the Fund. The term
"Eligible Securities" includes securities rated by the "Requisite NRSROs" in
one of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means (a) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a
rating with respect to a security or class of debt obligations of an issuer, or
(b) one NRSRO, if only one NRSRO has issued such a rating at the time that the
Fund acquires the security. A discussion of the ratings categories of the
NRSROs is contained in the Appendix to the Statement of Additional Information.

The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities ("U.S. government
securities"). In addition, the Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating from
the Requisite NRSROs and comparable unrated securities ("Second Tier
Securities") and may not invest more than 1% of its total assets in the Second
Tier Securities of any one issuer. The Fund may invest more than 5% (but no
more than 25%) of the then-current value of the Fund's total assets in the
securities of a single issuer for a period of up to three business days,
provided that (a) the securities either are rated by the Requisite NRSROs in
the highest short-term rating category or are securities of issuers that have
received such rating with respect to other short-term debt securities or are
comparable unrated securities, and (b) the Fund does not make more than one
such investment at any one time.

The following descriptions illustrate the kinds of instruments in which the
Fund invests:

The Fund may purchase obligations of issuers in the banking industry, such as
commercial paper, notes, certificates of deposit, bankers' acceptances and time
deposits and U.S. dollar-denominated instruments issued or supported by the
credit of U.S. or non-U.S. banks or savings institutions having total assets
at the time of purchase in excess of $1 billion. The Fund may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its assets.

The Fund may invest in commercial paper, other short-term obligations and
repurchase agreements. The Fund may invest without limit in U.S.
dollar-denominated commercial paper and obligations of non-U.S. issuers.

The Fund may invest substantially in U.S. dollar-denominated securities of
non-U.S. issuers, including obligations of non-U.S. banks or non-U.S. branches
of U.S. banks and debt securities of non-U.S. issuers, where the Investment
Adviser deems the instrument to present minimal credit risks. Investments in
non-U.S. banks or non-U.S. issuers present certain risks, including those
resulting from future political and economic developments and the possible
imposition of non-U.S. governmental laws or restrictions and reduced
availability of public information. Non-U.S. issuers are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements applicable to domestic issuers.

The Fund may purchase obligations issued or guaranteed by the U.S. government
or its agencies and instrumentalities. Obligations of certain agencies and
instrumentalities of the U.S. government are backed by the full faith and
credit of the United States. Others are backed by the right of the issuer to
borrow from the U.S. Treasury or are backed only by the credit of the agency or
instrumentality issuing the obligation.

- 6 -

<PAGE> 11

In addition, the Fund may, when deemed appropriate in light of the Fund's
investment objective, invest in high quality, short-term obligations issued by
state and local governmental issuers which carry yields that are competitive
with those of other types of money market instruments of comparable quality.

INVESTMENT LIMITATIONS

1 The Fund may not borrow money, except from banks for temporary
purposes and then in amounts not exceeding one-third of the value of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts
borrowed or one-third of the value of its total assets at the time of
such borrowing. Additional investments will not be made by the Fund
when borrowings exceed 5% of its total assets.

2 The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, except that the
Fund will invest 25% or more of the value of its total assets in
obligations of issuers in the banking industry or in obligations, such
as repurchase agreements, secured by such obligations (unless the Fund
is in a temporary defensive position); provided that there is no
limitation with respect to investments in U.S. government securities.

3 The Fund may not purchase the securities of any one issuer if as a
result more than 5% of the value of its total assets would be invested
in the securities of such issuer, except that up to 25% of the value
of its total assets may be invested without regard to this 5%
limitation and provided that there is no limitation with respect to
investments in U.S. government securities.

The third investment limitation listed above will give the Fund the ability to
invest, with respect to 25% of the value of its total assets, more than 5% of
its assets in any one issuer (excluding investments in U.S. government
securities) only in the event that Rule 2a-7 under the Investment Company Act
of 1940, as amended (the "1940 Act"), is amended in the future. The Fund's
operating policy, which complies with Rule 2a-7 as currently in effect,
provides that, with certain exceptions, the Fund may not invest more than 5% of
its total assets in the securities of any one issuer, except for U.S.
government securities.

OTHER INVESTMENT PRACTICES

- 7 -

<PAGE> 12

in some cases, the Fund may be able to resell such notes in the dealer market.
Variable and floating rate notes typically are rated by credit rating agencies,
and their issuers must satisfy the same quality criteria as set forth above.
The Fund invests in variable or floating rate notes only when the Investment
Adviser deems the investment to involve minimal credit risk.

Certain of the floating or variable rate notes that may be purchased by the
Fund may carry a demand feature that would permit the holder to tender them
back to the issuer of the underlying instrument, or to a third party, at par
value prior to maturity. Where necessary to ensure that such a note is an
Eligible Security, the Fund will require that the issuer's obligation to pay
the principal of the note be backed by an unconditional third-party letter or
line of credit, guarantee or commitment to lend. If a floating or variable rate
demand note is not actively traded in a secondary market, it may be difficult
for the Fund to dispose of the note if the issuer were to default on its
payment obligation or during periods that the Fund is not entitled to exercise
its demand rights, and the Fund could, for this or other reasons, suffer a loss
to the extent of the default. While, in general, the Fund will invest only in
securities that mature within thirteen months of purchase, the Fund may invest
in floating or variable rate demand notes which have nominal maturities in
excess of thirteen months, if such instruments carry demand features that
comply with conditions established by the SEC.

REPURCHASE AGREEMENTS. The Fund may purchase instruments from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase them at an agreed upon time and price ("repurchase
agreements"). The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price. Default by the seller would, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.

REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary purposes
by entering into reverse repurchase agreements in accordance with its
investment limitations described above. Pursuant to such agreements, the Fund
would sell portfolio securities to financial institutions and agree to
repurchase them at an agreed upon date and price. The Fund would consider
entering into reverse repurchase agreements to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. Reverse
repurchase agreements involve the risk that the market value of the portfolio
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase.

LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
consistent with its investment policies. The Fund may lend portfolio securities
against collateral, consisting of cash or securities which are consistent with
its permitted investments, which is equal at all times to at least 100% of the
value of the securities loaned. There is no limitation on the amount of
securities that may be loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Fund's
Investment Adviser to be of good standing and only when, in the Adviser's
judgment, the income to be earned from the loans justifies the attendant risks.

WHEN-ISSUED SECURITIES. The Fund may purchase securities on a "when-issued"
basis. When-issued securities are securities purchased for delivery beyond the
normal settlement date at a stated price and yield. The Fund will generally not
pay for such securities or start earning interest on them until they are
received. Securities purchased on a when-issued basis are recorded as an asset
and are subject to changes in value based upon changes in the general level of
interest rates. The Fund expects that commitments to purchase when-issued
securities will not exceed 25% of the value of its total assets absent unusual
market

- 8 -

<PAGE> 13

conditions. The Fund does not intend to purchase when-issued securities for
speculative purposes but only in furtherance of its investment objectives.

STAND-BY COMMITMENTS. The Fund may enter into put transactions, including
transactions sometimes referred to as stand-by commitments, with respect to
securities held in its portfolio. In a put transaction, the Fund acquires the
right to sell a security at an agreed upon price within a specified period
prior to its maturity date, and a stand-by commitment entitles the Fund to
same-day settlement and to receive an exercise price equal to the amortized
cost of the underlying security plus accrued interest, if any, at the time of
exercise. In the event that the party obligated to purchase the underlying
security from the Fund defaults on its obligation to purchase the underlying
security, then the Fund might be unable to recover all or a portion of any loss
sustained from having to sell the security elsewhere. Acquisition of puts will
have the effect of increasing the cost of securities subject to the put and
thereby reducing the yields otherwise available from such securities.

STRIPS. The Fund may invest in separately traded principal and interest
components of securities backed by the full faith and credit of the U.S.
Treasury. The principal and interest components of U.S. Treasury bonds with
remaining maturities of longer than ten years are eligible to be traded
independently under the Separate Trading of Registered Interest and Principal
of Securities ("STRIPS") program. Under the STRIPS program, the principal and
interest components are separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts
separately. Under the stripped bond rules of the Internal Revenue Code of 1986,
as amended (the "Code"), investments by the Fund in STRIPS will result in the
accrual of interest income on such investments in advance of the receipt of the
cash corresponding to such income. The interest component of STRIPS may be more
volatile than that of U.S. Treasury bills with comparable maturities. In
accordance with Rule 2a-7, the Fund's investments in STRIPS are limited to
those with maturity components not exceeding thirteen months. The Fund will not
actively trade in STRIPS. The Fund will limit investments in STRIPS to 20% of
its total assets.

PARTICIPATION INTERESTS. The Fund may purchase participation certificates
issued by a bank, insurance company or other financial institution in
obligations owned by such institutions or affiliated organizations that may
otherwise be purchased by the Fund, and loan participation certificates. A
participation certificate gives the Fund an undivided interest in the
underlying obligations in the proportion that the Fund's interest bears to the
total principal amount of such obligations. Certain of such participation
certificates may carry a demand feature that would permit the holder to tender
them back to the issuer or to a third party prior to maturity. See "Floating
and Variable Rate Notes" for additional information with respect to demand
instruments that may be purchased by the Fund. The Fund may invest in
participation certificates even if the underlying obligations carry stated
maturities in excess of thirteen months, upon compliance with certain
conditions contained in Rule 2a-7. Loan participation certificates are
considered by the Fund to be "illiquid" for purposes of its investment policies
with respect to illiquid securities as set forth under Illiquid Securities
below.

OTHER MONEY MARKET FUNDS. The Fund may invest up to 10% of the value of its
total assets in shares of other money market funds. The Fund will invest in
other money market funds only if such funds are subject to the requirements of
Rule 2a-7 and are considered to present minimal credit risks. The Fund's
Investment Adviser will monitor the policies and investments of other money
market funds in which it invests, based on information furnished to
shareholders of those funds, with respect to their compliance with their
investment objectives and Rule 2a-7.

- 9 -

<PAGE> 14

ILLIQUID SECURITIES. The Fund will not knowingly invest more than 10% of the
value of its total assets in illiquid securities, including time deposits and
repurchase agreements having maturities longer than seven days. Securities that
have readily available market quotations are not deemed illiquid for purposes
of this limitation (irrespective of any legal or contractual restrictions on
resale). The Fund may invest in commercial obligations issued in reliance on
the so-called "private placement exemption" from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended ("Section 4(2) paper").
The Fund may also purchase securities that are not registered under the
Securities Act of 1933, as amended, but which can be sold to qualified
institutional buyers in accordance with Rule 144A under that Act ("Rule 144A
securities"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as the Fund who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. Rule 144A securities generally must be sold to other
qualified institutional buyers. If a particular investment in Section 4(2)
paper or Rule 144A securities is not determined to be liquid, that investment
will be included within the 10% limitation on investment in illiquid
securities. The Fund's Investment Adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors. See
"Investment Objective and Policies - Additional Information on Portfolio
Instruments and Investment Practices - Illiquid and Restricted Securities" in
the Statement of Additional Information.

________________________________________________________________________________

PURCHASE OF SHARES
________________________________________________________________________________

Purchases of Fund shares must be made through a brokerage account maintained
through Lehman Brothers Inc. ("Lehman Brothers") or a broker that clears
securities transactions through Lehman Brothers on a fully disclosed basis (an
"Introducing Broker"). The Fund reserves the right to reject any purchase order
and to suspend the offering of shares for a period of time.

The minimum initial investment in each class of the Fund is $5,000 and the
minimum subsequent investment is $1,000, except for purchases of the Fund
through (a) Individual Retirement Accounts ("IRAs") and Self-Employed
Retirement Plans, for which the minimum initial and subsequent investments are
$1,000 and $500, respectively, and (b) retirement plans qualified under Section
403(b)(7) of the Code, for which the minimum and subsequent investment is $500.
In addition, for participants with an automatic purchase arrangement in
connection with their brokerage accounts, there is no minimum initial or
subsequent investment. There are no minimum investment requirements for
employees of Lehman Brothers and its affiliates. The Fund reserves the right at
any time to vary the initial and subsequent investment minimums. No
certificates are issued for Fund shares.

- 10 -

<PAGE> 15

calculates its net asset value. See "Valuation of Shares." Purchase orders
received after the close of regular trading on the NYSE are effective as of the
time the net asset value is next determined. When orders for the purchase of
Fund shares are paid for other than in federal funds, Lehman Brothers or the
Introducing Broker, acting on behalf of the investor, will complete the
conversion into, or itself advance, federal funds, and the order becomes
effective on the day following its receipt by Lehman Brothers or the
Introducing Broker. Shares purchased begin to accrue income dividends on the
next business day following the day that the purchase order becomes effective.

On or about February 21, 1995, the Fund will begin processing purchase orders
and redemption requests for the Fund's shares on a new processing system (the
"System Transfer"). After the System Transfer a purchase order will become
effective on the day the Fund receives sufficient federal funds to cover the
purchase price and will be priced at the net asset value next determined after
the Fund's Transfer Agent receives such federal funds. Investors should note
that there may be a delay between the time when Lehman Brothers or an
Introducing Broker receives purchase proceeds and the time when those proceeds
are transmitted to the Fund and that Lehman Brothers or the Introducing Broker,
as applicable, may benefit from the use of temporarily uninvested funds.
Shares purchased after the System Transfer will begin to accrue income
dividends on the day the purchase order becomes effective.

The Fund's Select Shares are available on a no-load basis to all investors
except for investors who are investing through a CDSC Fund Exchange (as defined
below). Investors who are investing in the Fund in connection with a CDSC Fund
Exchange may purchase only CDSC Shares pursuant to such exchange. For purposes
of this Prospectus, a "CDSC Fund Exchange" is an exchange of shares of another
fund in the Lehman Brothers Group of Funds which are subject to a CDSC upon
redemption for shares in the Fund.

________________________________________________________________________________

REDEMPTION OF SHARES
________________________________________________________________________________

Holders of Select Shares may redeem their shares without charge on any day on
which the Fund calculates its net asset value. Holders of CDSC Shares may also
redeem their shares on any day on which the Fund calculates its net asset value
subject to any applicable CDSC as described below. See "Valuation of Shares."
Redemption requests received in proper form prior to the close of regular
trading on the NYSE are priced at the net asset value per share determined on
that day. Redemption requests received after the close of regular trading on
the NYSE are priced at the net asset value as next determined. The Fund
normally transmits redemption proceeds for credit to the shareholder's account
at Lehman Brothers or the Introducing Broker at no charge (other than any
applicable CDSC in the case of CDSC Shares) on the business day following
receipt of a redemption request. Generally, these funds will not be invested
for the shareholder's benefit without specific instruction, and Lehman Brothers
or the Introducing Broker will benefit from the use of temporarily uninvested
funds.

Effective after the System Transfer, redemption requests received in proper
form prior to noon, Eastern time, on any day the Fund calculates its net asset
value will be priced at the net asset value per share determined at noon on
that day and redemption requests received after such time will be priced at the
net asset value next determined. Commencing on the date of the System Transfer
and thereafter, the Fund will normally transmit redemption proceeds for credit
to the shareholder's account on the day of receipt of the redemption request.

- 11 -

<PAGE> 16

A shareholder who pays for Fund shares by personal check will be credited with
the proceeds of a redemption of those shares only after the purchase check has
been collected, which may take up to 15 days or more. A shareholder who
anticipates the need for more immediate access to his or her investment should
purchase shares with federal funds by bank wire or with a certified or
cashier's check.

Holders of Select Shares who purchase securities through Lehman Brothers or the
Introducing Broker may take advantage of special redemption procedures under
which Fund shares will be redeemed automatically to the extent necessary to
satisfy debit balances arising in the shareholder's account with Lehman
Brothers or the Introducing Broker. One example of how an automatic redemption
may occur involves the purchase of securities. If a shareholder purchases
securities but does not pay for them by settlement date, the number of Select
Shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs five business days after the trade date.
Shareholders not wishing to participate in these arrangements should notify
their Lehman Brothers Investment Representatives.

A Fund account that is reduced by a shareholder to a value of $1,000 or less
($500 for IRAs and Self-Employed Retirement Plans) may be subject to redemption
by the Fund, but only after the shareholder has been given at least 30 days in
which to increase the account balance to more than $1,000 ($500 for IRAs and
Self-Employed Retirement Plans). In addition, the Fund may redeem shares
involuntarily or suspend the right of redemption as permitted under the 1940
Act, as described in the Statement of Additional Information under "Additional
Purchase and Redemption Information."

Fund shares may be redeemed in one of the following ways:

REDEMPTION THROUGH LEHMAN BROTHERS

Redemption requests may be made through Lehman Brothers or an Introducing
Broker.

REDEMPTION BY MAIL

Shares held by Lehman Brothers on behalf of investors must be redeemed by
submitting a written request to a Lehman Brothers Investment Representative.
All other shares may be redeemed by submitting a written request for redemption
to the Fund's transfer agent:

Lehman Brothers Funds, Inc.
c/o The Shareholder Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184

A written redemption request to the Fund's transfer agent must (a) state the
class and number of shares to be redeemed, (b) indicate the name of the Fund
from which such shares are to be redeemed, (c) identify the shareholder's
account number and (d) be signed by each registered owner exactly as the shares
are registered. Any signature appearing on a redemption request must be
guaranteed by a domestic bank, a savings and loan institution, a domestic
credit union, a member bank of the Federal Reserve System or a member firm of a
national securities exchange. The Fund's transfer agent may require additional
supporting documents for redemptions made by corporations, executors,
administrators, trustees and guardians. A redemption request will not be deemed
to be properly received until the Fund's transfer agent receives all required
documents in proper form.

- 12 -

<PAGE> 17

CONTINGENT DEFERRED SALES CHARGE ON CDSC SHARES

A CDSC payable to Lehman Brothers is imposed on any redemption of CDSC Shares,
however effected, that causes the current value of a shareholder's CDSC Share
account to fall below the dollar amount of all payments by the shareholder for
the purchase of CDSC Shares ("purchase payments") during the preceding two
years. No charge is imposed to the extent that the net asset value of the CDSC
Shares redeemed does not exceed (a) the current net asset value of CDSC Shares
purchased through reinvestment of dividends or capital gains distributions,
plus (b) the current net asset value of CDSC Shares purchased more than two
years prior to the redemption, plus (c) increases in the net asset value of the
shareholder's CDSC Shares above the purchase payments made during the preceding
two years.

In circumstances in which the CDSC is imposed, the amount of the charge will
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed. Solely for purposes of determining the
number of years since a purchase payment was made, all purchase payments made
during a month will be aggregated and deemed to have been made on the last
Friday of the preceding Lehman Brothers statement month. The Fund's CDSC Shares
will be deemed to have been purchased on the same date as the shares of the
funds which have been exchanged through a CDSC Fund Exchange. The following
table sets forth the rates of the CDSC for redemptions of CDSC Shares:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS SINCE PURCHASE
PAYMENT WAS MADE CDSC
- --------------------------------------------------------------------------------
<S> <C>
First 2.00%
- --------------------------------------------------------------------------------
Second 1.00%
- --------------------------------------------------------------------------------
Third 0.00%
- --------------------------------------------------------------------------------
</TABLE>

The purchase payment from which a redemption of CDSC Shares is made is assumed
to be the earliest purchase payment from which a full redemption has not
already been effected. In the case of redemptions of shares of other funds in
the Lehman Brothers Group of Funds issued in exchange for CDSC Shares of the
Fund, the term "purchase payments" refers to the purchase payments for the
shares given in exchange. In the event of an exchange of shares of funds with
differing CDSC schedules, the shares will be, in all cases, subject to the
higher CDSC schedule. See "Exchange Privilege."

WAIVERS OF CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares following the death or disability of the
shareholder; (c) redemptions of shares in connection with certain
post-retirement distributions and withdrawals from retirement plans or IRAs;
(d) involuntary redemptions; (e) redemption proceeds from other funds in the
Lehman Brothers Group of Funds that are reinvested within 30 days of the
redemption; (f) redemptions of shares in connection with a combination of any
investment company with the Fund by merger, acquisition of assets or otherwise;
and (g) redemptions of shares owned by employees of Lehman Brothers and its
affiliates.

________________________________________________________________________________

EXCHANGE PRIVILEGE
________________________________________________________________________________

CDSC and Select Shares of the Fund may be exchanged without charge for shares
of the same class of certain other funds in the Lehman Brothers Group of Funds.
In exchanging shares, a shareholder must meet the minimum initial investment
requirement of the fund into which the exchange is being made and the shares
involved must be legally available for sale in the state where the shareholder
resides.

- 13 -

<PAGE> 18

Orders for exchanges will be accepted only on days on which both funds involved
determine their respective net asset values. To obtain information regarding
the availability of funds into which shares of the Fund may be exchanged,
investors should contact a Lehman Brothers Investment Representative.

TAX EFFECT. The exchange of shares of one fund for shares of another fund is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with an exchange.

CDSC. Holders of CDSC Shares may exchange their shares without the imposition
of an exchange fee. In the event holders of CDSC Shares of the Fund exchange
all or a portion of their CDSC Shares for shares in any of the funds in the
Lehman Brothers Group of Funds imposing a CDSC higher than that imposed by the
Fund on the CDSC Shares, the exchanged shares will be subject to the higher
applicable CDSC. Upon an exchange, the new shares will be deemed to have been
purchased on the same date as the CDSC Shares which have been exchanged.

ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Shareholders
exercising the exchange privilege with any of the other funds in the Lehman
Brothers Group of Funds should review the prospectus of that fund carefully
prior to making an exchange. Lehman Brothers reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at any
time after notice to shareholders. For further information regarding the
exchange privilege or to obtain the current prospectuses for members of the
Lehman Brothers Group of Funds, investors should contact a Lehman Brothers
Investment Representative.

________________________________________________________________________________

VALUATION OF SHARES
________________________________________________________________________________

The net asset value per share of each class is calculated on each day, Monday
through Friday, except on days on which the NYSE or the Federal Reserve Bank of
Boston is closed. Currently one or both of these institutions are scheduled to
be closed on the customary national business holidays of New Year's Day, Martin
Luther King, Jr's. Birthday (observed), Presidents' Day (observed), Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Columbus Day
(observed), Veterans Day, Thanksgiving and Christmas and on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. The net asset value per share of each class of the Fund
is currently determined as of the close of regular trading on the NYSE
(currently 4:00 p.m., Eastern time). After the System Transfer, the net asset
value per share of each class of the Fund will be determined at noon on each
day on which the Fund computes its net asset value. The net asset value per
each Select Share and CDSC Share is computed by dividing the value of the net
assets of the Fund attributable to the relevant class of shares by the total
number of shares of that class outstanding. The Fund's assets are valued on the
basis of amortized cost, which involves valuing a portfolio instrument at its
cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. The Fund seeks to maintain a constant net
asset value of $1.00 per share, although there can be no assurance that it can
do so on a continuing basis. Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.

- 14 -

<PAGE> 19
________________________________________________________________________________

MANAGEMENT OF THE FUND
________________________________________________________________________________

The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Board of Directors approves all significant
agreements between the Company and the persons or companies that furnish
services to the Fund, including agreements with its Distributor, Investment
Adviser, Administrator, Custodian and Transfer Agent. The day-to-day
operations of the Fund are delegated to its Investment Adviser and
Administrator. One of the directors and all of the Company's officers are
affiliated with Lehman Brothers, The Shareholder Services Group, Inc. or one of
their affiliates. The Statement of Additional Information relating to the Fund
contains general background information regarding each director and executive
officer of the Company.

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as the Investment
Adviser to the Fund. LBGAM, together with other Lehman Brothers investment
advisory affiliates, had approximately $11 billion in assets under management
as of September 30, 1994. Subject to the supervision and direction of the
Company's Board of Directors, LBGAM manages the Fund's portfolio in accordance
with the Fund's investment objective and policies, makes investment decisions
for the Fund and places orders to purchase and sell securities. As compensation
for the services of LBGAM as Investment Adviser to the Fund, LBGAM is entitled
to receive a monthly fee from the Fund at the annual rate of 0.30% of the value
of the Fund's average daily net assets.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").

ADMINISTRATOR AND TRANSFER AGENT -
THE SHAREHOLDER SERVICES GROUP, INC.

The Shareholder Services Group, Inc. ("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109, serves as the Fund's Administrator and Transfer
Agent. TSSG is a wholly-owned subsidiary of First Data Corporation. As
administrator, TSSG calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's Administration and operation. As
compensation for TSSG's services as Administrator, TSSG is entitled to receive
a monthly fee from the Fund at the annual rate of 0.20% of the value of the
Fund's average daily net assets. TSSG is also entitled to receive a fee from
the Fund for its services as Transfer Agent.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers that
Lehman Brothers and its affiliates, consistent with their fiduciary duties and
assuming certain service quality standards are met, would recommend TSSG as the
provider of administration services to the Fund. This duty to recommend expires
on May 21, 2000. In addition, under the terms of the Stock Purchase Agreement
dated September 14, 1992 between Mellon and Lehman Brothers (then named
Shearson Lehman Brothers Inc.), Lehman Brothers agreed to recommend Boston Safe
Deposit and Trust Company ("Boston Safe"), an indirect wholly-owned subsidiary
of Mellon, as Custodian of mutual funds affiliated

- 15 -

<PAGE> 20

with Lehman Brothers until May 21, 2000 to the extent consistent with its
fiduciary duties and other applicable law.

DISTRIBUTOR AND PLAN OF DISTRIBUTION

Lehman Brothers, located at 3 World Financial Center, New York, New York 10285,
is the Distributor of the Fund's shares. Lehman Brothers, a leading full
service investment firm, meets the diverse financial needs of individuals,
institutions and governments around the world.

The Company has adopted a plan of distribution with respect to each class of
the Fund (the "Plan of Distribution") pursuant to Rule 12b-1 under the 1940
Act. Under the Plan of Distribution, the Fund has agreed with respect to the
Select Shares and the CDSC Shares to pay Lehman Brothers monthly for
advertising, marketing and distributing its shares at an annual rate of 0.25%
of its average daily net assets. Under the Plan of Distribution, Lehman
Brothers may retain all or a portion of the payments made to it pursuant to the
Plan and may make payments to its Investment Representatives or Introducing
Brokers that engage in the sale of such classes of Fund shares. The Plan of
Distribution also provides that Lehman Brothers may make payments to assist in
the distribution of each class of the Fund's shares out of the other fees
received by it or its affiliates from the Fund, its past profits or any other
sources available to it. From time to time, Lehman Brothers may waive receipt
of fees under the Plan of Distribution while retaining the ability to be paid
under such Plan thereafter. The fees payable to Lehman Brothers under the Plan
of Distribution for advertising, marketing and distributing such shares of the
Fund and payments by Lehman Brothers to its Investment Representatives or
Introducing Brokers are payable without regard to actual expenses incurred.
Lehman Brothers Investment Representatives and any other person entitled to
receive compensation for selling shares of the Fund may receive different
levels of compensation for selling one particular class of shares over another
in the Fund.

CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY

Boston Safe, an indirect wholly-owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as the Fund's Custodian.

EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to a particular class
based on either expenses identifiable to the class or relative net assets of
the class and other classes of Fund shares. LBGAM and TSSG have agreed to
reimburse the Fund to the extent required by applicable state law for certain
expenses that are described in the Statement of Additional Information relating
to the Fund.

- 16 -

<PAGE> 21
________________________________________________________________________________

DIVIDENDS
________________________________________________________________________________

The Fund declares dividends from its net investment income (i.e., income other
than net realized long- and short-term capital gains) on each day the Fund is
open for business and pays dividends monthly. Distributions of net realized
long- and short-term capital gains, if any, are declared and paid annually
after the close of the Fund's fiscal year in which they have been earned.
Unless a shareholder instructs the Fund to pay dividends or capital gains
distributions in cash and credit them to the shareholder's account at Lehman
Brothers, dividends and distributions from the Fund will be reinvested
automatically in additional shares of the same class of the Fund at net asset
value. Shares redeemed during the month are entitled to dividends and
distributions declared up to and including the date of redemption. The Fund
does not expect to realize net long-term capital gains. Commencing on the date
of the System Transfer and thereafter, shares redeemed during a month will be
entitled to dividends up to, but not including, the date of redemption, and
purchased shares will be entitled to dividends and distributions declared on
the day the purchase order becomes effective.

________________________________________________________________________________

TAXES
________________________________________________________________________________

The Fund will be treated as a separate entity for federal income tax purposes,
and thus the provisions of the Code applicable to regulated investment
companies generally will be applied to each series of the Company separately,
rather than to the Company as a whole. In addition, net realized long-term
capital gains, net investment income and operating expenses will be determined
separately for each series of the Company. The Fund intends to qualify each
year as a "regulated investment company" under the Code. A regulated investment
company is exempt from federal income tax on amounts distributed to its
shareholders.

Qualification as a regulated investment company under the Code for a taxable
year requires, among other things, that the Fund distribute to its shareholders
each taxable year (a) at least 90% of its investment company taxable income for
such year and (b) at least 90% of the excess of its tax-exempt interest income
over certain deductions disallowed with respect to such income. In general, the
Fund's investment company taxable income will be its taxable income (including
dividends and short-term capital gains, if any) subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. The Fund intends
to distribute substantially all of its investment company taxable income each
year. Such distributions will be taxable as ordinary income to Fund
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or a qualified retirement plan are
deferred under the Code.) It is anticipated that none of the Fund's
distributions will be eligible for the dividends received deduction for
corporations. The Fund does not expect to realize long-term capital gains and,
therefore, does not contemplate payment of any "capital gain dividends" as
described in the Code.

Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by the shareholders and paid by the Fund on December 31 of
such year in the event such dividends are actually paid during January of the
following year.

- 17 -

<PAGE> 22

Shareholders will be advised at least annually as to the federal income tax
status of distributions made to them each year.

_____________

The foregoing discussion is only a brief summary of some of the important
federal tax considerations generally affecting the Fund and its shareholders.
As noted above, IRAs receive special tax treatment. No attempt is made to
present a detailed explanation of the federal, state or local income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Fund should consult their tax advisers with specific reference to their own
tax situation.

________________________________________________________________________________

YIELDS
________________________________________________________________________________

From time to time, the "yields" and "effective yields" for each class of shares
of the Fund may be quoted in advertisements or in reports to shareholders.
Yield quotations are computed separately for each class of shares of the Fund.
The "yield" quoted in advertisements for each class of the Fund's shares refers
to the income generated by an investment in that class over a specified period
(such as a seven-day period) identified in the advertisement. This income is
then "annualized"; that is, the amount of income generated by the investment
during that period is assumed to be generated each such period over a 52-week
or one-year period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in a given class of shares is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.

The Fund's yields may be compared to those of other mutual funds with similar
objectives, to bond or other relevant indices, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds, or to the average yields reported by the Bank
Rate Monitor from money market deposit accounts offered by the 50 leading banks
and thrift institutions in the top five standard metropolitan statistical
areas. For example, such data are reported in national financial publications
such as IBC/Donoghue's Money Fund Report(R), Ibbotson Associates of Chicago,
The Wall Street Journal and The New York Times, reports prepared by Lipper
Analytical Service, Inc. and publications of a local or regional nature.

The Fund's yield figures represent past performance, will fluctuate and should
not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. The methods used to compute the yields on
each class of the Fund's shares are described in more detail in the Statement
of Additional Information. Investors may call 800-861-4171 to obtain current
yield information.

________________________________________________________________________________

ADDITIONAL INFORMATION
________________________________________________________________________________

The Company was incorporated under the laws of the State of Maryland on May 5,
1993. The authorized capital stock of the Company consists of 10,000,000,000
shares having a par value of $.001 per share. The Company's Charter currently
authorizes the issuance of several series of shares, corresponding to shares of

- 18 -

<PAGE> 23

the Fund as well as shares of other investment portfolios of the Company. The
Company's Board of Directors may, in the future, authorize the issuance of
additional series of capital stock representing shares of additional investment
portfolios or additional classes of shares of the Fund or the Company's other
investment portfolios.

The Company has received an order from the SEC permitting it, subject to
certain terms and conditions, to establish multiple classes of shares within
each series. The Board of Directors of the Company has authorized the
establishment of three classes of shares in the Fund: "Select Shares," "CDSC
Shares" and "Global Clearing Shares". As of the date of this Prospectus, the
Fund offers two classes of shares, Select Shares and CDSC Shares. The Fund
contemplates that it will in the future also offer an additional class of
shares, Global Clearing Shares. This Prospectus relates to Select Shares and
CDSC Shares of the Fund. The shares of each class of the Fund represent
interests in the Fund in proportion to their relative net asset values. CDSC
Shares of the Fund are subject to a CDSC as described under "Redemption of
Shares." If offered by the Fund, Global Clearing Shares would be subject to a
distribution fee payable under the Plan of Distribution at the annual rate of
0.50% of the Fund's average daily net assets attributable to that class. Global
Clearing Shares would be available only through Introducing Brokers and would
be exchangeable only for Global Clearing Shares of other funds in the Lehman
Brothers Group of Funds. Certain Fund expenses, such as transfer agency
expenses, are allocated separately to each class of the Fund's shares based on
expenses identifiable by class.

All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class
is required by law or where the matter involved affects only one series or
class. Under the corporate law of Maryland, the Company's state of
incorporation, and the Company's By-Laws (except as required under the 1940
Act), the Company is not required and does not currently intend to hold annual
meetings of shareholders for the election of directors. Shareholders, however,
do have the right to call for a meeting to consider the removal of one or more
of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities.

All shares of the Company, when issued, will be fully paid and nonassessable.

The Fund sends shareholders a semi-annual and audited annual report, which
includes listings of investment securities held by the Fund at the end of the
period covered. In an effort to reduce the Fund's printing and mailing costs,
the Fund may consolidate the mailing of its semi-annual and annual reports by
household. This consolidation means that a household having multiple accounts
with the identical address of record would receive a single copy of each
report. In addition, the Fund may consolidate the mailing of its Prospectus so
that a shareholder having multiple accounts (e.g., individual IRA and/or
Self-Employed Retirement Plan accounts) would receive a single Prospectus
annually. When the Fund's annual report is combined with the Prospectus into a
single document, the Fund will mail the combined document to each shareholder
to comply with legal requirements. Any shareholder who does not want this
consolidation to apply to his or her account should contact his or her Lehman
Brothers Investment Representative or the Fund's transfer agent. Shareholders
may direct inquiries regarding the Fund to their Lehman Brothers Investment
Representative.

- 19 -

<PAGE> 24

LEHMAN BROTHERS

Member SIPC

3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285

MF 5001

- 20 -

<PAGE> 25

LEHMAN BROTHERS FUNDS, INC.

LEHMAN BROTHERS MUNICIPAL INCOME FUND

Prospectus begins on page one.

DATED NOVEMBER 28, 1994

<PAGE> 26

LEHMAN BROTHERS MUNICIPAL INCOME FUND

________________________________________________________________________________

PROSPECTUS NOVEMBER 28, 1994

________________________________________________________________________________

This Prospectus describes LEHMAN BROTHERS MUNICIPAL INCOME FUND (the "Fund"), a
separate, diversified money market portfolio of Lehman Brothers Funds, Inc.
(the "Company"), an open-end management investment company. This Prospectus
relates to Select Shares and CDSC Shares, two classes of shares offered by the
Fund.

[Continued on next page.]

Shares of the Fund are not deposits or obligations of, or guaranteed of
endorsed by, any bank, and such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency. Shares of the Fund involve certain investment risks,
including the possible loss of principal. There can be no assurance that the
Fund will be able to maintain a net asset value of $1.00 per share.

LEHMAN BROTHERS INC. sponsors the Fund and acts as Distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
Investment Adviser.

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated November 28,
1994, and as may be amended or supplemented from time to time, has been filed
with the Securities and Exchange Commission and is available to investors
without charge by calling 800-861-4171. The Statement of Additional Information
is incorporated in its entirety by reference into this Prospectus.

_____________

LEHMAN BROTHERS

<PAGE> 27

[Continued from previous page.]

The Fund's investment objective is to provide investors with as high a level of
current income exempt from federal income tax as is consistent with stability
of principal. The Fund invests substantially all of its assets in short-term
tax-exempt obligations issued by state and local governments and tax-exempt
derivative securities. All or a portion of the Fund's dividends may be a
specific preference item for purposes of the federal individual and corporate
alternative minimum taxes.

_____________

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Benefits to Investors 3
Background and Expense Information 3

Financial Highlights 5

Investment Objective and Policies 6
Purchase of Shares 12
Redemption of Shares 13
Exchange Privilege 15
Valuation of Shares 16
Management of the Fund 16
Dividends 18
Taxes 18
Yields 20
Additional Information 20
</TABLE>

- 2 -

<PAGE> 28
________________________________________________________________________________

BENEFITS TO INVESTORS
________________________________________________________________________________

The Fund offers investors several important benefits:

/ / A professionally managed portfolio of high quality money market
instruments exempt from federal income taxes, providing investment
diversification that is otherwise beyond the means of many individual
investors.

/ / Investment liquidity through convenient purchase and redemption
procedures.

/ / Stability of principal through maintenance of a constant net asset
value of $1.00 per share (although there is no assurance that it can
do so on a continuing basis).

/ / A convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct ownership of
securities.

________________________________________________________________________________

BACKGROUND AND EXPENSE INFORMATION
________________________________________________________________________________

<TABLE>
EXPENSE SUMMARY
================================================================================================
<CAPTION>

SELECT CDSC
SHAREHOLDER TRANSACTION EXPENSES SHARES SHARES
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum CDSC
(as a percentage of proceeds)* None 2.00%
- ------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
- ------------------------------------------------------------------------------------------------
Advisory Fees (after waivers)** 0.25% 0.25%
- ------------------------------------------------------------------------------------------------
Rule 12b-1 Fees (after waivers)*** 0.18% 0.18%
- ------------------------------------------------------------------------------------------------
Other Expenses - including Administration Fees
(after waivers)+ 0.27% 0.27%
- ------------------------------------------------------------------------------------------------
Total Fund Operating Expenses
(after waivers)++ 0.07% 0.70%
================================================================================================

</TABLE>

- 3 -

<PAGE> 29

* The Fund's CDSC Shares are subject to a maximum CDSC of 2% of
redemption proceeds during the first year after the date of purchase,
1% of redemption proceeds during the second year, and no CDSC
thereafter. The Fund's CDSC Shares will be deemed to have been
purchased on the same date as the shares of the funds which have been
exchanged through a CDSC Fund Exchange. The CDSC set forth in the
table above is the maximum charge imposed on redemptions of CDSC
Shares, and investors may pay an actual CDSC of less than 2%. See
"Redemption of Shares."

++ Absent the voluntary waivers referred to above, the ratio of total
fund operating expenses to average net assets would be .86%.

EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:

================================================================================================
1 3
YEAR YEAR
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Select Shares:
(assuming complete redemption at the end of each time period) $ 7 $22
- ------------------------------------------------------------------------------------------------
CDSC Shares:
Assuming complete redemption at end of each time period* $27 $22
Assuming no redemption $ 7 $22
===============================================================================================

</TABLE>

* Assumes deduction at the time of redemption of the maximum CDSC applicable
for that period.

THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATES OF RETURN, WHICH MAY BE GREATER OR LESS THAN THOSE SHOWN. The foregoing
table has not been audited by the Fund's independent auditors.

- 4 -

<PAGE> 30
________________________________________________________________________________

FINANCIAL HIGHLIGHTS
________________________________________________________________________________

The following financial highlights for the fiscal period ended July 31, 1994,
are derived from the Fund's financial statements audited by Ernst & Young LLP,
independent auditors, whose report thereon appears in the Company's Annual
Report dated July 31, 1994. This information should be read in conjunction
with the Financial Statements and Notes thereto that appear in the Company's
Annual Report, which are incorporated by reference into the Statement of
Additional Information.

Selected data for a Select Share and CDSC Share outstanding throughout the
period:

<TABLE>
<CAPTION>
Period Ended Period Ended
7/31/94* 7/31/94*
Select Shares CDSC Shares
<S> <C> <C>
Net asset value, beginning of period . . . . . . . . . . . . . . $ 1.00 $ 1.00
---------- ----------
Income from investment operations:
Net investment income (1) . . . . . . . . . . . . . . . . . . . . 0.0207 .0018
Dividends from net investment income . . . . . . . . . . . . . . (0.0207) (.0018)
---------- ----------
Net asset value, end of period . . . . . . . . . . . . . . . . . $ 1.00 $ 1.00
========== ==========
Total return (2) . . . . . . . . . . . . . . . . . . . . . . . . 2.09% 0.18%
========== ==========

Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) . . . . . . . . . . . . $ 264,425 $ 10.00
Ratio of net investment income to average net assets(3) . . 2.06% 2.06%
Ratio of operating expenses to average net assets (3)(4) . . 0.64O% 0.64%
</TABLE>

_________________
* The Fund commenced selling Select Shares and CDSC Shares to the public
on August 2, 1993 and July 6, 1994, respectively.

(1) Net investment income before waiver of fees by the Investment Adviser,
Administrator, and Distributor for Select Shares and CDSC Shares was
$0.0182 and $0.0017, respectively.

(2) Total return represents aggregate total return for the period
indicated.

(3) Annualized.

(4) Annualized expense ratio before waiver of fees by the Investment
Adviser, Administrator and Distributor for each of Select Shares and
CDSC Shares were 0.89% and 0.89%, respectively.

- 5 -

<PAGE> 31

________________________________________________________________________________

INVESTMENT OBJECTIVE AND POLICIES

________________________________________________________________________________

The Fund's investment objective is to provide investors with as high a level of
current income exempt from federal income tax as is consistent with stability
of principal. All or a portion of the Fund's dividends may be a specific
preference item for purposes of the federal individual and corporate
alternative minimum taxes. There can be no assurance that the Fund will
achieve its investment objective.

In pursuing its investment objective, the Fund, which operates as a diversified
investment company, invests substantially all of its assets in a diversified
portfolio of short-term tax-exempt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia, and their respective authorities, agencies, instrumentalities and
political subdivisions and tax-exempt derivative securities such as tender
option bonds, participations, beneficial interests in trusts and partnership
interests (collectively "Municipal Obligations"). Except as described below,
the Fund will not knowingly purchase securities the interest on which is
subject to federal income tax. (See, however, "Taxes" below concerning
treatment of dividends paid by the Fund for purposes of the federal alternative
minimum tax applicable to particular categories of investors.)

Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from federal income tax are rendered by bond counsel to the
respective issuers at the time of issuance, and opinions relating to the
validity of and the tax-exempt status of payments received by the Fund from
tax-exempt derivative securities are rendered by counsel to the respective
sponsors of such securities. The Fund and its Investment Adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Obligations, the creation of any
tax-exempt derivative securities or the bases for such opinions.

Except during temporary defensive periods, the Fund will invest substantially
all, but in no event less than 80%, of its total assets in Municipal
Obligations. The Fund may hold uninvested cash reserves pending

- 6 -

<PAGE> 32
investment and during temporary defensive periods including when suitable
tax-exempt obligations are unavailable. There is no percentage limitation on
the amount of assets which may be held uninvested. Uninvested cash reserves
will not earn income. In addition to or in lieu of holding uninvested cash
reserves under the aforementioned circumstances, the Fund may elect to invest
in high quality, short-term instruments, including U.S. government and U.S. and
non-U.S. bank and commercial obligations, and repurchase agreements with
respect to such instruments, the income from which is subject to federal income
tax.

The two principal classifications of Municipal Obligations which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.

The Fund's portfolio may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.

Although the Fund may invest more than 25% of its net assets in (a) Municipal
Obligations whose issuers are in the same state and (b) Municipal Obligations
the interest on which is paid solely from revenues of similar projects, it does
not presently intend to do so on a regular basis. To the extent the Fund's
assets are concentrated in Municipal Obligations that are payable from the
revenues of similar projects, are issued by issuers located in the same state
or are private activity bonds, the Fund will be subject to the peculiar risks
presented by the laws and economic conditions relating to such states, projects
and bonds to a greater extent than it would be if its assets were not so
concentrated.

INVESTMENT LIMITATIONS

The investment limitations enumerated below, as well as the Fund's policy of
investing at least 80% of its total assets in Municipal Obligations, are
fundamental and may not be changed by the Company's Board of Directors without
the affirmative vote of the holders of a majority of the Fund's outstanding
shares. The Fund's investment objective and the other investment policies
described herein may be changed by the Board of Directors at any time. If there
is a change in the investment objective of the Fund, shareholders of the Fund
should consider whether the Fund remains an appropriate investment in light of
their then current financial position and needs. (A complete list of the Fund's
investment limitations that cannot be changed without a vote of shareholders is
contained in the Statement of Additional Information under "Investment
Objectives and Policies.")

- 7 -

<PAGE> 33
2 The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that
there is no limitation with respect to investments in U.S. government
securities or Municipal Obligations (other than those backed only by
the assets and revenues of non-governmental users).

OTHER INVESTMENT PRACTICES

FLOATING AND VARIABLE RATE NOTES. The Fund may purchase variable or floating
rate notes, which are instruments that provide for adjustments in the interest
rate on certain reset dates or whenever a specified interest rate index
changes, respectively. Such notes might not be actively traded in a secondary
market but, in some cases, the Fund may be able to resell such notes in the
dealer market. Variable and floating rate notes typically are rated by credit
rating agencies, and their issuers must satisfy the same quality criteria as
set forth above. The Fund invests in variable or floating rate notes only when
the Investment Adviser deems the investment to involve minimal credit risk.

- 8 -

<PAGE> 34

Reverse repurchase agreements involve the risk that the market value of the
portfolio securities sold by the Fund may decline below the price of the
securities the Fund is obligated to repurchase.

LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
consistent with its investment policies. The Fund may lend portfolio securities
against collateral, consisting of cash or securities which are consistent with
its permitted investments, which is equal at all times to at least 100% of the
value of the securities loaned. There is no limitation on the amount of
securities that may be loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Fund's
Investment Adviser to be of good standing and only when, in the adviser's
judgment, the income to be earned from the loans justifies the attendant risks.

TENDER OPTION BONDS. The Fund may purchase tender option bonds. A tender option
bond is a municipal obligation (generally held pursuant to a custodial
arrangement) having a maturity longer than 13 months and bearing interest at a
fixed rate substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, at periodic intervals, to
tender their securities to the institution and receive the face value thereof.
As consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal obligation's fixed
coupon rate and the rate, as determined by remarketing or similar agent at or
near the commencement of such period, that would cause the securities coupled
with the tender option, to trade at or near par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-end tax
exempt rate. The Fund's Investment Adviser will consider on an ongoing basis
the creditworthiness of the issuer of the underlying municipal obligation, of
any custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
municipal obligation and for other reasons.

- 9 -

<PAGE> 35

MUNICIPAL LEASE OBLIGATIONS. The Fund may invest in municipal obligations that
constitute participations in a lease obligation or installment purchase
contract obligation (hereafter collectively called "municipal lease
obligations") of a municipal authority or entity. Although municipal lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a municipal lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a yearly
basis. Although non-appropriation municipal lease obligations are secured by
the leased property, disposition of the property in the event of foreclosure
might prove difficult. The Fund will seek to minimize the special risks
associated with such securities by not investing more than 10% of its assets in
municipal lease obligations that contain non-appropriation clauses, and by only
investing in those non-appropriation leases where (a) the nature of the leased
equipment or property is such that its ownership or use is essential to a
governmental function of the municipality, (b) appropriate covenants will be
obtained from the municipal obligor prohibiting the substitution or purchase of
similar equipment if lease payments are not appropriated, (c) the lease obligor
has maintained good market acceptability in the past, (d) the investment is of
a size that will be attractive to institutional investors, and (e) the
underlying leased equipment has elements of portability and/or use that enhance
its marketability in the event foreclosure on the underlying equipment were
ever required. Municipal lease obligations provide a premium interest rate
which along with regular amortization of the principal may make them attractive
for a portion of the assets of the Fund.

CUSTODIAL RECEIPTS AND CERTIFICATES. The Fund may acquire custodial receipts or
certificates underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both, on certain
municipal obligations. The underwriter of these certificates or receipts
typically purchases municipal obligations and deposits the obligations in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Although
under the terms of a custodial receipt, the Fund typically would be authorized
to assert its rights directly against the issuer of the underlying obligation,
the Fund could be required to assert through the custodian bank those rights as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the Fund may be subject
to delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation instead of a non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes paid.

- 10 -

<PAGE> 36

Fund will not actively trade in STRIPS. The Fund will limit investments in
STRIPS to 20% of its total assets.

- 11 -

<PAGE> 37
________________________________________________________________________________

PURCHASE OF SHARES
________________________________________________________________________________

The minimum initial investment in each class of the Fund is $5,000 and the
minimum subsequent investment is $1,000. In addition, for participants with an
automatic purchase arrangement in connection with their brokerage accounts,
there is no minimum initial or subsequent investment. There are no minimum
investment requirements for employees of Lehman Brothers and its affiliates.
The Fund reserves the right at any time to vary the initial and subsequent
investment minimums. No certificates are issued for Fund shares.

The Fund's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A purchase
order becomes effective when Lehman Brothers or an Introducing Broker receives,
or converts the purchase amount into, federal funds (i.e., monies of member
banks within the Federal Reserve System held on deposit at a Federal Reserve
Bank). When orders for the purchase of Fund shares are paid for in federal
funds, or are placed by an investor with sufficient federal funds or cash
balance in the investor's brokerage account with Lehman Brothers or the
Introducing Broker, the order becomes effective on the day of receipt if
received prior to the close of regular trading on the New York Stock Exchange,
Inc. (the "NYSE"), currently 4:00 p.m., Eastern time, on any day the Fund
calculates its net asset value. See "Valuation of Shares." Purchase orders
received after the close of regular trading on the NYSE are effective as of the
time the net asset value is next determined. When orders for the purchase of
Fund shares are paid for other than in federal funds, Lehman Brothers or the
Introducing Broker, acting on behalf of the investor, will complete the
conversion into, or itself advance, federal funds, and the order becomes
effective on the day following its receipt by Lehman Brothers or the
Introducing Broker. Shares purchased begin to accrue income dividends on the
next business day following the day that the purchase order becomes effective.

- 12 -

<PAGE> 38
________________________________________________________________________________

REDEMPTION OF SHARES
________________________________________________________________________________

Holders of Select Shares may redeem their shares without charge on any day on
which the Fund calculates its net asset value. Holders of CDSC Shares may also
redeem their shares on any day on which the Fund calculates its net asset
value, subject to any applicable CDSC as described below. See "Valuation of
Shares." Redemption requests received in proper form prior to the close of
regular trading on the NYSE are priced at the net asset value per share
determined on that day. Redemption requests received after the close of regular
trading on the NYSE are priced at the net asset value as next determined. The
Fund normally transmits redemption proceeds for credit to the shareholder's
account at Lehman Brothers or the Introducing Broker at no charge (other than
any applicable CDSC in the case of CDSC Shares) on the business day following
receipt of a redemption request. Generally, these funds will not be invested
for the shareholder's benefit without specific instruction, and Lehman Brothers
or the Introducing Broker will benefit from the use of temporarily uninvested
funds.

Effective after the System Transfer, redemption requests received in proper
form prior to noon, Eastern time, on any day the Fund calculates its net asset
value will be priced at the net asset value per share determined at noon on
that day and redemption requests received after such time will be priced at the
net asset value next determined. Commencing on the date of the System Transfer,
and thereafter, the Fund will normally transmit redemption proceeds for credit
to the shareholder's account on the day of receipt of the redemption request.

A Fund account that is reduced by a shareholder to a value of $1,000 or less
may be subject to redemption by the Fund, but only after the shareholder has
been given at least 30 days in which to increase the account balance to more
than $1,000. In addition, the Fund may redeem shares involuntarily or suspend
the right of redemption as permitted under the 1940 Act, as described in the
Statement of Additional Information under "Additional Purchase and Redemption
Information."

Fund shares may be redeemed in one of the following ways:

- 13 -

<PAGE> 39

REDEMPTION THROUGH LEHMAN BROTHERS

Redemption requests may be made through Lehman Brothers or an Introducing
Broker.

REDEMPTION BY MAIL

Lehman Brothers Funds, Inc.
c/o The Shareholder Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184

A written redemption request to the Fund's transfer agent must (a) state the
class and number of shares to be redeemed, (b) indicate the name of the Fund
from which such shares are to be redeemed, (c) identify the shareholder's
account number and (d) be signed by each registered owner exactly as the shares
are registered. Any signature appearing on a redemption request must be
guaranteed by a domestic bank, a savings and loan institution, a domestic
credit union, a member bank of the Federal Reserve System or a member firm of a
national securities exchange. The Fund's transfer agent may require additional
supporting documents for redemptions made by corporations, executors,
Administrators, trustees and guardians. A redemption request will not be deemed
to be properly received until the Fund's transfer agent receives all required
documents in proper form.

CONTINGENT DEFERRED SALES CHARGE ON CDSC SHARES

- 14 -

<PAGE> 40

<TABLE>
================================================================================
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- --------------------------------------------------------------------------------
<S> <C>
First 2.00%
- --------------------------------------------------------------------------------
Second 1.00%
- --------------------------------------------------------------------------------
Third 0.00%
================================================================================
</TABLE>

________________________________________________________________________________

EXCHANGE PRIVILEGE
________________________________________________________________________________

Orders for exchanges will only be accepted on days on which both funds involved
determine their respective net asset values. To obtain information regarding
the availability of funds into which shares of the Fund may be exchanged,
investors should contact a Lehman Brothers Investment Representative.

- 15 -

<PAGE> 41

________________________________________________________________________________

VALUATION OF SHARES
________________________________________________________________________________

________________________________________________________________________________

MANAGEMENT OF THE FUND
________________________________________________________________________________

The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Board of Directors approves all significant
agreements between the Company and the persons or companies that furnish
services to the Fund, including agreements with its Distributor, Investment
Adviser, Administrator, Custodian and Transfer Agent. The day-to-day operations
of the Fund are delegated to its Investment Adviser and Administrator. One of
the directors and all of the Company's officers are affiliated with Lehman
Brothers, The Shareholder Services Group, Inc. or one of their affiliates. The
Statement of Additional Information relating to the Fund contains general
background information regarding each director and executive officer of the
Company.

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

- 16 -

<PAGE> 42

investment objective and policies, makes investment decisions for the Fund and
places orders to purchase and sell securities. As compensation for the services
of LBGAM as Investment Adviser to the Fund, LBGAM is entitled to receive a
monthly fee from the Fund at the annual rate of 0.30% of the value of the
Fund's average daily net assets.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").

ADMINISTRATOR AND TRANSFER AGENT - THE SHAREHOLDER SERVICES GROUP, INC.

The Shareholder Services Group, Inc. ("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109, serves as the Fund's Administrator and Transfer
Agent. TSSG is a wholly-owned subsidiary of First Data Corporation. As
Administrator, TSSG calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation. As
compensation for TSSG's services as Administrator, TSSG is entitled to receive
a monthly fee from the Fund at the annual rate of 0.20% of the value of the
Fund's average daily net assets. TSSG is also entitled to a monthly fee from
the Fund for its services as Transfer Agent.

On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers that
Lehman Brothers and its affiliates, consistent with their fiduciary duties and
assuming certain service quality standards are met, would recommend TSSG as the
provider of administration services to the Fund. This duty to recommend expires
on May 21, 2000. In addition, under the terms of the Stock Purchase Agreement
dated September 14, 1992 between Mellon and Lehman Brothers (then named
Shearson Lehman Brothers Inc.). Lehman Brothers agreed to recommend Boston
Safe Deposit and Trust Company ("Boston Safe"), an indirect wholly-owned
subsidiary of Mellon, as custodian of mutual funds affiliated with Lehman
Brothers until May 21, 2000 to the extent consistent with its fiduciary duties
and other applicable law.

DISTRIBUTOR AND PLAN OF DISTRIBUTION

The Company has adopted a plan of distribution with respect to each class of
the Fund (the "Plan of Distribution") pursuant to Rule 12b-1 under the 1940
Act. Under the Plan of Distribution, the Fund has agreed with respect to the
Select Class and the CDSC Class to pay Lehman Brothers monthly for advertising,
marketing and distributing its shares at an annual rate of 0.25% of its average
daily net assets. Under the Plan of Distribution, Lehman Brothers may retain
all or a portion of the payments made to it pursuant to the Plan and may make
payments to its Investment Representatives or Introducing Brokers that engage
in the sale of such classes of Fund shares. The Plan of Distribution also
provides that Lehman Brothers may make payments to assist in the distribution
of each class of the Fund's shares out of the other fees received by it or its
affiliates from the Fund, its past profits or any other sources available to
it. From time to time, Lehman Brothers may waive receipt of fees under the Plan
of Distribution while retaining the ability to be paid under such Plan
thereafter. The fees payable to Lehman Brothers under the Plan of

- 17 -

<PAGE> 43

Distribution for advertising, marketing and distributing such shares of the
Fund and payments by Lehman Brothers to its Investment Representatives or
Introducing Brokers are payable without regard to actual expenses incurred.
Lehman Brothers Investment Representatives and any other person entitled to
receive compensation for selling shares of the Fund may receive different
levels of compensation for selling one particular class of shares over another
in the Fund.

CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY

Boston Safe, an indirect wholly-owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108 and serves as the Fund's Custodian.

EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to a particular class
based on either expenses identifiable to the class or relative net assets of
the class and the other classes of Fund shares. LBGAM and TSSG have agreed to
reimburse the Fund to the extent required by applicable state law for certain
expenses that are described in the Statement of Additional Information relating
to the Fund.

________________________________________________________________________________

DIVIDENDS
________________________________________________________________________________

________________________________________________________________________________

TAXES
________________________________________________________________________________

- 18 -

<PAGE> 44

The Fund intends to qualify each year as a "regulated investment company" under
the Code. A regulated investment company is exempt from federal income tax on
amounts distributed to its shareholders.

Qualification as a regulated investment company under the Code for a taxable
year requires, among other things, that the Fund distribute to its shareholders
each taxable year (a) at least 90% of its investment company taxable income for
such year and (b) at least 90% of the excess of its tax-exempt interest income
over certain deductions disallowed with respect to such income. In general, the
Fund's investment company taxable income will be its taxable income (including
dividends and short-term capital gains, if any) subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. The Fund intends
to distribute substantially all of its investment company taxable income each
year. Such distributions will be taxable as ordinary income to Fund
shareholders who are not currently exempt from federal income taxes, whether
such income is received in cash or reinvested in additional shares. (Federal
income taxes for distributions to an IRA or a qualified retirement plan are
deferred under the Code.) It is anticipated that none of the Fund's
distributions will be eligible for the dividends received deduction for
corporations. The Fund does not expect to realize long-term capital gains and,
therefore, do not contemplate payment of any "capital gain dividends" as
described in the Code.

Shareholders will be advised at least annually as to the federal income tax
status of distributions made to them each year.

Dividends paid by the Fund which are derived from exempt-interest income may be
treated by the Fund's shareholders as items of interest excludable from their
gross income under Section 103(a) of the Code, unless under the circumstances
applicable to the particular shareholder the exclusion would be disallowed.
(See the Statement of Additional Information under "Additional Information
Concerning Taxes.")

The Fund may hold without limit certain private activity bonds issued after
August 7, 1986. Shareholders must include, as an item of tax preference, the
portion of dividends paid by the Fund that is attributable to interest on such
bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the 26% or 28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareholders must also
take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum tax and environmental tax purposes.
The environmental tax applicable to corporations is imposed at the rate of .12%
on the excess of the corporation's modified federal alternative minimum taxable
income over $2,000,000. Shareholders receiving Social Security benefits should
note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.

To the extent, if any, dividends paid to shareholders by the Fund are derived
from taxable income or from long-term or short-term capital gains, such
dividends will not be exempt from federal income tax, whether such dividends
are paid in the form of cash or additional shares, and may also be subject to
state and local taxes. Under state or local law, the Fund's distributions of
net investment income may be taxable to investors as dividend income though a
substantial portion of such distributions may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
income taxes.

- 19 -

<PAGE> 45
_____________

________________________________________________________________________________

YIELDS
________________________________________________________________________________

From time to time, the "yields," effective yields" and "tax-equivalent yields"
for shares of each class of shares of the Fund may be quoted in advertisements
or in reports to shareholders. Yield quotations are computed separately for
each class of shares of the Fund. The "yield" quoted in advertisements for each
class of the Fund's shares refers to the income generated by an investment in
that class over a specified period (such as a seven-day period) identified in
the advertisement. This income is then "annualized"; that is, the amount of
income generated by the investment during that period is assumed to be
generated each such period over a 52-week or one-year period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly
but, when annualized, the income earned by an investment in a given class of
shares is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The "tax-equivalent yield" demonstrates the level of taxable
yield necessary to produce an after tax yield equivalent to the Fund's tax-free
yield. It is calculated by increasing the yield (calculated as above) by the
amount necessary to reflect the payment of federal taxes at a stated rate. The
"tax-equivalent yield" will always be higher than the "yield."

________________________________________________________________________________

ADDITIONAL INFORMATION
________________________________________________________________________________

- 20 -

<PAGE> 46

Company's Charter currently authorizes the issuance of several series of
shares, corresponding to shares of the Fund as well as shares of the other
investment portfolios of the Company. The Company's Board of Directors may, in
the future, authorize the issuance of additional series of capital stock
representing shares of additional investment portfolios or additional classes
of shares of the Fund or the Company's other investment portfolios.

All shares of the Company, when issued, will be fully paid and nonassessable.

- 21 -

<PAGE> 47

LEHMAN BROTHERS

Member SIPC

3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285

MF 5001

- 22 -

<PAGE> 48
LEHMAN SELECTED GROWTH
STOCK PORTFOLIO

Prospectus

November 28, 1994

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 its 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.

TABLE OF CONTENTS

<TABLE>
<S> <C>
2 Prospectus Summary
4 Background and Expense Information
5 Financial Highlights
6 Investment Objective and Policies
13 Purchase of Shares
14 Redemption of Shares
16 Exchange Privilege
16 Valuation of Shares
17 Management of the Fund
19 Dividends
19 Taxes
21 The Fund's Performance
21 Additional Information
</TABLE>

______________________________________________________________________________
LEHMAN BROTHERS

<PAGE> 49

PROSPECTUS

LEHMAN SELECTED GROWTH STOCK PORTFOLIO

AN INVESTMENT PORTFOLIO OF LEHMAN BROTHERS FUNDS, INC.

November 28, 1994

This Prospectus describes the LEHMAN SELECTED GROWTH STOCK PORTFOLIO (the
"Fund"), a diversified portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end management investment company.

The Fund's investment objective is to seek long-term capital appreciation. The
Fund will, under normal market conditions, invest primarily in equity
securities which the Fund's Investment Adviser believes to have the potential
for above-average capital appreciation. Such securities will be primarily those
of small- and medium-sized companies. Because of the nature of the Fund's
investment objective and policies and its ability to leverage its assets, the
Fund may be subject to greater investment risks than those assumed by certain
other investment companies.

LEHMAN BROTHERS INC. sponsors the Fund and acts as Distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC. ("LBGAM") serves as the
Fund's Investment Adviser.

The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund may be obtained through a
Lehman Brothers Investment Representative or by calling 800-861-4171.

This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information dated November 28,
1994, as amended or supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to investors without charge
by calling 800-861-4171. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.

- 1 -

<PAGE> 50
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross-references in this summary are to headings in the
Prospectus.

BENEFITS TO INVESTORS

The Fund offers investors several important benefits:

- a professionally managed portfolio of equity securities having the
potential for above-average capital appreciation.

- investment liquidity through convenient purchase and redemption
procedures.

- a convenient way to invest without the administrative and
recordkeeping burdens normally associated with the direct ownership of
securities.

- automatic dividend reinvestment feature, plus exchange privilege with
the shares of certain other funds in the Lehman Brothers Group of
Funds.

INVESTMENT OBJECTIVE

The Fund's investment objective is to seek long-term capital appreciation. The
Fund will, under normal market conditions, invest primarily in equity
securities which the Fund's Investment Adviser believes to have the potential
for above-average capital appreciation. Although the Fund invests primarily in
common stocks, it may also invest in other equity securities, such as
convertible securities, preferred stocks and warrants. The equity securities in
which the Fund invests will be primarily those of small- and medium-sized
companies, although the Fund may invest up to 20% of its total assets in equity
securities of larger companies.

INVESTMENT APPROACH

In selecting equity securities with above-average growth potential, the Fund's
Investment Adviser employs a disciplined investment methodology under which (i)
a fundamental analysis is performed on specific issuers, (ii) quantitative
models are applied to assess the relative attractiveness of issuers with
fundamental characteristics deemed to be favorable, (iii) investments are
selected in a manner intended to achieve diversification across broad industry
sectors, and (iv) investments are monitored on an ongoing basis with respect to
fundamental characteristics and quantitative projections. See "Investment
Objective and Policies."

PURCHASE OF SHARES

The Fund's shares are offered with no sales charge imposed at the time of
purchase but are subject to a contingent deferred sales charge ("CDSC") upon
redemption as described below. The Fund engages in a continuous offering of
its shares. Shares of the Fund may be purchased at the next determined net
asset value per share through a brokerage account maintained through Lehman
Brothers Inc. ("Lehman

- 2 -
<PAGE> 51

Brothers") or through a broker that clears securities transactions through
Lehman Brothers on a fully disclosed basis (an "Introducing Broker"). See
"Purchase of Shares."

INVESTMENT MINIMUMS

Investors are subject to a minimum initial investment requirement of $5,000 and
a minimum subsequent investment requirement of $1,000. However, for Individual
Retirement Accounts ("IRAs") and Self-Employed Retirement Plans, the minimum
initial investment requirement is $2,000 and the minimum subsequent investment
requirement is $1,000 and for certain qualified retirement plans, the minimum
initial and subsequent investment requirement is $500. See "Purchase of
Shares."

SYSTEMATIC INVESTMENT PLAN

The Fund also offers shareholders a Systematic Investment Plan under which they
may authorize the automatic placement of a purchase order each month or quarter
for Fund shares in an amount not less than $100. See "Purchase of Shares."

REDEMPTION OF SHARES

The Fund redeems shares at its next determined net asset value, subject to a
maximum CDSC of 2% of redemption proceeds during the first year after the date
of purchase, 1% of redemption proceeds during the second year, and no CDSC
thereafter. See "Redemption of Shares."

MANAGEMENT OF THE FUND

LBGAM serves as Investment Adviser to the Fund. LBGAM, together with other
Lehman Brothers investment advisory affiliates, had approximately $11 billion
in assets under management as of September 30, 1994. See "Management of the
Fund."

EXCHANGE PRIVILEGE

Shares of the Fund may be exchanged for shares of certain other funds in the
Lehman Brothers Group of Funds. See "Exchange Privilege."

DIVIDENDS AND DISTRIBUTIONS

The Fund's policy is to distribute its investment income and net realized
capital gains, if any, once a year, normally at the end of the year in which
earned or at the beginning of the next year. Dividends and distributions will
be reinvested in additional shares of the Fund unless a shareholder requests
otherwise. See "Dividends."

RISK FACTORS AND SPECIAL CONSIDERATIONS

There is no assurance that the Fund will achieve its investment objectives.
Securities of the kinds of companies in which the Fund invests may be subject
to significant price fluctuation and above-average risk. In addition, the Fund
may from time to time leverage its investments by purchasing securities with
borrowed money, in amounts not to exceed 33-1/3% of its total assets (including
the amount borrowed) less

-3-
<PAGE> 52
its liabilities (excluding the amount borrowed). Borrowed money creates an
opportunity for greater capital gain but at the same time increases exposure to
capital risk. In addition, the Fund may invest up to 15% of its total assets in
illiquid securities, invest in derivatives and engage in hedging and certain
other investment practices, which may entail certain risks. For a more complete
discussion of the risks associated with an investment in the Fund, see
"Investment Objective and Policies - Other Investments and Investment
Practices" and "- Risk Factors and Special Considerations."

BACKGROUND AND EXPENSE INFORMATION

The following Expense Summary lists the costs and expenses that a shareholder
can expect to incur as an investor in the Fund, based upon the maximum CDSC and
estimated expenses and average net assets for the current fiscal year.

EXPENSE SUMMARY

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum CDSC
(as a percentage of redemption proceeds) . . . . . . . . . . . . . . . . . . . 2.00%

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

Advisory Fees (estimated, after expense reimbursements) . . . . . . . . . . . . 0.75%
Rule 12b-1 Fees* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00%
Other Expenses - including Administration Fees
(estimated, after expense reimbursements)** . . . . . . . . . . . . . . . . . . 0.35%
----
Total Fund Operating Expenses
(estimated, after expense reimbursements)*** . . . . . . . . . . . . . . . . . 2.10%
====

</TABLE>

* Lehman Brothers receives an annual 12b-1 fee of 1.00% of the value of
the Fund's average daily net assets, consisting of a .75% distribution
fee and a .25% service fee. See "Management of the Fund -
Distributor."

** The amount set forth for "Other Expenses" is based on estimates for
the current fiscal year, after giving effect to the voluntary expense
reimbursements as described below. Absent these voluntary expense
reimbursements, the ratio of "Other Expenses" to average net assets is
estimated to be 0.46%.

*** The amount set forth for "Total Fund Operating Expenses" reflects the
agreement by LBGAM and the Fund's administrator to reimburse the Fund
for "Total Fund Operating Expenses" in excess of 2.10% average net
assets for a period of at least one year from the date of this
Prospectus. Absent these voluntary expense reimbursements, the ratio
of "Total Fund Operating Expenses" to average net assets is estimated
to be 2.21%.

The CDSC set forth in the above table is the maximum charge imposed on
redemptions of Fund shares, and investors may pay an actual CDSC of less than
2% as described under "Redemption of Shares."

-4-
<PAGE> 53
EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:

<TABLE>
<CAPTION>
1 year 3 years
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expenses, assuming complete redemption
at the end of each time period:* . . . . . . . . . . . . . . . . . . . . . $41 $66
Expenses, assuming no redemptions . . . . . . . . . . . . . . . . . . . . . $21 $66
</TABLE>

* Assumes deduction at the time of redemption of the maximum CDSC applicable for
that time period.

Long-term shareholders in mutual funds with Rule 12b-1 fees, such as the Fund,
may pay more than the economic equivalent of the maximum front-end sales charge
permitted by rules of the National Association of Securities Dealers, Inc.

FINANCIAL HIGHLIGHTS

The tables "For a share outstanding throughout each period" below supplement
the Fund's Financial Statements contained in the Statement of Additional
Information and set forth certain information regarding the investment
operations of the Fund for the periods presented.

The financial highlights for the period ended July 31, 1994, are derived from
the Fund's Financial Statements audited by Ernst & Young LLP, independent
auditors, whose report thereon appears in the Company's Annual Report dated
July 31, 1994. This information should be read in conjunction with the
financial statements and notes thereto that also appear in the Company's Annual
Report, which are incorporated by reference into the Statement of Additional
Information.

For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Period Ended
9/30/94** Period Ended
(unaudited) 7/31/94*

<S> <C> <C>
Net asset value, beginning of period . . . . . . . . . . . . . . $ 9.73 $ 10.00
------ -------
Income from investment operations:
Net investment income(1) . . . . . . . . . . . . . . . . . . . . 0.00(5) 0.01
Net realized and unrealized gain/(loss) on investments . . . . . 0.54 (0.28)
------ -------
Total from investment operations . . . . . . . . . . . . . . . . 0.54 (0.27)
------ -------
Net asset value, end of period . . . . . . . . . . . . . . . . . $10.27 $ 9.73
====== =======
Total return(2) . . . . . . . . . . . . . . . . . . . . . . . . $ 5.56% (2.70)%
====== =======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) . . . . . . . . . . . . $30,480 $26,341
Ratio of net investment income to average net assets(3) . . 0.09% 1.06%
Ratio of operating expenses to average net assets(3)(4) . . 2.17% 2.04%
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 28% 33%
</TABLE>

- 5 -
<PAGE> 54

- -------------------
* Lehman Selected Growth Stock Portfolio commenced operations on
May 20, 1994.

** Period from August 1, 1994 to September 30, 1994.

(1) Net investment income before waiver of fees and/or reimbursement of
expenses by the Investment Adviser and Administrator for the periods
shown above rounded to less than $0.00.

(2) Total return represents aggregate total return for the periods
indicated.

(3) Annualized.

(4) Annualized operating expense ratios before waiver of fees and/or
expenses reimbursed by the Investment Adviser and Administrator for
the periods shown above were 3.02% and 3.42%, respectively.

(5) Amount represents less than $0.01 per share.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek long-term capital appreciation.
Although the Fund may receive current income from dividends, interest and other
sources, income is only an incidental consideration of the Fund. The Fund will,
under normal market conditions, invest primarily in equity securities which
LBGAM believes to have the potential for above-average capital appreciation.
Although LBGAM anticipates that the assets of the Fund will, under normal
market conditions, be invested primarily in common stocks, the Fund may also
invest in other equity securities, such as convertible securities, preferred
stocks and warrants. See "Investment Objective and Policies - Other Investments
and Investment Practices." The equity securities in which the Fund invests will
be primarily those of small- and medium-sized companies, although the Fund may
invest up to 20% of its total assets in equity securities of larger companies.
Although the Fund may receive current income from dividends, interest and other
sources, income is only an incidental consideration of the Fund. There can be
no assurance that the Fund will achieve its investment objective. For a
discussion of certain risks and considerations associated with an investment in
the Fund, see "Investment Objective and Policies - Risk Factors and Special
Considerations."

INVESTMENT APPROACH

In selecting equity securities with above-average growth potential, LBGAM
employs a disciplined investment methodology under which (i) a fundamental
analysis is performed on specific issuers, (ii) quantitative models are applied
to assess the relative attractiveness of issuers with fundamental
characteristics deemed to be favorable, (iii) investments are selected in a
manner intended to achieve diversification across broad industry sectors, and
(iv) investments are monitored on an ongoing basis with respect to fundamental
characteristics and quantitative projections.

Fundamental Analysis. In selecting equity securities for the Fund's portfolio,
LBGAM initially applies a fundamental analysis on specific issuers. LBGAM
focuses on companies which have relatively unleveraged capital structures
(generally where debt represents less than one-third of total capitalization),
small- and medium-sized companies which have total annual revenues of less than
$1 billion and a market capitalization of less than $2.5 billion, companies
which satisfy certain benchmarks with respect to their internal rates of
return, and companies with high cash flows relative to market capitalization.
LBGAM also

-6-
<PAGE> 55
seeks to identify companies with certain business characteristics which it
deems favorable, such as strong brand name recognition, a franchise or service
that can be easily replicated but is expensive to duplicate in a defined market
niche, and service companies which compete based primarily on quality of
service rather than price. LBGAM also seeks companies where a significant
proportion of revenues is derived from reorder activity as opposed to companies
which are dependent on product life cycles. Companies may not satisfy all of
the foregoing fundamental criteria, however, if the overall mix of
characteristics is deemed favorable by LBGAM. The Fund may invest up to 20% of
its total assets in larger companies (i.e., those with total annual revenues in
excess of $1 billion or a market capitalization in excess of $2.5 billion).

Quantitative Models. After selecting equity securities with fundamental
characteristics deemed by LBGAM to be favorable, LBGAM applies three distinct
quantitative models to assess the relative attractiveness of the securities
identified as having favorable fundamental characteristics. In applying the
quantitative models, LBGAM seeks to select securities with projected earnings
growth rates of 15% or higher over the following three years. In addition,
LBGAM seeks to use the models to identify securities with favorable risk/reward
characteristics. Among the models employed by LBGAM are a valuation model which
places a value on growth relative to the long-term interest rate environment,
an earnings momentum model, which seeks to identify companies most likely to
experience an upward revision in earnings targets, and an earnings stability
model, which emphasizes the consistency of growth. There can of course be no
assurance that the models will predict accurately the performance of particular
securities.

Industry Diversification. Once equity securities are identified by LBGAM as
having favorable fundamental and quantitative characteristics, LBGAM selects
stocks for the Fund in a manner intended to achieve diversification across
broad industry sectors. LBGAM divides companies into four broad industry
classifications: Business/Industrial Service, Consumer Service, Health Care and
Technology. LBGAM expects that a substantial proportion of the Fund's
investments will be comprised of companies in each of these sectors. However,
LBGAM does not seek an equal balance among sectors but instead allocates
investments in each of these sectors based upon its expectations as to the
relative future performance of each sector. Although the Fund is subject to an
investment limitation which generally prohibits it from investing 25% or more
of its total assets in a single industry, the four industry classifications
employed by LBGAM are substantially broader than the term "industry" as used in
the foregoing investment limitation and as interpreted by the staff of the
Securities and Exchange Commission (the "SEC"). See "Investment Objective and
Policies - Investment Limitations."

Ongoing Monitoring. LBGAM will monitor the Fund's investments on an ongoing
basis with respect to, among other things, the continuing presence of favorable
fundamental characteristics, the performance of investments compared with
projections of the quantitative models, and changing prospects for the industry
sectors. LBGAM will also review other investment opportunities on an ongoing
basis and will alter the Fund's investment portfolio as it deems appropriate.

TEMPORARY INVESTMENTS

For temporary defensive purposes, the Fund may vary from its investment
objective and may invest, without limit (except for the limitations described
under "Investment Objective and Policies - Investment Limitations"), in cash or
certain high quality short-term debt instruments described below. The Fund may
also at any time invest funds in such instruments for cash management purposes,
pending investment in accordance with the Fund's investment objective and
policies and to meet operating expenses.

-7-
<PAGE> 56
The short-term instruments in which the Fund may invest include obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities ("U.S. Government Securities"); obligations issued or
guaranteed by other governments or one of their agencies or instrumentalities;
obligations issued or guaranteed by international organizations designed or
supported by multiple foreign government entities to promote economic
reconstruction or development; bank obligations, such as certificates of
deposit, time deposits and bankers' acceptances; corporate debt obligations,
including commercial paper; and repurchase agreements. To be eligible for
investment under the circumstances described above, such instruments (other
than U.S. Government Securities) must be issued by an issuer having a
short-term debt rating of A-1 or better by Standard & Poor's Ratings Group, a
rating of Prime-1 by Moody's Investors Service, Inc., a comparable rating from
another nationally recognized rating service or, if unrated, deemed to be of
equivalent quality by LGBAM.

OTHER INVESTMENTS AND INVESTMENT PRACTICES

Leverage. The Fund may from time to time leverage its investments by
purchasing securities with borrowed money. The Fund may borrow only from banks
or by entering into reverse repurchase agreements, in aggregate amounts not to
exceed 33-1/3% of its total assets (including the amount borrowed) less its
liabilities (excluding the amount borrowed). Bank borrowings may be from U.S.
or foreign banks and may be secured or unsecured. The Fund may also borrow by
entering into reverse repurchase agreements, pursuant to which it would sell
portfolio securities to financial institutions, such as banks and
broker-dealers, and agree to repurchase them at an agreed upon date and price.
The Fund would also consider entering into reverse repurchase agreements to
avoid otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase. In addition to the
foregoing, the Fund may borrow up to 5% of its total assets (including the
amount borrowed) for temporary or emergency purposes. Borrowed money creates an
opportunity for greater capital gain but at the same time increases exposure to
capital risk, as any gain in the value of securities purchased with borrowed
money that exceeds the interest paid on the amount borrowed would cause the
Fund's net asset value to increase more rapidly than otherwise, while any
decline in the value of securities purchased would cause the Fund's net asset
value to decrease more rapidly than otherwise.

Other Investment Companies. The Fund may invest in the securities of other
investment companies, to the extent permitted by the Investment Company Act of
1940, as amended (the "1940 Act"). Under the 1940 Act, the Fund may invest up
to 10% of its total assets in shares of other investment companies and up to 5%
of its total assets in any one investment company, provided that the investment
does not represent more than 3% of the voting stock of the acquired investment
company. By investing in another investment company, the Fund bears a ratable
share of the investment company's expenses, as well as continuing to bear the
Fund's advisory and administrative fees with respect to the amount of the
investment.

Repurchase Agreements. The Fund may purchase instruments from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase them at an agreed upon time and price ("repurchase
agreements"). The Fund would enter into repurchase agreements to generate
additional income. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price. Default by the seller would, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.

-8-

<PAGE> 57
Loans of Portfolio Securities. The Fund may lend its portfolio securities
consistent with its investment policies, in order to generate additional
income. The Fund may lend portfolio securities against collateral, consisting
of cash or securities which are consistent with its permitted investments,
which is equal at all times to at least 100% of the value of the securities
loaned. There is no limitation on the amount of securities that may be loaned.
Such loans would involve risks of delay in receiving additional collateral or
in recovering the securities loaned or even loss of rights in the collateral
should the borrower of the securities fail financially. However, loans will be
made only to borrowers deemed by LBGAM to be of good standing and only when, in
the judgment of LBGAM, the income to be earned from the loans justifies the
attendant risks.

When-Issued and Delayed Delivery Securities. The Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. When-issued and delayed
delivery securities are securities purchased for delivery beyond the normal
settlement date at a stated price. The Fund will generally not pay for such
securities or start earning income on them until they are received. Securities
purchased on a when-issued or delayed delivery basis are recorded as an asset
and are subject to changes in value based upon changes in the general level of
interest rates. The Fund expects that commitments to purchase when-issued or
delayed delivery securities will not exceed 25% of the value of its total
assets absent unusual market conditions. The Fund does not intend to purchase
when-issued or delayed delivery securities for speculative purposes but only in
furtherance of its investment objective. When the Fund purchases securities on
a when-issued or delayed delivery basis, it will set aside securities or cash
with its custodian equal to the payment that will be due.

Illiquid Securities. The Fund will not invest more than 15% of the value of
its total assets in illiquid securities. Illiquid securities are securities
which may not be sold or disposed of in the ordinary course of business within
seven days at approximately the value at which the Fund has valued the
investments, and include securities with legal or contractual restrictions on
resale, time deposits, repurchase agreements having maturities longer than
seven days and securities that do not have readily available market quotations.
In addition, the Fund may invest in securities that are sold in private
placement transactions between their issuers and their purchasers and that are
neither listed on an exchange nor traded over-the counter. These factors may
have an adverse effect on the Fund's ability to dispose of particular
securities and may limit the Fund's ability to obtain accurate market
quotations for purposes of valuing securities and calculating net asset value
and to sell securities at fair value. If any privately placed securities held
by the Fund are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"), but
which can be sold to qualified institutional buyers in accordance with Rule
144A under that Act ("Rule 144A securities"). Rule 144A securities generally
must be sold to other qualified institutional buyers. The Fund may also invest
in commercial obligations issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the 1933 Act
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to institutional
investors such as the Fund who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. If a particular investment in Rule 144A
securities, Section 4(2) paper or private placement securities is not
determined to be liquid, that investment will be included within the 15%
limitation on investment in illiquid securities. The ability to sell Rule 144A
securities to qualified institutional buyers is a recent development and it is
not possible to predict how this market will mature. LBGAM will monitor the
liquidity of such restricted

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<PAGE> 58
securities under the supervision of the Board of Directors. See "Investment
Objective and Policies - Additional Information on Portfolio Instruments and
Certain Investment Practices - Illiquid and Restricted Securities" in the
Statement of Additional Information.

Warrants. The Fund may invest up to 5% of the value of its net assets (valued
at the lower of cost or market) in warrants for equity securities, which are
securities permitting, but not obligating, their holder to subscribe for other
equity securities. Warrants do not carry with them the right to dividends or
voting rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As
a result, an investment in warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does
not necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to its expiration
date. The Fund will not invest more than 2% of the value of its net assets
(valued as described above) in warrants which are not listed on the New York or
American Stock Exchanges.

Convertible Securities. Convertible securities are fixed-income securities
that may be converted into or exchanged for, at either a stated price or stated
rate, underlying shares of common stock. Convertible securities have general
characteristics similar to both fixed-income and equity securities. Although to
a lesser extent than with fixed-income securities generally, the market value
of convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because
of the conversion feature, the market value of convertible securities tends to
vary with fluctuations in the market value of the underlying common stocks and
therefore also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that 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 common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of 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.

Hedging and Derivatives. The Fund is authorized to use various hedging and
investment strategies described below to hedge broad or specific market
movements, or to seek to increase the Fund's income or gains. The Fund may
purchase and sell (or write) exchange-listed and over-the-counter put and call
options on securities, financial futures contracts, equity indices and other
financial instruments and enter into financial futures contracts (collectively,
these transactions are referred to in this Prospectus as "Derivatives").

Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased by the Fund resulting from
securities market to protect the Fund's unrealized gains in the value of its
securities, to facilitate the sale of those securities for investment purposes,
to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities or to seek to enhance the
Fund's income or gain. The Fund may use any or all types of Derivatives at any
time; no particular strategy will dictate the use of one type of transaction
rather than another, as use of any Derivatives will be a function of numerous
variables, including market conditions. The ability of the Fund to utilize
Derivatives successfully will depend on, in addition to the factors described
above, LBGAM's ability to predict pertinent market movements, which cannot be
assured. These skills are different from those needed to select the Fund's
securities. The Fund is not a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")) and Derivatives involving

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<PAGE> 59

futures contracts and options on futures contracts will be purchased, sold or
entered into only for bona fide hedging purposes, provided that the Fund may
enter into such transactions for purposes other than bona fide hedging if,
immediately thereafter, the sum of the amount of its initial margin and
premiums on open contracts and options would not exceed 5% of the liquidation
value of the Fund's portfolio, provided, further, that, in the case of an
option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Derivatives will require that
the Fund segregate cash, liquid high grade debt obligations or other assets to
the extent the Fund's obligations are not otherwise "covered" through ownership
of the underlying security or financial instrument. See "Risk Factors and
Special Considerations."

A detailed discussion of Derivatives, including applicable requirements of the
CFTC, the requirement to segregate assets with respect to these transactions
and special risks associated with such strategies, appears in the Statement of
Additional Information.

The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes."

Short Sales. The Fund may make short sales of securities "against the box." A
short sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, the Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical
security. Short sales against the box are a form of hedging to offset potential
declines in long positions in similar securities.

INVESTMENT LIMITATIONS

The investment limitations enumerated below are fundamental and may not be
changed by the Company's Board of Directors without the affirmative vote of the
holders of a majority of the Fund's outstanding shares. The Fund's investment
objectives and the other investment policies described herein may be changed by
the Board of Directors at any time. If there is a change in the investment
objectives of the Fund, shareholders of the Fund should consider whether the
Fund remains an appropriate investment in light of their then current financial
position and needs. (A complete list of Fund's investment limitations that
cannot be changed without a vote of shareholders is contained in the Statement
of Additional Information under "Investment Objective and Policies.") The
percentage limitations set forth below, as well as those contained elsewhere in
this Prospectus and the Statement of Additional Information, apply at the time
a transaction is effected, and a subsequent change in a percentage resulting
from market fluctuations or any other cause other than an action by the Fund
will not require the Fund to dispose of portfolio securities or to take other
action to satisfy the percentage limitation.

1. The Fund may not purchase the securities of any one issuer if as a
result more than 5% of the value of its total assets would be invested
in the securities of such issuer, except that up to 25% of the value
of its total assets may be invested without regard to this 5%
limitation and provided that there is no limitation with respect to
investments in U.S. Government Securities.

2. The Fund may not borrow money, except (a) from banks or by entering
into reverse repurchase agreements, in aggregate amounts not exceeding
33-1/3% of the value of its total assets at the time of such borrowing
and (b) in amounts not exceeding 5% of the value of its total assets
at the time of such borrowing for temporary or emergency purposes
(including for clearance of securities transactions or payment of
redemptions or dividends). For purposes of the foregoing investment

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<PAGE> 60
limitation, the term "total assets" shall be calculated after giving
effect to the net proceeds of any borrowings and reduced by any
liabilities and indebtedness other than such borrowings.

3. The Fund may not purchase any securities which would cause 25% or more
of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry; provided that
there is no limitation with respect to investments in U.S. Government
Securities.

RISK FACTORS AND SPECIAL CONSIDERATIONS

Securities of the kinds of companies in which the Fund invests may be subject
to significant price fluctuation and above-average risk. Stocks of small- and
medium-sized companies are more volatile than stocks of larger companies. The
Fund may invest in relatively new or unseasoned companies which are in their
early states of development, or small companies positioned in new and emerging
industries. Securities of small and unseasoned companies present greater risks
than securities of larger, more established companies. The companies in which
the Fund may invest may have relatively small revenues and limited product
lines, and may have a small share of the market for their products or services.
Smaller companies may lack depth of management. They may be unable internally
to generate funds necessary for growth or potential development or to generate
such funds through external financing on favorable terms. They may be
developing or marketing new products or services for which markets are not yet
established and may never become established. Due to these and other factors,
smaller companies may incur significant losses.

In addition, the Fund may invest in illiquid securities and engage in hedging
and other strategic transactions and certain other investment practices, which
may entail certain risks. See "Investment Objective and Policies - Other
Investments and Investment Practices."

Derivatives involve special risks, including possible default by the other
party to the transaction, illiquidity and, to the extent LBGAM's view as to
certain market movements is incorrect, the risk that the use of Derivatives
could result in greater losses than if they had not been used. Use of put and
call options could result in losses to the Fund, force the purchase or sale of
portfolio securities at inopportune times or for prices higher or lower than
current market values or cause the Fund to hold a security it might otherwise
sell. The use of options and futures transactions entails certain special
risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund could create the possibility that losses on the Derivative
will be greater than gains in the value of the Fund's position. In addition,
futures and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. The Fund might not be able to
close out certain positions without incurring substantial losses. To the
extent the Fund utilizes futures and options transactions for hedging, such
transactions should tend to minimize the risk of loss due to a decline in the
value of the hedged position and, at the same time, limit any potential gain to
the Fund that might result form an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium and transaction
costs. Losses resulting from the use of Derivatives will reduce the Fund's net
asset value, and possibly income, and the losses may be greater than if
Derivatives had not been used. Additional information regarding the risks and
special considerations associated with Derivatives appears in the Statement of
Additional Information.

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<PAGE> 61
PURCHASE OF SHARES

Purchases of Fund shares must be made through a brokerage account maintained
through Lehman Brothers or a broker or dealer (each, an "Introducing Broker")
that (i) clears securities transactions through Lehman Brothers on a fully
disclosed basis or (ii) has entered into an agreement with Lehman Brothers with
respect to the sale of Fund shares. The Fund's shares are offered with no sales
charge imposed at the time of purchase but are subject to a CDSC upon
redemption. See "Redemption of Shares." The Fund reserves the right to reject
any purchase order and to suspend the offering of shares for a period of time.

The Fund engages in a continuous offering of its shares. During the continuous
offering, Fund shares may be purchased through Lehman Brothers or an
Introducing Broker at the net asset value next determined after the purchase
order is received by Lehman Brothers or an Introducing Broker. See "Valuation
of Shares."

Purchase orders received by Lehman Brothers or an Introducing Broker prior to
the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"),
currently 4:00 p.m., New York time, on any day the Fund's net asset value is
calculated are priced according to the net asset value determined on that day.
Purchase orders received after the close of regular trading on the NYSE are
priced as of the time the net asset value per share is next determined. See
"Valuation of Shares." Payment is generally due to Lehman Brothers or an
Introducing Broker on the fifth business day (the "Settlement Date") after the
trade date. Investors who make payment prior to a Settlement Date may permit
the payment to be held in their brokerage accounts or may designate a temporary
investment (such as a money market fund in the Lehman Brothers Group of Funds)
for such payment until the Settlement Date. The Fund reserves the right to
reject any purchase order and to suspend the offering of shares for a period of
time.

SYSTEMATIC INVESTMENT PLAN

The Fund offers shareholders a Systematic Investment Plan under which
shareholders may authorize Lehman Brothers or an Introducing Broker to place a
purchase order each month or quarter for shares of the Fund in an amount not
less than $100. The purchase price is paid automatically from cash held in the
shareholder's Lehman Brothers brokerage account or through the automatic
redemption of the shareholder's shares of a Lehman Brothers money market fund.
For further information regarding the Systematic Investment Plan, shareholders
should contact their Lehman Brothers Investment Representative.

MINIMUM INVESTMENTS

The minimum initial investment in the Fund is $5,000 and the minimum subsequent
investment is $1,000, except for purchases through (i) Individual Retirement
Accounts ("IRAs") and Self-Employed Retirement Plans, for which the minimum
initial and subsequent investments are $2,000 and $1,000, respectively, (ii)
retirement plans qualified under Section 403(b)(7) of the Code ("Qualified
Retirement Plan"), for which the minimum and subsequent investment is $500 and
(iii) the Fund's Systematic Investment Plan, for which the minimum and
subsequent investment is $100. For employees of Lehman Brothers and its
affiliates, the minimum initial investment is $1,000 and the minimum subsequent
investment is $500. The Fund reserves the right at any time to vary the initial
and subsequent investment minimums.

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<PAGE> 62
REDEMPTION OF SHARES

Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. The Fund normally transmits redemption proceeds for
credit to the shareholder's account at Lehman Brothers or the Introducing
Broker at no charge (other than any applicable CDSC) within seven days after
receipt of a redemption request. Generally, these funds will not be invested
for the shareholder's benefit without specific instruction, and Lehman Brothers
or the Introducing Broker will benefit from the use of temporarily uninvested
funds. A shareholder who pays for Fund shares by personal check will be
credited with the proceeds of a redemption of those shares only after the
purchase check has been collected, which may take up to 15 days or more. A
shareholder who anticipates the need for more immediate access to his or her
investment should purchase shares with federal funds, by bank wire or with a
certified or cashier's check.

A Fund account that is reduced by a shareholder to a value of $1,000 or less
($500 for IRAs and Self-Employed Retirement Plans) may be subject to redemption
by the Fund, but only after the shareholder has been given at least 30 days in
which to increase the account balance to more than $1,000 ($500 for IRAs,
Self-Employed Retirement Plans and Qualified Retirement Plans). In addition,
the Fund may redeem shares involuntarily or suspend the right of redemption as
permitted under the 1940 Act, as described in the Statement of Additional
Information under "Additional Purchase and Redemption Information."

Fund shares may be redeemed in one of the following ways:

REDEMPTION THROUGH LEHMAN BROTHERS OR AN INTRODUCING BROKER

Redemption requests may be made through Lehman Brothers or an Introducing
Broker.

REDEMPTION BY MAIL

Shares held by Lehman Brothers as custodian must be redeemed by submitting a
written request to a Lehman Brothers Investment Representative. All other
shares may be redeemed by submitting a written request for redemption to the
Fund's transfer agent:

Lehman Selected Growth Stock Portfolio
c/o The Shareholder Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184

A written redemption request to the Fund's transfer agent or a Lehman Brothers
Investment Representative must (a) state the number of shares to be redeemed,
(b) identify the shareholder's account number and (c) be signed by each
registered owner exactly as the shares are registered. Any signature appearing
on a redemption request must be guaranteed by a domestic bank, a savings and
loan institution, a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange. The Fund's transfer
agent may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until the Fund's transfer
agent receives all required documents in proper form.

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<PAGE> 63
CONTINGENT DEFERRED SALES CHARGE

A CDSC payable to Lehman Brothers is imposed on any redemption of Fund shares,
however effected, that causes the current value of a shareholder's account to
fall below the dollar amount of all payments by the shareholder for the
purchase of Fund shares ("purchase payments") during the preceding two years.
No charge is imposed to the extent that the net asset value of the Fund shares
redeemed does not exceed (a) the current net asset value of Fund shares
purchased through reinvestment of dividends or capital gains distributions,
plus (b) the current net asset value of Fund shares purchased more than two
years prior to the redemption, plus (c) increases in the net asset value of the
shareholder's Fund shares above the purchase payments made during the preceding
two years.

In circumstances in which the CDSC is imposed, the amount of the charge will
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed. Solely for purposes of determining the
number of years since a purchase payment was made, all purchase payments made
during a month will be aggregated and deemed to have been made on the last
Friday of the preceding Lehman Brothers statement month. The following table
sets forth the rates of the CDSC for redemptions of Fund shares:

<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------------------------------------------------
<S> <C>
First 2.00%
Second 1.00%
Third 0.00%
</TABLE>

The purchase payment from which a redemption of Fund shares is made is assumed
to be the earliest purchase payment from which a full redemption has not
already been effected. In the case of redemptions of shares of other funds in
the Lehman Brothers Group of Funds issued in exchange for shares of the Fund,
the term "purchase payments" refers to the purchase payments for the shares
given in exchange. In the event of an exchange of shares of funds with
differing CDSC schedules, the shares will be, in all cases, subject to the
higher CDSC schedule. See "Exchange Privilege."

Waivers of CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares following the death or disability of the
shareholder; (c) redemptions of shares in connection with certain
post-retirement distributions and withdrawals from retirement plans or IRAs;
(d) involuntary redemptions; (e) redemption proceeds from other funds in the
Lehman Brothers Group of Funds that are reinvested within 30 days of the
redemption; (f) redemptions of shares in connection with a combination of any
investment company with the Fund by merger, acquisition of assets or otherwise;
and (g) redemptions of shares owned by employees of Lehman Brothers and its
affiliates.

EXCHANGE PRIVILEGE

Shares of the Fund may be exchanged for shares of the following funds in the
Lehman Brothers Group of Funds, to the extent shares are offered for sale in
the shareholder's state of residence.

LEHMAN BROTHERS DAILY INCOME FUND, a money market fund which seeks as high a
level of current income as is consistent with stability of principal. Shares of
the Fund may be exchanged for CDSC Shares of this fund.

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<PAGE> 64
LEHMAN BROTHERS MUNICIPAL INCOME FUND, a money market fund which seeks as high
a level of current income exempt from federal income tax as is consistent with
stability of principal. Shares of the Fund may be exchanged for CDSC Shares of
this fund.

Additional Funds. It is contemplated that additional funds will become
available into which Fund shareholders will exchange their Fund shares. To
obtain information regarding the availability of such additional funds,
investors should contact a Lehman Brothers Investment Representative.

Tax Effect. The exchange of shares of one fund for shares of another fund is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with an exchange.

CDSC. Shareholders may exchange their fund shares without the imposition of an
exchange fee. In the event shareholders of the Fund exchange all or a portion
of their Fund shares for shares in any of the funds listed above imposing a
CDSC higher than that imposed by the Fund, the exchanged shares will be subject
to the higher applicable CDSC. Upon an exchange, the new shares will be deemed
to have been purchased on the same date as the shares of the Fund which have
been exchanged.

Additional Information Regarding the Exchange Privilege. Shareholders
exercising the exchange privilege with any of the other funds in the Lehman
Brothers Group of Funds should review the prospectus of that fund carefully
prior to making an exchange. Lehman Brothers reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at any
time after notice to shareholders. For further information regarding the
exchange privilege or to obtain the current prospectuses for members of the
Lehman Brothers Group of Funds, investors should contact their Lehman Brothers
Investment Representative.

VALUATION OF SHARES

The net asset value per share is calculated on each day, Monday through Friday,
except on days on which the NYSE is closed. The NYSE currently is scheduled to
be closed on New Year's Day, Presidents' Day (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day (observed), Thanksgiving and
Christmas and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively.

The net asset value per share of the Fund is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the net
assets of the Fund by the total number of Fund shares outstanding. Generally,
the Fund's investments are valued at market value or, in the absence of a
market value with respect to any securities, at fair value as determined by or
under the direction of the Company's Board of Directors. Short-term investments
that mature in 60 days or less are valued at amortized cost whenever the Board
of Directors determines that amortized cost reflects fair value of those
investments. Further information regarding the Fund's valuation policies is
contained in the Statement of Additional Information.

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<PAGE> 65
MANAGEMENT OF THE FUND

The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Board of Directors approves all significant
agreements between the Company and the persons or companies that furnish
services to the Fund, including agreements with its Distributor, Investment
Adviser, Administrator, Custodian and Transfer Agent. The day-to-day operations
of the Fund are delegated to the Fund's Investment Adviser and Administrator.
One of the directors and all of the Company's officers are affiliated with
Lehman Brothers, The Shareholders Services Group, Inc. or one of their
affiliates. The Statement of Additional Information relating to the Fund
contains general background information regarding each director and executive
officer of the Company.

INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.

Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as Investment
Adviser to the Fund. LBGAM, together with other Lehman Brothers investment
advisory affiliates, had approximately $11 billion in assets under management
as of September 30, 1994. Subject to the supervision and direction of the
Company's Board of Directors, LBGAM manages the portfolio of the Fund in
accordance with the Fund's investment objective and policies, makes investment
decisions for the Fund and places orders to purchase and sell securities. As
compensation for the services of LBGAM as Investment Adviser to the Fund, LBGAM
is entitled to receive a monthly fee from the Fund at the annual rate of 0.75%
of the value of the Fund's average daily net assets.

Ms. Susan Hirsch, a Portfolio Manager for LBGAM, has primary responsibility for
the management of the Fund's investment portfolio. Prior to joining LBGAM in
1994, Ms. Hirsch was a Senior Vice President at Lehman Brothers, where she had
primary responsibility for the selection of investments for the Lehman Brothers
Selected Growth Stock List (the "List"). Although the investment approach to be
used in managing the Fund's portfolio is generally similar to that which had
been used by Ms. Hirsch in selecting investments for the List, the approach in
managing the Fund will differ because, among other things, (i) the Fund may
invest in a broader range of investments than those eligible for the List, (ii)
the Fund may employ certain additional investment techniques, as described
under "Investment Objective and Policies - Other Investments and Investment
Practices," (iii) shares of the Fund will be purchased and sold by shareholders
on an ongoing basis, and (iv) the Fund will be subject to various limitations
on its operations, including those imposed under the Code.

LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").

ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.

The Shareholder Services Group, Inc. ("TSSG") serves as the Fund's
Administrator. As Administrator, TSSG calculates the net asset value of the
Fund's shares and generally assists in all aspects of the Fund's administration
and operation. As compensation for TSSG's services as Administrator, TSSG is
entitled to receive a monthly fee at the annual rate of 0.20% of the value of
the Fund's average daily net assets. TSSG is a wholly-owned subsidiary of
First Data Corporation. TSSG is located at 53 State Street, Boston,
Massachusetts 02109.

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<PAGE> 66

DISTRIBUTOR

Lehman Brothers, located at 3 World Financial Center, New York, New York 10285,
is Distributor of the Fund's shares. Lehman Brothers, a leading full service
investment firm serving U.S. and foreign securities and commodities markets,
meets the diverse financial needs of individuals, institutions and governments
around the world. Lehman Brothers is a wholly owned subsidiary of Holdings.

The Company has adopted a services and distribution plan with respect to the
Fund (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the Fund has agreed to pay Lehman Brothers a service fee, accrued daily and
paid monthly, at an annual rate of .25% of the value of the Fund's average
daily net assets, and a distribution fee, accrued daily and paid monthly, at an
annual rate of .75% of the value of the Fund's average daily net assets. The
service fee is used by Lehman Brothers to pay its Investment Representatives or
Introducing Brokers for servicing shareholder accounts. The distribution fee is
paid to Lehman Brothers for advertising, marketing and distributing Fund
shares, including compensation for its initial expense of paying Investment
Representatives or Introducing Brokers a commission upon the sale of Fund
shares and accruals for interest on the amount of the foregoing expenses that
exceed the amount of the distribution fee and the CDSC received by the
Distributor. Under the Plan, Lehman Brothers may retain all or a portion of the
distribution fee, and may make payments out of its distribution fee to
Investment Representatives or Introducing Brokers that engage in the sale of
Fund shares or provide support services in connection with the distribution of
the shares. The payments to Lehman Brothers Investment Representatives and
Introducing Brokers for selling shares of the Fund may include a commission
paid at the time of sale and a continuing fee based upon the value of the
average daily net assets of the Fund's shares sold that remain invested in the
Fund. The service fee is credited at the rate of .25% of the value of the
average daily net assets of the Fund's shares that remain invested in the Fund.
The Plan also provides that Lehman Brothers may make payments to assist in the
distribution of the Fund's shares out of the other fees received by it or its
affiliates from the Fund, its past profits or any other sources available to
it. From time to time, Lehman Brothers may waive receipt of fees under the Plan
while retaining the ability to be paid under the Plan thereafter. The fees
payable to Lehman Brothers under the Plan and payments by Lehman Brothers to
its Investment Representatives or Introducing Brokers are payable without
regard to actual expenses incurred.

EXPENSES

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<PAGE> 67
shareholders, advisory and administration fees, charges of the custodian,
transfer agent and dividend disbursing agent, certain insurance premiums,
outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. LBGAM and TSSG have agreed to reimburse the Fund
to the extent required by applicable state law for certain expenses that are
described in the Statement of Additional Information relating to the Fund. In
addition, LBGAM and TSSG have agreed to reimburse the Fund for total operating
expenses in excess of 2.10% of average net assets for a period of at least one
year from the date of this Prospectus.

DIVIDENDS

The Fund's policy is to distribute its investment income and net realized
capital gains, if any, once a year, normally at the end of the year in which
earned or at the beginning of the next year. Unless a shareholder instructs the
Fund to pay dividends or capital gains distributions in cash and credit them to
the shareholder's account at Lehman Brothers, dividends and distributions will
be reinvested automatically in additional shares of the Fund at net asset
value. Shares redeemed during the month are entitled to dividends and
distributions declared up to and including the date of redemption.

Each shareholder or its authorized representative will receive an annual
statement designating the amount of any dividends and distributions made during
the year and their federal tax qualification.

TAXES

The Fund intends to qualify and elect to be treated as a regulated investment
company for federal income tax purposes under Subchapter M of the Code. If so
qualified, the Fund will not be subject to federal income taxes on its
investment company taxable income (as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (the excess of the Fund's net long-term capital gain over its net
short-term capital loss), if any, that it distributes to its shareholders in
each taxable year. To qualify as a regulated investment company, the Fund
must, among other things, distribute to its shareholders at least 90% of its
net investment company taxable income for such taxable year. However, the Fund
would be subject to corporate income tax at a rate of 35% on any undistributed
income or net capital gain. The Fund must also derive less than 30% of its
gross income in each taxable year from the sale or other disposition of certain
securities held for less than three months (the "30% limitation"). If in any
year the Fund should fail to qualify as a regulated investment company, the
Fund would be subject to federal income tax in the same manner as an ordinary
corporation, and distributions to shareholders would be taxable to such holders
as ordinary income to the extent of the earnings and profits of the Fund.
Distributions in excess of earnings and profits will be treated as a tax-free
return of capital, to the extent of a holder's basis in its shares, and any
excess, as a long- or short-term capital gain.

The Fund intends to distribute substantially all of its investment company
taxable income each year. Such distributions, whether paid in cash or
reinvested in additional shares, of net investment income will be taxable as
ordinary income. Federal income taxes for distributions to an IRA or a
qualified retirement plan are deferred under the Code. A portion of such
dividends may qualify for the dividends-received deduction generally available
for corporate shareholders under the Code. Distributions to shareholders of
net capital gain, whether paid in cash or reinvested in additional shares, that
are designated by the Fund as "capital gains dividends" will be taxable as
long-term capital gains, whether paid in cash or additional shares, regardless
of how long the shares have been held by such shareholders. Shareholders
receiving

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<PAGE> 68
distributions from the Fund in the form of additional shares will be treated
for federal income tax purposes as receiving a distribution in an amount equal
to the fair market value of the additional shares on the date of such a
distribution.

Gain or loss, if any, recognized on the sale or other disposition of shares of
the Fund will be taxed as capital gain or loss if the shares are capital assets
in the shareholder's hands. Generally, a shareholder's gain or loss will be a
long-term gain or loss if the shares have been held for more than one year. If
a shareholder sells or otherwise disposes of a share of the Fund before holding
it for more than six months, any loss on the sale or other disposition of such
share shall be treated as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such share. A loss
realized on a sale or exchange of shares may be disallowed if other shares are
acquired within a 61-day period beginning 30 days before the ending 30 days
after the date that the shares are disposed of.

Dividends and distributions by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made. Any dividend
declared by the Fund in October, November or December of any calendar year,
however, which is payable to shareholders of record on a specified date in such
a month and not paid on or before December 31 of such year will be treated as
received by the Shareholders as of December 31 of such year, provided that the
dividend is paid during January of the following year.

The Fund may engage in hedging involving forward contracts, options and futures
contracts. See "Investment Objective and Policies - Other Investments and
Investment Practices - Hedging and Derivatives." Such transactions will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (that is, may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer recognition of certain of the Fund's losses.
These rules could therefore affect the character, amount and timing of
distributions to shareholders. In addition, these provisions (1) will require
the Fund to "mark-to-market" certain types of positions in its portfolio (that
is, treat them as if they were closed out) and (2) may cause the Fund to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes. The extent to which the Fund may be able to
use such hedging techniques and continue to qualify as a regulated investment
company may be limited by the 30% limitation discussed above. The Fund intends
to monitor its transactions, will make the appropriate tax elections and will
make the appropriate entries in its books and records when it acquires any
forward contracts, option, futures contract, or hedged investment in order to
mitigate the effect of these rules and prevent disqualification of the Fund as
a regulated investment company.

The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the Internal Revenue Services ("IRS") notifies the
Fund that the shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that effect, or (iii)
when required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding.

Ordinary income dividends paid by the Fund to shareholders who are non-resident
aliens or foreign entities will be subject to a 30% withholding tax unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law or the income is "effectively connected" with a U.S.
trade or business. Generally, subject to certain exceptions, capital gain
dividends paid to non-resident shareholders or foreign

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<PAGE> 69
entities will not be subject to U.S. tax. Non-resident shareholders are urged
to consult their own tax advisers concerning the applicability of the U.S.
withholding tax.

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

The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the Fund and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Fund or its shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.

THE FUND'S PERFORMANCE

From time to time, the "total return" for shares may be quoted in
advertisements or reports to shareholders. Total return figures show the
average percentage change in the value of an investment in the Fund from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by the Fund during the
period were reinvested in shares of the Fund. Total return figures include any
applicable CDSC. These figures also take into account the service and
distribution fees payable with respect to Fund shares.

Total return figures will be given for the recent one-, five- and ten-year
periods, or the life of the Fund to the extent it has not been in existence for
any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering average annual total return figures for
periods longer than one year, it is important to note that the total return for
any one year in the period might have been greater or less than the average for
the entire period. "Aggregate total return" figures may be used for various
periods, representing the cumulative change in value of an investment in Fund
shares for the specific period (again reflecting changes in share prices and
assuming reinvestment of dividends and distributions). Aggregate total return
may be calculated either with or without the effect of any applicable CDSC, may
be shown by means of schedules, charts or graphs and may indicate subtotals of
the various components of total return (that is, change in the value of initial
investment, income dividends and capital gains distributions).

In reports or other communications to shareholders or in advertising materials,
performance of Fund shares may be compared with that of other mutual funds or
classes of shares of other mutual funds, as listed in the rankings prepared by
Lipper Analytical Services, Inc. or similar independent services that monitor
the performance of mutual funds, or other industry or financial publications
such as Barron's, Business Week, CDA Investment Technologies, Inc., Changing
Times, Forbes, Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. Performance figures are based on historical earnings and are
not intended to indicate future performance. The Statement of Additional
Information contains a further description of the methods used to determine
performance. Investors may call 800-861-4171 to obtain current performance
figures.

ADDITIONAL INFORMATION

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<PAGE> 70
Company's Charter currently authorizes the issuance of several series of
shares, corresponding to shares of the Fund and other investment portfolios of
the Company. The Company's Board of Directors may, in the future, authorize the
issuance of additional series of capital stock representing shares of
additional investment portfolios or additional classes of shares of the Fund or
the Company's other investment portfolios. The Company has received an order
from the SEC permitting it, subject to certain terms and conditions, to
establish multiple classes of shares within each series.

All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class
is required by law or where the matter involved affects one series or class.
Under the corporate law of Maryland, the Company's state of incorporation, and
the Company's By-Laws (except as required under the 1940 Act), the Company is
not required and does not currently intend to hold annual meetings of
shareholders for the election of directors. Shareholders, however, do have the
right to call for a meeting to consider the removal of one or more of the
Company's directors if such a request is made, in writing, by the holders of at
least 10% of the Company's outstanding voting securities.

All shares of the Company, when issued, will be fully paid and nonassessable.

Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.

TSSG, a subsidiary of First Data Corporation, is located at One Exchange Place,
Boston, Massachusetts 02109, and serves as the Fund's transfer agent.

The Fund sends shareholders a semi-annual and audited annual report, which
includes listings of investment securities held by the Fund at the end of the
period covered. In an effort to reduce the Fund's printing and mailing costs,
the Fund may consolidate the mailing of its semi-annual and annual reports by
household. This consolidation means that a household having multiple accounts
with the identical address of record would receive a single copy of each
report. In addition, the Fund may consolidate the mailing of its Prospectus so
that a shareholder having multiple accounts (e.g., individual, IRA and/or
Self-Employed Retirement Plan accounts) would receive a single Prospectus
annually. Any shareholder who does not want this consolidation to apply to his
or her account should contact his or her Lehman Brothers Investment
Representative or the Fund's transfer agent. Shareholders may direct inquiries
regarding the Fund to their Lehman Brothers Investment Representative.

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<PAGE> 71

LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS

LEHMAN MEXICAN GROWTH AND INCOME PORTFOLIO

Incorporated by reference to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form N-1A, filed on January
14, 1994, and not affected by this filing.

<PAGE> 72
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS

LEHMAN LATIN AMERICA DOLLAR INCOME PORTFOLIO

Incorporated by reference to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form N-1A, filed on January
14, 1994, and not affected by this filing.

<PAGE> 73
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS INTERNATIONAL BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 74
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS GLOBAL EMERGING MARKETS EQUITY FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 75
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS GLOBAL EMERGING MARKETS BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 76
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 77
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS INTERNATIONAL EQUITY FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 78
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS MUNICIPAL BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 79
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS NEW YORK MUNICIPAL BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 80
LEHMAN BROTHERS FUNDS, INC.

PROSPECTUS FOR CLASS A, B, C and W SHARES, PROSPECTUS FOR PREMIER SHARES, AND
PROSPECTUS FOR SELECT SHARES

LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 81
PART B

Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund

______________________________________

STATEMENT OF ADDITIONAL INFORMATION
______________________________________

November 28, 1994

This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses for the Lehman Brothers Daily Income Fund
(the "Daily Income Fund") and the Lehman Brothers Municipal Income Fund (the
"Municipal Income Fund" and, together with the Daily Income Fund, the "Funds"),
dated November 28, 1994 as amended or supplemented from time to time, and is
incorporated by reference in its entirety into each of the Prospectuses. Each
of the Funds is a separate, diversified money market portfolio of Lehman
Brothers Funds, Inc. (the "Company"), an open-end, management investment
company. Because this Statement of Additional Information is not itself a
prospectus, no investment in shares of the Funds should be made solely upon the
information contained herein. Copies of the Prospectuses may be obtained by
calling 800-861-4171. Capitalized terms used but not defined herein have the
same meanings as in the Prospectuses.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Information Concerning Municipal Obligations - The Municipal Income Fund . . . . . . . . . . 9
Additional Purchase and Redemption Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Management of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Additional Yield Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Additional Information Concerning Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>

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<PAGE> 82
INVESTMENT OBJECTIVES AND POLICIES

The investment objective of the Daily Income Fund is to provide investors with
as high a level of current income as is consistent with stability of principal.
The investment objective of the Municipal Income Fund is to provide investors
with as high a level of current income exempt from federal income tax as is
consistent with stability of principal. The following policies supplement the
description of each Fund's investment objective and policies in the applicable
Prospectus.

The Funds are managed to provide stability of capital while achieving
competitive yields. The investment adviser intends to follow a value-oriented,
research-driven and risk-averse investment strategy, engaging in a full range
of economic, strategic, credit and market-specific analyses in researching
potential investment opportunities.

PORTFOLIO TRANSACTIONS

Subject to the general control of the Company's Board of Directors, Lehman
Brothers Global Asset Management Inc. ("LBGAM"), the Funds' investment adviser,
is responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for a Fund. LBGAM generally
purchases portfolio securities for the Funds either directly from the issuer or
from dealers who specialize in money market instruments. Such purchases are
usually without brokerage commissions. In making portfolio investments, LBGAM
seeks to obtain the best net price and the most favorable execution of orders.
To the extent that the execution and price offered by more than one dealer are
comparable, LBGAM may, in its discretion, effect transactions in portfolio
securities with dealers who provide the Company with research advice or other
services. Research advice and other services furnished by brokers through whom
the Funds effect securities transactions may be used by LBGAM in servicing
accounts in addition to the Funds, and not all such services will necessarily
benefit the Funds.

Transactions in the over-the-counter market are generally principal
transactions with dealers, and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Funds, where possible, will deal directly with the dealers
who make a market in the securities involved except in those circumstances
where better prices and execution are available elsewhere.

LBGAM may seek to obtain an undertaking from issuers of commercial
paper or dealers selling commercial paper to consider the repurchase of such
securities from the Daily Income Fund prior to their maturity at their original
cost plus interest (interest may sometimes be adjusted to reflect the actual
maturity of the securities) if LBGAM believes that the Fund's anticipated need
for liquidity makes such action desirable. Certain dealers (but not issuers)
have charged and may in the future charge a higher price for commercial paper
where they undertake to repurchase prior to maturity. The payment of a higher
price in order to obtain such an undertaking reduces the yield which might
otherwise be received by the Fund on the commercial paper. The Company's Board
of Directors has authorized LBGAM to pay a higher price for commercial paper
where it secures such an undertaking if LBGAM believes that the prepayment
privilege is desirable to assure the Fund's liquidity and such an undertaking
cannot otherwise be obtained.

Investment decisions for each Fund are made independently from those
for the other Fund or other investment company portfolio or accounts advised by
LBGAM. Such other portfolios may also invest in the same securities as the
Funds. When purchases or sales of the same security are made at substantially

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<PAGE> 83
the same time on behalf of such other portfolios, transactions are averaged as
to price, and available investments allocated as to amount, in a manner which
LBGAM believes to be equitable to each portfolio, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtainable for a Fund. To the
extent permitted by law, LBGAM may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for such other
portfolios in order to obtain best execution.

The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with Lehman Brothers Inc. ("Lehman Brothers"), LBGAM or
any affiliated person (as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of either of them, except to the extent
permitted by the Securities and Exchange Commission (the "SEC"). However,
pursuant to an exemption granted by the SEC, the Funds may engage in
transactions involving certain money market instruments with Lehman Brothers
and certain of its affiliates acting as principal. The Funds will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which Lehman Brothers or any affiliate thereof is a member, except
to the extent permitted by the SEC. Under certain circumstances, the Funds may
be at a disadvantage because of these limitations in comparison with other
investment company portfolios which have a similar investment objective but are
not subject to such limitations.

The Municipal Income Fund may participate, if and when practicable, in
bidding for the purchase of "Municipal Obligations" directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Fund will engage in this practice, however, only when LBGAM,
in its sole discretion, believes such practice to be in the Fund's interest.
"Municipal Obligations" consist of municipal obligations (as defined in the
Municipal Income Fund's Prospectus) and tax-exempt derivatives such as tender
option bonds, participations, beneficial interests in trusts and partnership
interests.

The Funds do not intend to seek profits through short-term trading.
Each Fund's annual portfolio turnover will be relatively high, but is not
expected to have a material effect on its net income. Each Fund's portfolio
turnover rate is expected to be zero for regulatory reporting purposes.

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT PRACTICES

U.S. Government Obligations. Examples of the types of U.S. government
obligations that may be held by the Daily Income Fund include, in addition to
U.S. Treasury Bills, the obligations of the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, Federal
National Mortgage Association, Federal Financing Bank, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Farm Credit
Banks, Maritime Administration, Resolution Trust Corporation, Tennessee Valley
Authority, U.S. Postal Service and Washington D.C. Armory Board.

Bank Obligations. For purposes of the Daily Income Fund's investment policies
with respect to obligations of issuers in the banking industry, the assets of a
bank or savings institution will be deemed to include the assets of its
domestic and foreign branches. The Daily Income Fund's investments in the
obligations of foreign branches of U.S. banks and of foreign banks and other
foreign issuers may subject the Daily Income Fund to investment risks that are
different in some respects from those of investment in

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<PAGE> 84
obligations of U.S. domestic issuers. Such risks include future political and
economic developments, the possible seizure or nationalization of foreign
deposits, the possible adoption of foreign governmental restrictions which
might adversely affect the payment of principal and interest on such
obligations. In addition, foreign branches of U.S. banks and foreign banks may
be subject to less stringent reserve requirements and foreign issuers generally
are subject to different accounting, auditing, reporting and record keeping
standards than those applicable to U.S. issuers. The Daily Income Fund will
acquire securities issued by foreign branches of U.S. banks or foreign issuers
only when the Fund's investment adviser believes that the risks associated with
such instruments are minimal.

Among the bank obligations in which the Daily Income Fund may invest
are notes issued by banks. These notes, which are exempt from registration
under federal securities laws, are not deposits of the banks and are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Holders of notes rank on a par with other unsecured and unsubordinated
creditors of the banks. Notes may be sold at par or sold on a discount basis
and may bear fixed or floating rates of interest.

Variable and Floating Rate Instruments. Securities purchased by the Funds may
include variable and floating rate instruments, which provide for adjustments
in the interest rate on certain reset dates or whenever a specified interest
rate index changes, respectively. Variable and floating rate instruments are
subject to the credit quality standards described in the Prospectuses. In some
cases the Funds may require that the obligation to pay the principal of the
instrument be backed by a letter or line of credit or guarantee. Such
instruments may carry stated maturities in excess of 397 days provided that the
maturity-shortening provisions stated in Rule 2a-7 under the 1940 Act are
satisfied. Although a particular variable or floating rate demand instrument
might not be actively traded in a secondary market, in some cases, the Funds
may be entitled to principal on demand and may be able to resell such notes in
the dealer market. With respect to the floating and variable rate notes and
demand notes described in the Prospectuses, a Fund's investment adviser will
consider the earning power, cash flows and other liquidity ratios of the
issuers of such notes and will continuously monitor their financial ability to
meet payment obligations when due.

Variable and floating rate demand instruments held by a Fund may have
maturities of more than thirteen months provided: (i) the Fund is entitled to
the payment of principal at any time, or during specified intervals not
exceeding 13 months, upon giving the prescribed notice (which may not exceed 30
days), and (ii) the rate of interest on such instruments is adjusted at
periodic intervals which may extend up to 13 months (397 days). Variable and
floating rate notes that do not provide for payment within seven days may be
deemed illiquid and subject to the 10% limitation on such investments.

In determining a Fund's average weighted portfolio maturity and
whether a variable or floating rate demand instrument has a remaining maturity
of 13 months or less, each instrument will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until its next interest
rate adjustment or the period remaining until the principal amount can be
recovered through demand. In determining whether an unrated variable or
floating rate demand instrument is of comparable quality at the time of
purchase to securities in which a Fund may invest, LBGAM will follow guidelines
adopted by the Company's Board of Directors.

Repurchase Agreements. The repurchase price under the repurchase
agreements described in the Prospectuses generally equals the price paid by a
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Company's custodian,

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<PAGE> 85
sub-custodian or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by a Fund under the 1940 Act.

Reverse Repurchase Agreements. Whenever the Funds enter into reverse
repurchase agreements as described in the Prospectuses, they will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained. Reverse repurchase
agreements are considered to be borrowings by the Funds under the 1940 Act.

Loans of Portfolio Securities. Each Fund has the ability to lend securities
from its portfolio to brokers, dealers and other financial organizations. There
is no investment restriction on the amount of securities that may be loaned. A
Fund may not lend its portfolio securities to Lehman Brothers or its affiliates
without specific authorization from the SEC. Loans of portfolio securities by a
Fund will be collateralized by cash, letters of credit or securities which are
consistent with its permitted investments, which will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. From time to time, a Fund may return a part of the interest
earned from the investment of collateral received for securities loaned to the
borrower and/or a third party, which is unaffiliated with the Fund or Lehman
Brothers, and which is acting as a "finder." With respect to loans by the Funds
of their portfolio securities, the Funds would continue to accrue interest on
loaned securities and would also earn income on loans. Any cash collateral
received by a Fund in connection with such loans would be invested in
securities in which such Fund is permitted to invest.

When-Issued Securities. As stated in the Prospectus for the Daily Income Fund,
the Daily Income Fund may purchase securities on a "when issued" basis (i.e.,
for delivery beyond the normal settlement date at a stated price and yield).
When the Fund agrees to purchase when-issued securities, the custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Fund may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of
the Fund's commitment. It may be expected that the Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. Because the Fund will
set aside cash or liquid assets to satisfy its purchase commitments in the
manner described, the Fund's liquidity and ability to manage its portfolio might
be affected in the event its commitments to purchase when-issued securities ever
exceeded 25% of the value of its assets. When the Fund engages in when-issued
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous. The Fund does not
intend to purchase when-issued securities for speculative purposes but only in
furtherance of its investment objective. The Fund reserves the right to sell
these securities before the settlement date if it is deemed advisable.

Tender Option Bonds. The Municipal Income Fund may invest in tender option
bonds. The Fund will not purchase tender option bonds unless (a) the demand
feature applicable thereto is exercisable by the Fund within 13 months of the
date of such purchase upon no more than 30 days' notice and thereafter is
exercisable by the Fund no less frequently than annually upon no more than 30
days' notice and, (b) at the time of such purchase, LBGAM reasonably expects
that, (i) based upon its assessment of current and historical interest rate
trends, prevailing short-term tax-exempt rates will not exceed the stated
interest rate on the underlying Municipal Obligations at the time of the next
tender fee adjustment, and (ii) the circumstances which might entitle the
grantor of a tender option to terminate the tender option would not

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<PAGE> 86
occur prior to the time of the next tender opportunity. At the time of each
tender opportunity, the Fund will exercise the tender option with respect to
any tender option bonds unless LBGAM reasonably expects that, (a) based upon
its assessment of current and historical interest rate trends, prevailing
short-term tax-exempt rates will not exceed the stated interest rate on the
underlying Municipal Obligations at the time of the next tender fee adjustment,
and (b) the circumstances which might entitle the grantor of a tender option to
terminate the tender option would not occur prior to the time of the next
tender opportunity. The Fund will exercise the tender feature with respect to
tender option bonds, or otherwise dispose of their tender option bonds, prior
to the time the tender option is scheduled to expire pursuant to the terms of
the agreement under which the tender option is granted. The Fund otherwise will
comply with the provisions of Rule 2a-7 under the 1940 Act in connection with
the purchase of tender option bonds, including, without limitation, the
requisite determination by the Board of Directors that the tender option bonds
in question meet the quality standards described in Rule 2a-7. In the event of
a default of the Municipal Obligation underlying a tender option bond, or the
termination of the tender option agreement, the Fund would look to the maturity
date of the underlying security for purposes of compliance with Rule 2a-7 and,
if its remaining maturity was greater than 13 months, the Fund would sell the
security as soon as would be practicable. The Fund will purchase tender option
bonds only when it is satisfied that (a) the custodial and tender option
arrangements, including the fee payment arrangements, will not adversely affect
the tax-exempt status of the underlying Municipal Obligations and (b) payment
of any tender fees will not have the effect of creating taxable income for the
Fund. Based on the tender option bond arrangement, the Fund expects to value
the tender option bond at par; however, the value of the instrument will be
monitored to assure that it is valued at fair value.

Stand-By Commitments. Each Fund may acquire rights to "put" its securities at
an agreed upon price within a specified period prior to their maturity date.
The Funds may also enter into put transactions sometimes referred to as
"stand-by commitments," which entitle the holder to same-day settlement and to
receive an exercise price equal to the amortized cost of the underlying
security plus accrued interest, if any, at the time of exercise. Each Fund's
right to exercise a stand-by commitment will be unconditional and unqualified.

The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for certain stand-by commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to a stand-by commitment (thus reducing the yield to
maturity otherwise available for the same securities). The Funds intend to
enter into stand-by commitments solely to facilitate portfolio liquidity and do
not intend to exercise their rights thereunder for trading purposes. The
acquisition of a stand-by commitment will not affect the valuation of the
underlying security, which will continue to be valued in accordance with the
amortized cost method. The actual stand-by commitment will be valued at zero in
determining net asset value. Where a Fund pays any consideration directly or
indirectly for a stand-by commitment, its cost will be reflected as unrealized
depreciation for the period during which the stand-by commitment is held by the
Fund and will be reflected in realized gain or loss when the stand-by
commitment is exercised or expires.

In the event that the issuer of a stand-by commitment acquired by a
Fund defaults on its obligation to purchase the underlying security, then that
Fund might be unable to recover all or a portion of any loss sustained from
having to sell the security elsewhere.

If the value of the underlying security increases, the potential for
unrealized or realized gain is reduced by the cost of the stand-by commitment.
The maturity of a portfolio security will not be considered

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<PAGE> 87
shortened by a stand-by commitment to which such obligation is subject.
Therefore, stand-by commitment transactions will not affect the average
weighted maturity of a Fund's portfolio.

Asset-Backed and Receivable-Backed Securities. The Daily Income Fund may
invest in asset-backed and receivable-backed securities. Several types of
asset-backed and receivable-backed securities have been offered to investors,
including interests in pools of credit card receivables and motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on these securities
are passed through to certificate holders. In addition, asset-backed securities
often carry credit protection in the form of extra collateral, subordinate
certificates, cash reserve accounts and other enhancements. An investor's
return on these securities may be affected by early prepayment of principal on
the underlying receivables or sales contracts. Any asset-backed or
receivable-backed securities held by the Fund must comply with the portfolio
maturity and quality requirements contained in Rule 2a-7 under the 1940 Act.
The Fund will monitor the performance of these investments and will not acquire
any such securities unless rated in the highest rating category by at least two
NRSROs.

Illiquid and Restricted Securities. Neither Fund may invest more than 10% of
its net assets in illiquid securities, including securities that are illiquid
by virtue of the absence of a readily available market or legal or contractual
restrictions on resale. Securities that have legal or contractual restrictions
on resale but have a readily available market are not considered illiquid for
purposes of this limitation.

The SEC has adopted Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"), which allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. The Funds' investment adviser anticipates that the market
for certain restricted securities such as institutional commercial paper and
institutional municipal securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers.

Each Fund's investment adviser will monitor the liquidity of
restricted and other illiquid securities under the supervision of the Board of
Directors. In reaching liquidity decisions with respect to Rule 144A
securities, the Funds' investment adviser will consider, inter alia, the
following factors: (1) the unregistered nature of a Rule 144A security; (2) the
frequency of trades and quotes for a Rule 144A security; (3) the number of
dealers wishing to purchase or sell the Rule 144A security and the number of
other potential purchasers; (4) dealer undertakings to make a market in the
Rule 144A security; (5) the trading markets for the Rule 144A security; and (6)
the nature of the Rule 144A security and the nature of the marketplace trades
(e.g., the time needed to dispose of the Rule 144A security, the method of
soliciting offers and the mechanics of the transfer).

The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by NRSROs for obligations that
may be purchased by each Fund.

INVESTMENT LIMITATIONS

The Prospectus of each Fund summarizes certain investment limitations that may
not be changed without the affirmative vote of the holders of a majority of
such Fund's outstanding shares (as defined below under "Additional Information
Concerning Fund Shares"). Investment limitations numbered 1 through 7 may not

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<PAGE> 88
be changed without such a vote of shareholders; investment limitations 8
through 13 may be changed by a vote of the Company's Board of Directors at any
time.

1. Neither Fund may purchase securities of any one issuer if as a
result more than 5% of the value of the Fund's total assets would be invested
in the securities of such issuer, except that up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% limitation and
provided that there is no limitation with respect to investments in U.S.
government securities.

2. Neither Fund may borrow money, except from banks for temporary
purposes and then in amounts not exceeding one-third of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or one-third of the value
of its total assets at the time of such borrowing. Additional investments will
not be made by a Fund when borrowings exceed 5% of its total assets.

3. Neither Fund may purchase any securities which would cause 25%
or more of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry, except that the Daily Income Fund
will invest 25% or more of the value of its total assets in obligations of
issuers in the banking industry or in obligations, such as repurchase
agreements, secured by such obligations (unless the Fund is in a temporary
defensive position); provided that there is no limitation with respect to
investments in U.S. government securities or, in the case of the Municipal
Income Fund, Municipal Obligations (other than those backed only by the assets
and revenues of non-governmental users).

4. Neither Fund may make loans, except that each Fund may
purchase or hold debt instruments in accordance with its investment objective
and policies, and the Daily Income Fund may enter into repurchase agreements
with respect to portfolio securities.

5. Neither Fund may act as an underwriter of securities, except
insofar as a Fund may be deemed an underwriter under applicable securities laws
in selling portfolio securities.

6. Neither Fund may purchase or sell real estate or real estate
limited partnerships, provided that a Fund may purchase securities of issuers
which invest in real estate or interests therein.

7. Neither Fund may purchase or sell commodities contracts, or
invest in oil, gas or mineral exploration or development programs or in mineral
leases.

8. Neither Fund may knowingly invest more than 10% of the value
of its net assets in securities that may be illiquid because of legal or
contractual restrictions on resale or securities for which there are no readily
available market quotations.

9. Neither Fund may purchase securities on margin, make short
sales of securities or maintain a short position.

10. Neither Fund may write or sell puts, calls, straddles, spreads
of combinations thereof.

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<PAGE> 89
11. Neither Fund may invest in securities if as a result the Fund
would then have more than 5% of its total assets in securities of companies
(including predecessors) with less than three years of continuous operation.

12. Neither Fund may purchase securities of other investment
companies except as permitted under the 1940 Act or in connection with a
merger, consolidation, acquisition or reorganization.

13. Neither Fund may invest in warrants.

In addition, without the affirmative vote of the holders of a majority
of the Municipal Income Fund's outstanding shares, that Fund may not change its
policy of investing at least 80% of its total assets (except during temporary
defensive periods) in Municipal Obligations.

In order to permit the sale of Fund shares in certain states, the
Funds may make commitments more restrictive than the investment policies and
limitations above. Should a Fund determine that any such commitments are no
longer in its best interests, it will revoke the commitment by terminating
sales of its shares in the state involved. Further, with respect to the
above-stated third limitation, each Fund will consider wholly owned finance
companies to be in the industries of their parents, if their activities are
primarily related to financing the activities of their parents, and will divide
utility companies according to their services; for example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry.

ADDITIONAL INFORMATION CONCERNING MUNICIPAL OBLIGATIONS --
THE MUNICIPAL INCOME FUND

Municipal Obligations include debt obligations issued by governmental entities
to obtain funds for various public purposes, including the construction of a
wide range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds that are or were issued by
or on behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Obligations if the interest
paid thereon is exempt from federal income tax. Opinions relating to the
validity of Municipal Obligations and to the exemption of interest thereon from
federal income taxes are rendered by counsel to the issuers or bond counsel to
the respective issuing authorities at the time of issuance. Neither the Fund
nor its investment adviser will review independently the underlying proceedings
relating to the issuance of Municipal Obligations or the bases for such
opinions.

The Fund may hold tax-exempt derivatives which may be in the form of
tender option bonds, participations, beneficial interests in a trust,
partnership interests or other forms. A number of different structures have
been used. For example, interests in long-term fixed rate Municipal Obligations
held by a bank as trustee or custodian are coupled with tender option, demand
and other features when tax-exempt derivatives are created. Together, these
features entitle the holder of the interest to tender (or put) the underlying
Municipal Obligation to a third party at periodic intervals and to receive the
principal amount thereof. In some cases, Municipal Obligations are represented
by custodial receipts evidencing rights to receive specific future interest
payments, principal payments or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying municipal securities at its
face value to the sponsor (usually a bank or broker-dealer or other financial
institution), which is paid periodic fees equal to the difference between the
bond's fixed coupon rate and the rate that would cause the bond, coupled with
the tender option, to trade at par on the date of a

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<PAGE> 90
rate adjustment. The Fund may hold tax-exempt derivatives, such as
participation interests and custodial receipts, for Municipal Obligations which
give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Fund nor its
investment adviser will review independently the underlying proceedings related
to the creation of any tax-exempt derivatives or the bases for such opinions.

As described in the Prospectus for the Municipal Income Fund, the two
principal classifications of Municipal Obligations consist of "general
obligation" and "revenue" issues, and the Fund's portfolio may include "moral
obligation" issues, which are normally issued by special purpose authorities.
There are, of course, variations in the quality of Municipal Obligations both
within a particular classification and between classifications, and the yields
on Municipal Obligations depend upon a variety of factors, including general
money market conditions, the financial condition of other issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of NRSROs
represent their opinions as to the quality of Municipal Obligations. It should
be recognized, however, that ratings are general and are not absolute standards
of quality, and Municipal Obligations with the same maturity, interest rate and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by the Fund, an issue of Municipal Obligations may
cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The Fund's investment adviser will consider
such an event in determining whether the Fund should continue to hold the
obligation.

An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.

Among other instruments, the Fund may purchase short-term General
Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, the Fund may invest in other types
of tax-exempt instruments such as municipal bonds, private activity bonds and
pollution control bonds, provided they have remaining maturities of 13 months
or less at the time of purchase.

The payment of principal and interest on most securities purchased by
the Fund will depend upon the ability of the issuers to meet their obligations.
The District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities, and authorities and each multi-state agency of
which a state is a member is a separate "issuer" as that term is used in this
Statement of Additional Information and the Prospectus for the Municipal Income
Fund. The non-governmental user of facilities financed by private activity
bonds is also considered to be an "issuer."

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<PAGE> 91

The Tax Reform Act of 1986 (the "Act") substantially revised
provisions of prior law affecting the issuance and use of proceeds of certain
tax-exempt obligations. A new definition of private activity bonds was applied
to many types of bonds, including those which were industrial development bonds
under prior law. Interest on private activity bonds is tax-exempt only if the
bonds fall within certain defined categories of qualified private activity
bonds and meet the requirements specified in those respective categories. The
Act generally did not change the tax treatment of bonds issued to finance
governmental operations. The changes generally apply to bonds issued after
August 15, 1986, with certain transitional rule exemptions. As used in this
Statement of Additional Information, the term "private activity bonds" also
includes industrial development revenue bonds issued pursuant to the Internal
Revenue Code of 1986, as amended (the "Code"). The portion of dividends paid
by the Fund that is attributable to interest on certain private activity bonds
is an item of tax preference for purposes of the federal individual and
corporate alternative minimum taxes.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Information on how to purchase and redeem each Fund's shares is included in the
applicable Prospectus. The issuance of shares is recorded on a Fund's books,
but share certificates are not issued for Fund shares.

The Funds offer their shares to the public on a continuous basis.
Purchase of Fund shares must be made through a brokerage account maintained
through Lehman Brothers or with a broker that clears securities transactions
through Lehman Brothers on a fully disclosed basis (an "Introducing Broker").

Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.) Each Fund is obligated to
redeem shares solely in cash up to $250,000 or 1% of such Fund's net asset
value, whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount will also be in cash unless the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable. In such a case, a Fund may make
payment wholly or partly in readily marketable securities or other property,
valued in the same way as that Fund determines net asset value. See "Net Asset
Value" below for an example of when such redemption or form of payment might be
appropriate. Redemption in kind is not as liquid as a cash redemption.
Shareholders who receive a redemption in kind may incur transaction costs, if
they sell such securities or property, and may receive less than the redemption
value of such securities or property upon sale, particularly where such
securities are sold prior to maturity.

The Funds normally transmit payment of redemption proceeds for credit
to the shareholder's account at Lehman Brothers or the Introducing Broker on
the business day following receipt of the redemption request but, in any event,
payment will be made within seven days thereafter.

The Prospectuses describe special redemption procedures for certain
shareholders who engage in purchases of securities through Lehman Brothers or
an Introducing Broker, under which Fund shares are redeemed automatically to
satisfy debit balances arising in the shareholder's account on the settlement
date of other securities transactions. A shareholder may choose not to redeem
Fund shares automatically by

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<PAGE> 92
notifying Lehman Brothers or the Introducing Broker, and by making payment for
securities purchased by the settlement date, which is usually five business
days after the trade date.

NET ASSET VALUE

The Prospectuses discuss the time at which the net asset value of shares of
each class of the applicable Fund is determined for purposes of sales and
redemptions. The following is a description of the procedures used by the Funds
in valuing their assets.

The valuation of each Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at
its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the instrument.

Pursuant to the 1940 Act, each Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less and invest only in securities
determined by LBGAM to be of eligible quality with minimal credit risks.

Pursuant to the rule, the Company's Board of Directors also have
established procedures designed to stabilize, to the extent reasonably
possible, the price per share of each Fund as computed for the purpose of sales
and redemptions at $1.00. Such procedures include review of each Fund's
portfolio holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by
using available market quotations or market equivalents deviates from $1.00 per
share based on amortized cost.

The rule also provides that the extent of any deviation between a
Fund's net asset value based upon available market quotations or market
equivalents and the $1.00 per share net asset value based on amortized cost
must be examined by the Board of Directors. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, pursuant to the
rule the Board of Directors must cause the Fund to take such corrective action
as the Board of Directors regards as necessary and appropriate, including:
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding dividends or
paying distributions from capital or capital gains; redeeming shares in kind;
or establishing a net asset value per share by using available market
quotations.

EXCHANGE PRIVILEGE

Holders of a Fund's CDSC Shares may exchange all or part of their CDSC Shares
for shares of certain other funds in the Lehman Brothers Group of Funds, as
indicated in the Prospectuses, to the extent such shares are offered for sale
in the shareholder's state of residence. There currently is no charge for this
service, and exchanges are made on the basis of relative net asset value per
share at the time of exchange. CDSC Shares of a Fund exchanged for shares of
another fund will be subject to the higher applicable CDSC of the two funds
and, for purposes of calculating CDSC rates, will be deemed to have been held
since the date the CDSC Shares being exchanged were purchased.

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<PAGE> 93
The exchange privilege enables holders of a Fund's CDSC Shares to
acquire shares in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in which the fund
shares being acquired may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of each
fund into which an exchange is to be made. Prospectuses may be obtained from
any Lehman Brothers Investment Representative.

Exercise of the exchange privilege is treated as a sale and repurchase
for federal income tax purposes and, depending on the circumstances, a short-
or long-term capital gain or loss may be realized. The price of the shares of
the fund into which shares are exchanged will be the new cost basis for tax
purposes.

Upon receipt of proper instructions and all necessary supporting
documents, a Fund's CDSC Shares submitted for exchange are redeemed at the
then-current net asset value and the proceeds immediately invested in shares of
the fund being acquired subject to any applicable CDSC. Lehman Brothers
reserves the right to reject any exchange request. The exchange privilege may
be modified or terminated at any time after notice to shareholders.

MANAGEMENT OF THE FUNDS

Directors and Officers

The Company's directors and executive officers, their addresses, principal
occupations during the past five years and other affiliations are as follows:

PRINCIPAL OCCUPATION DURING PAST
NAME AND ADDRESS POSITION WITH THE COMPANY 5 YEARS AND OTHER AFFILIATIONS
- ---------------- ------------------------- --------------------------------

<S> <C> <C>
Kirk Hartman (1) Chairman of the Board and Managing Director, Lehman Brothers
World Financial Center Director
New York, New York 10285

Burt N. Dorsett (2)(3) Director Managing Partner, Dorsett McCabe
Capital Management, Inc.; Director,
Research Corporation Technologies;
formerly President, Westinghouse
Pension Investments Corporation;
formerly Executive Vice President and
Trustee, College Retirement Equities
Fund, Inc.; formerly Investment
Officer, University of Rochester.
</TABLE>

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<PAGE> 94

PRINCIPAL OCCUPATION DURING PAST
NAME AND ADDRESS POSITION WITH THE COMPANY 5 YEARS AND OTHER AFFILIATIONS
- ---------------- ------------------------- --------------------------------

<S> <C> <C>
Kathleen C. Holmes(2)(3) Director Managing Director, Wharton School
Wharton Financial Financial Institutions Center,
Institutions Center University of Pennsylvania; Senior
3620 Locust Walk Partners and Management Consultant,
3301 Steinberg Hall Furash & Company.
Dietrich Hall
Philadelphia, Pennsylvania 19104-5367

John N. Hatsopoulos(2)(3) Director Executive Vice President and Chief
Thermo Electron Corp. Financial Officer, Thermo Electron
81 Wyman Street Corp.
Waltham, Massachusetts 02254

Andrew Gordon President Managing Director, Lehman Brothers
World Financial Center Inc.
New York, New York 10285

John M. Winters Vice President Senior Vice President, Lehman
World Financial Center Brothers
New York, New York 10285

Michael Kardok Treasurer and Chief Financial Vice President, The Shareholder
53 State Street Officer Services Group, Inc.
Boston, Massachusetts 02109

Patricia L. Bickimer Secretary Vice President and Associate General
53 State Street Counsel, The Shareholder Services
Boston, Massachusetts 02109 Group, Inc.
</TABLE>

___________

1. Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.

Two directors of the Company, Messrs. Hartman and Dorsett, serve as
directors or trustees of other investment companies for which Lehman Brothers,
LBGAM or one of their affiliates serves as distributor or investment adviser.

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<PAGE> 95
TSSG or any of their affiliates, a fee of $20,000 per annum plus $500 per
meeting attended and reimburses them for travel and out-of-pocket expenses.

By virtue of the responsibilities assumed by Lehman Brothers, LBGAM,
TSSG and their affiliates under their respective agreements with the Company,
the Company itself requires no employees in addition to its officers.

INVESTMENT ADVISER

LBGAM serves as Investment Adviser to the Funds pursuant to separate written
advisory agreements approved by the Company's Board of Directors, including a
majority of the directors who are not "interested persons" (as defined in the
1940 Act) of the Company or LBGAM, on July 26, 1993. The services provided by
LBGAM under its advisory agreements and the fees paid to LBGAM are described in
the Prospectus. LBGAM bears all expenses in connection with the performance of
its services and pays the salaries of all officers or employees who are
employed by both it and the Company. Unless sooner terminated, each advisory
agreement will continue in effect until July 25, 1995 and from year to year
thereafter if such continuance is approved at least annually by the Company's
Board of Directors or by a vote of a majority (as defined under "Additional
Description Concerning Fund Shares") of the outstanding shares of the related
Fund and, in either case, by a majority of the directors who are not parties to
such agreement or "interested persons" of any party by votes cast in person at
a meeting called for such purpose. Each advisory agreement will be terminable
by the Company or LBGAM on 60 days' written notice, and will terminate
immediately in the event of its assignment.

ADMINISTRATOR

As the Funds' Administrator, TSSG has agreed to provide the following services:
(i) assist generally in supervising a Fund's operations, providing and
supervising the operation of an automated data processing system to process
purchase and redemption orders, providing information concerning a Fund to its
shareholders of record, handling shareholder problems, supervising the services
of employees whose principal responsibility and function is to preserve and
strengthen shareholder relations; (ii) prepare reports to a Fund's shareholders
and prepare tax returns and reports to and filings with the SEC; (iii) compute
the respective net asset value per share of each Fund; (iv) provide the
services of certain persons who may be elected as directors or appointed as
officers of the Company by the Board of Directors; and (v) maintain the
registration or qualification of a Fund's shares for sale under state
securities laws.

DISTRIBUTOR AND PLAN OF DISTRIBUTION

Lehman Brothers acts as Distributor of each Fund's shares. Each Fund's shares
are sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of a Fund (excluding preparation and printing expenses
necessary for the continued registration of a Fund's shares) and of preparing,
printing and distributing all sales literature.

Rule 12b-1 (the "Rule") adopted by the SEC under the 1940 Act
provides, among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Company's Board of Directors has adopted such a plan with respect to
each Fund (the "Plan of Distribution"). The Board of Directors believes that
there is a reasonable likelihood that the Plan of Distribution will benefit the
related Fund and its shareholders.

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<PAGE> 96
A quarterly report of the amounts expended with respect to each class
of each Fund under the Plan of Distribution, and the purposes for which such
expenditures were incurred, must be made to the Board of Directors for its
review. In addition, the Plan of Distribution provides that it may not be
amended with respect to a class of a Fund to increase materially the costs
which may be borne for distribution pursuant to the Plan of Distribution
without the approval of shareholders of that class, and that other material
amendments of the Plan of Distribution must be approved by the Board of
Directors, and by the Directors who are neither "interested person" (as defined
in the 1940 Act) of the Company nor have any direct or indirect financial
interest in the operation of the Plan of Distribution or any related
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Plan of Distribution and any related
agreements are subject to annual approval by such vote cast in person at a
meeting called for the purpose of voting on the Plan. The Plan of Distribution
may be terminated with respect to a class of a Fund at any time by vote of a
majority of the Directors who are not "interested persons" and have no direct
or indirect financial interest in the operation of the Plan of Distribution or
in any related agreement or by vote of a majority of the shares of that class.

CUSTODIAN AND TRANSFER AGENT

Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect wholly owned
subsidiary of Mellon Bank Corporation, is located at One Boston Place, Boston,
Massachusetts 02108, and serves as the Company's custodian pursuant to a
custody agreement. Under the custody agreement, Boston Safe holds each Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges, including out-of-pocket expenses. The assets of the Company are held
under bank custodianship in compliance with the 1940 Act.

TSSG, a subsidiary of First Data Corporation, is located at 53 State
Street, Boston, Massachusetts 02019, and serves as the Company's transfer
agent. Under the transfer agency agreement, TSSG maintains the shareholder
account records for the Company, handles certain communications between
shareholders and the Company and distributes dividends and distributions
payable by the Company and produces statements with respect to account activity
for the Company and its shareholders. For these services, TSSG receives a
monthly fee computed separately for each class of the Fund's shares on the
basis of the number of shareholder accounts that it maintains for the Company
during the month and is reimbursed separately by each class for out-of-pocket
expenses.

EXPENSES

A Fund's expenses include taxes, interest, fees and salaries of the Company's
trustees and officers who are not directors, officers or employees of the
Company's service contractors, SEC fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
The Funds also pay for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities. Fund expenses are
allocated to a particular class of Fund shares based on other expenses
identifiable to the class or the relative net assets of the class and other
classes of Fund shares. LBGAM and TSSG have agreed that if, in any fiscal
year, the expenses borne by a Fund exceed the applicable expense limitations
imposed by the securities regulations of any state in which shares of that Fund
are registered or qualified

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<PAGE> 97
for sale to the public, they will reimburse that Fund for any excess to the
extent required by such regulations in the same proportion that each of their
fees bears to the Fund's aggregate fees for investment advice and
administrative services. Unless otherwise required by law, such reimbursement
would be accrued and paid on the same basis that the advisory and
administration fees are accrued and paid by that Fund. To each Fund's
knowledge, of the expense limitations in effect on the date of this Statement
of Additional Information, none is more restrictive than two and one-half
percent (2-1/2%) of the first $30 million of a Fund's average annual net
assets, two percent (2%) of the next $70 million of the average annual net
assets and one and one-half percent (1-1/2%) of the remaining average annual
net assets.

ADDITIONAL INFORMATION CONCERNING TAXES

The following summarizes certain additional tax considerations generally
affecting a Fund and its shareholders that are not described in the
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of a Fund or its shareholders or possible legislative changes, and
the discussion here and in the Prospectuses is not intended as a substitute for
careful tax planning.

As stated in the Prospectuses, each Fund intends to qualify as a
regulated investment company under the Code. In order to so qualify under the
Code for a taxable year, a Fund must satisfy the distribution requirement
described in the Prospectuses, derive at least 90% of its gross income for the
year from certain qualifying sources, comply with certain diversification tests
and derive less than 30% of its gross income for the year from the sale or
other disposition of securities and certain other investments held for less
than three months. Interest (including original issue discount plus accrued
market discount) received by a Fund at maturity or disposition of a security
held for less than three months will not be treated as gross income derived
from the sale or other disposition of such security within the meaning of the
30% requirement. However, any income in excess of such interest will be treated
as gross income from the sale of other disposition of securities for this
purpose.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail currently to distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income
(excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.

If for any taxable year a Fund does not qualify for tax treatment as a
regulated investment company, all of that Fund's taxable income will be subject
to tax at regular corporate rates without any deduction for distributions to
Fund shareholders. In such event, dividend distributions to shareholders would
be taxable as ordinary income to the extent of that Fund's earnings and
profits, and would be eligible for the dividends received deduction in the case
of corporate shareholders.

Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or 31% of gross proceeds realized
upon sale paid to its shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to backup
withholding by the Internal Revenue Service for failure properly to include on
their return payments of taxable interest or dividends, or who have failed to
certify to a Fund that they are not subject to backup withholding when required
to do so or that they are "exempt recipients."

Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income tax,
depending upon the extent of its activities in states and localities

- 17 -

<PAGE> 98
in which its offices are maintained, in which its agents or independent
contractors are located or in which it is otherwise deemed to be conducting
business, a Fund may be subject to the tax laws of such states or localities.
In addition, in those states and localities which have income tax laws, the
treatment of a Fund and its shareholders under such laws may differ from the
treatment under federal income tax laws. Shareholders are advised to consult
their tax advisers concerning the application of state and local taxes.

THE MUNICIPAL INCOME FUND

As described above and in the Prospectus for the Municipal Income Fund, the
Municipal Income Fund is designed to provide institutions with current
tax-exempt interest income. The Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Fund would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts since
such plans and accounts are generally tax-exempt and, therefore, not only would
not gain any additional benefit from the Fund's dividends being tax-exempt but
also such dividends would be taxable when distributed to the beneficiary. In
addition, the Fund may not be an appropriate investment for entities which are
"substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his or her trade or business and whose gross revenues derived
with respect to the facilities financed by the issuance of bonds are more than
5% of the total revenues derived by all users of such facilities, or who
occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S Corporation and its
shareholders.

In order for the Fund to pay exempt-interest dividends for any taxable
year, at the close of each quarter of its taxable year at least 50% of the
aggregate value of the Fund's assets must consist of exempt-interest
obligations. After the close of its taxable year, the Fund will notify its
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by a Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund for the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of
total dividends paid by the Fund with respect to any taxable year which
qualifies as federal exempt-interest dividends will be the same for all
shareholders of the Fund receiving dividends for such year.

Interest on indebtedness incurred by a shareholder to purchase or
carry the Fund's shares is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year.

Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax exempt obligations attributable
to accrued market discount will be treated as ordinary income rather than
capital gain.

While the Fund does not expect to realize long-term capital gains, any
net realized long-term capital gains will be distributed at least annually. The
Fund will generally have no tax liability with respect to such gains, and the
distributions will be taxable to the Fund's shareholders as long-term capital
gains, regardless of how long a shareholder has held the Fund's shares. Such
distributions will be designated as a

- 18 -
<PAGE> 99

capital gain dividend in a written notice mailed by the Fund to its
shareholders not later than 60 days after the close of the Fund's taxable year.

Similarly, while the Fund does not expect to earn significant
investment com pany taxable income, taxable income earned by the Fund will be
distributed to its shareholders. In general, the Fund's investment company
taxable income will be its taxable income (for example, any short-term capital
gains or ordinary income) subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. The Fund will be taxed on any
undistributed investment company taxable income of the Fund. To the extent such
income is distributed by the Fund (whether in cash or additional shares), it
will be taxable to the Fund's shareholders as ordinary income.

DIVIDENDS

Each Fund's net investment income for dividend purposes consists of (i)
interest accrued and original issue discount earned on that Fund's assets, plus
(ii) the amortization of market discount and minus the amortization of market
premium on such assets, and less (iii) accrued expenses directly attributable
to that Fund and the general expenses (e.g., legal, accounting and directors'
fees) of the Company prorated to such Fund on the basis of its relative net
assets. The amortization of market discount on a Fund's assets is not included
in the calculation of net income. Any realized short-term capital gains may
also be distributed as dividends to Fund shareholders.

The Company uses its best efforts to maintain the net asset value per
share of each Fund at $1.00. As a result of a significant expense or realized
or unrealized loss incurred by a Fund, it is possible that a Fund's net asset
value per share may fall below $1.00.

ADDITIONAL YIELD INFORMATION

The "yields", "effective yields" and "tax-equivalent yields" are calculated
separately for each class of shares of the Fund. The seven day yield for shares
in a Fund is calculated by determining the net change in the value of a
hypothetical preexisting account in a Fund having a balance of one share at the
beginning of the period, dividing the net change by the value of the account at
the beginning of the period to obtain the base period return, and multiplying
the base period return by 365/7. The net change in the value of an account in a
Fund includes the value of additional shares purchased with dividends from the
original share and dividends declared on the original share and any such
additional shares, net of all fees charged to all shareholder accounts in
proportion to the length of the base period and the Fund's average account
size, but does not include gains and losses or unrealized appreciation and
depreciation. In addition, the effective annualized yield may be computed on a
compounded basis (calculated as described above) by adding 1 to the base period
return, raising the sum to a power equal to 365/7, and subtracting 1 from the
result. A tax-equivalent yield for the Municipal Income Fund's shares is
computed by dividing the portion of the yield (calculated as above) that is
exempt from federal income tax by one minus a stated federal income tax rate
and adding that figure to that portion, if any, of the yield that is not exempt
from federal income tax. Similarly, based on the calculations described above,
30-day (or one-month) yields, effective yields and tax-equivalent yields may
also be calculated.

Based on the period ended July 31, 1994, the yields and effective yields for
each of the Funds were as follows:

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<PAGE> 100
<TABLE>
<CAPTION>
7-DAY
7-DAY EFFECTIVE
YIELD YIELD
<S> <C> <C>
DAILY INCOME FUND*

SELECT SHARES 3.76% 3.83%
SELECT SHARES** 4.51% 4.60%

MUNICIPAL INCOME FUND*

SELECT SHARES 2.47% 2.50%
SELECT SHARES** 3.17% 3.22%
CDSC SHARES 2.47% 2.50%
CDSC SHARES** 3.17% 3.22%
</TABLE>

* as of the date of this Statement of Additional Information, the Daily Income
Fund had not sold any CDSC Shares to the public. The Municipal Income Fund
commenced selling CDSC Shares to the public on July 6, 1994

** without fee waivers and/or expense reimbursements

From time to time, in advertisements or in reports to shareholders, a
Fund's yield may be quoted and compared to that of other money market funds or
accounts with similar investment objectives and to bond or other relevant
indices. For example, the yield of a Fund may be compared to the IBC/Donoghue's
Money Fund Average, which is an average compiled by IBC/Donoghue's MONEY FUND
REPORT(R) of Holliston, MA 01746, a widely recognized independent publication
that monitors the performance of money market funds, or to the average yields
reported by the Bank Rate Monitor from money market deposit accounts offered by
the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas.

Yield will fluctuate, and any quotation of yield should not be
considered as representative of the future performance of a Fund. Since yields
fluctuate, yield data cannot necessarily be used to compare an investment in a
Fund's shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that performance and yield
are generally functions of the kind and quality of the investments held in a
portfolio, portfolio maturity, operating expenses and market conditions.

ADDITIONAL INFORMATION CONCERNING FUND SHARES

As used in this Statement of Additional Information and the Prospectuses, a
"majority of the outstanding shares", when referring to the approvals to be
obtained from shareholders in connection with matters affecting any particular
portfolio of the Company (such as each Fund) (e.g., approval of investment
advisory contracts) or any particular class (e.g., approval of plans of
distribution) means the lesser of (1) 67% of the shares of that particular or
class, as appropriate, represented at a meeting at which the holders of more
than 50% of the outstanding shares of such portfolio or class, as appropriate,
are present in

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<PAGE> 101
person or by proxy, or (2) more than 50% of the outstanding shares of such
portfolio or class, as appropriate.

The By-Laws of the Company provide that the Company shall not be
required to hold an annual meeting of shareholders in any year in which the
election of directors to the Company's Board of Directors is not required to be
acted upon under the 1940 Act. The law under certain circumstances provides
shareholders with the right to call for a meeting of shareholders to consider
the removal of one or more directors. To the extent required by law, the
Company will assist in shareholder communication in such matters.

Shares of each class of a particular portfolio of the Company (such as
each Fund) are entitled to such dividends and distributions out of the assets
belonging to that class as are declared in the discretion of the Company's
Board of Directors. In determining the net asset value of a class of a
portfolio, assets belonging to a particular Fund are credited with a
proportionate share of any general assets of the Company not belonging to a
particular class of a portfolio and are charged with the direct liabilities in
respect of that class of the portfolio and with a share of the general
liabilities of the Company which are normally allocated in proportion to the
relative asset values of the respective classes of the portfolios of the
Company at the time of allocation.

In the event of the liquidation or dissolution of the Company, shares
of each class of a portfolio are entitled to receive the assets attributable to
them that are available for distribution, and a proportionate distribution,
based upon the relative net assets of the classes of each portfolio, of any
general assets not attributable to a portfolio of the Company that are
available for distribution. Shareholders are not entitled to any preemptive
rights.

Subject to the provisions of the Company's Charter, determinations by
the Board of Directors as to the direct and allocable liabilities, and the
allocable portion of any general assets of the Company, with respect to a
particular portfolio or class are conclusive.

COUNSEL

Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017- 3594, serves as
counsel to the Company.

AUDITORS

The financial statements of the Funds which are incorporated by reference in
this Statement of Additional Information have been audited by Ernst & Young
LLP, independent auditors, whose report thereon appears in the Company's annual
report and has been included herein in reliance upon the report of said firm as
independent auditors. Ernst & Young LLP has offices at 200 Clarendon Street,
Boston, Massachusetts 02116-5072.

FINANCIAL STATEMENTS

The Company's Annual Report for the fiscal period ended July 31, 1994 is
incorporated into this Statement of Additional Information by reference in its
entirety.

- 21 -

<PAGE> 102
APPENDIX
DESCRIPTION OF RATINGS

COMMERCIAL PAPER AND BANK MONEY MARKET INSTRUMENTS

A Standard & Poor's Ratings Group commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the two highest
rating categories used by Standard & Poor's Ratings Group for commercial paper:

A-1 -- Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."

A-2 -- Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."

Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the two highest rating
categories used by Moody's for commercial paper:

PRIME-1 -- Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Principal 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 earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.

PRIME-2 -- Issuer or related supporting institutions are considered to
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 alternative liquidity is
maintained.

The two highest rating categories of Duff & Phelps for investment
grade commercial paper are "Duff 1" and "Duff 2." Duff & Phelps employs three
designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the two highest rating categories used by
Duff & Phelps for commercial paper:

DUFF 1+ -- Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.

DUFF 1 -- Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

DUFF 1- -- Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

A-1

<PAGE> 103
DUFF 2 -- Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.

Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The two highest rating
categories of Fitch for short-term obligations are "F-1" and "F-2." Fitch
employs two designations, "F-1+" and "F-1," within the highest rating category.
The following summarizes the two highest rating categories used by Fitch for
short-term obligations:

F-1+ -- Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.

F-1 -- Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."

F-2 -- Securities possess good credit quality. Issues carrying this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.

Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.

Thomson BankWatch commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by a bank holding company or an entity within the
holding company structure. The following summarizes the two highest ratings
used by Thomson BankWatch:

TBW-1 -- This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.

TBW-2 -- This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."

IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The highest rating category of
IBCA for short-term debt is "A." IBCA employs two designations, "A1+" and "A1,"
within the highest rating category. The following summarizes the two highest
rating categories used by IBCA for short-term debt ratings:

A1+ -- Obligations are supported by the highest capacity for timely
repayment.

A1 -- Obligations are supported by a strong capacity for timely
repayment.

A2 -- Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.

A-2

<PAGE> 104
Note: Various NRSROs utilize rankings within rating categories
indicated by a + or -. The Funds, in accordance with industry practice,
recognize such rankings within categories as gradations, viewing the example
S&P's ratings of A-1 + and A-1 as being in S&P's highest rating category.

CORPORATE BONDS

S&P. 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.
Bonds rated AA have a strong capacity to pay interest and repay principal and
differ from the highest rated issues only in a small degree.

Moody's. Bonds rated Aaa by Moody's are judged to be of the best quality.
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Bonds rated Aa are judged to be of high quality by all
standards. They are rated lower than the best bonds because the margins of
protection may not be as large or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Moody's applies
numerical modifiers 1, 2 and 3 in each generic rating classification from Aa
through B in its corporate bond rating system. 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.

IBCA. Bonds rated AAA by IBCA are obligations for which there is the lowest
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk significantly.
Bonds rated AA are obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly.

Fitch. Bonds rated AAA by Fitch are considered to be investment grade and of
the highest quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.

Duff & Phelps. Bonds rated AAA by Duff & Phelps are deemed to be of the
highest credit quality: the risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt. AA indicates high credit quality:
protection factors are strong, and risk is modest but may vary slightly from
time to time because of economic conditions.

MUNICIPAL LONG-TERM DEBT RATINGS

The following summarizes the two highest ratings used by Standard & Poor's
Ratings Group for municipal long-term debt:

AAA -- This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.

AA -- Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.

A-3

<PAGE> 105
PLUS (+) OR MINUS (-) -- The rating of "AA" may be modified by the
addition of a plus or minus sign to show relative standing within this rating
category.

The following summarizes the two highest ratings used by Moody's for
municipal long-term debt:

Aaa -- Bonds are judged to be of 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 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 of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.

Moody's applies numerical modifiers 1, 2 and 3 in generic
classification of "Aa" in its bond rating system. 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 at the lower end of its generic rating category.

The following summarizes the two highest ratings used by Duff & Phelps
for municipal long-term debt:

AAA -- Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.

AA -- Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.

To provide more detailed indications of credit quality, the "AA"
rating may be modified by the addition of a plus (+) or minus (-) sign to show
relative standing within this rating category.

CON. (- - -) -- Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.

The following summarizes the two highest ratings used by Fitch for
municipal bonds:

AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.

A-4

<PAGE> 106
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."

To provide more detailed indications of credit quality, the Fitch
rating of "AA" may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within this rating category.

Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long-term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the two highest rating categories used by Thomson BankWatch for long-term debt
ratings:

AAA -- This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.

AA -- This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues
rated in the highest category.

PLUS (+) OR MINUS (-) -- The ratings may include a plus or minus sign
designation which indicates where within the respective category the issue is
placed.

IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
two highest rating categories used by IBCA for long-term debt ratings:

AAA -- Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.

AA -- Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.

IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within these rating categories.

MUNICIPAL NOTE RATINGS

A Standard & Poor's Ratings Group rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less.

The following summarizes the two highest rating categories used by
Standard & Poor's Ratings Group for municipal notes:

SP-1 -- The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.

A-5

<PAGE> 107
SP-2 -- The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.

Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the two highest ratings used by Moody's
Investors Service, Inc. for short term notes:

MIG-1/VMIG-1 -- Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.

MIG-2/VMIG-2 -- Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.

Duff & Phelps and Fitch use the short-term ratings described under
Commercial Paper and Bank Money Market Instruments for municipal notes.

A-6

<PAGE> 108
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
An Investment Portfolio of Lehman Brothers Funds, Inc.

_______________________________________

STATEMENT OF ADDITIONAL INFORMATION
_______________________________________

November 28, 1994

This Statement of Additional Information is meant to be read in
conjunction with the Prospectus for the Lehman Selected Growth Stock Portfolio
(the "Fund"), dated November 28, 1994, as amended or supplemented from time to
time, and is incorporated by reference in its entirety into the Prospectus. The
Fund is a diversified portfolio of Lehman Brothers Funds, Inc. (the "Company"),
an open-end management investment company. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of the Fund
should be made solely upon the information contained herein. Copies of the
Prospectus may be obtained by calling 800-861-4171. Capitalized terms used but
not defined herein have the same meanings as in the Prospectus.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . 2
Additional Purchase and Redemption Information . . . . . . . . . . . . . . 13
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . . 20
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Additional Information Concerning Fund Shares . . . . . . . . . . . . . . . 22
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>

<PAGE> 109
INVESTMENT OBJECTIVE AND POLICIES

As stated in the Prospectus, the investment objective of the Fund is to seek
long-term capital appreciation. The following policies supplement the
description of the Fund's investment objective and policies in the Prospectus.

PORTFOLIO TRANSACTIONS

Subject to the general control of the Company's Board of Directors, Lehman
Brothers Global Asset Management Inc. ("LBGAM"), the Fund's investment adviser,
is responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for the Fund. Transactions on
domestic stock exchanges involve the payment of negotiated brokerage
commissions, which may vary among different brokers. The cost of securities
purchased from underwriters include an underwriter's commission or concession,
and the prices at which securities are purchased from and sold to dealers in
the over-the- counter market include an undisclosed dealer spread. In making
portfolio investments, LBGAM seeks to obtain the best net price and the most
favorable execution of orders. To the extent that the execution and price
offered by more than one broker or dealer are comparable, LBGAM may, in its
discretion, effect transactions in portfolio securities with brokers or dealers
who provide the Company with research advice or other services. Research advice
and other services furnished by brokers through whom the Fund effects
securities transactions may be used by LBGAM in servicing accounts in addition
to the Fund, and not all such services will necessarily benefit the Fund.

With respect to over-the-counter transactions, the Fund, where
possible, will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere.

Investment decisions for the Fund are made independently from those
for the other investment company portfolios or accounts advised by LBGAM. Such
other portfolios may also invest in the same securities as the Fund. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other portfolios, transactions are averaged as to price, and
available investments allocated as to amount, in a manner which LBGAM believes
to be equitable to each portfolio, including the Fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtainable for the Fund. To the extent
permitted by law, LBGAM may aggregate the securities to be sold or purchased
for the Fund with those to be sold or purchased for such other portfolios in
order to obtain best execution.

The Fund will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with Lehman Brothers Inc. ("Lehman Brothers"), LBGAM or
any affiliated person (as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of either of them, except to the extent
permitted by the Securities and Exchange Commission (the "SEC"). However,
pursuant to an exemption granted by the SEC, the Fund may engage in
transactions involving certain money market instruments with Lehman Brothers
and certain of its affiliates acting as principal. The Fund will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which Lehman Brothers or any affiliate thereof is a member, except
to the extent permitted by the SEC. Under certain circumstances, the Fund may
be at a disadvantage because of these limitations in comparison with other
investment company portfolios which have a similar investment objective but are
not subject to such limitations.

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<PAGE> 110
It is anticipated that the Fund's annual portfolio turnover rate
generally will not exceed 100%. This rate is calculated by dividing the lesser
of sales or purchases of portfolio securities for any given year by the average
monthly value of the Fund's portfolio securities for that year. For purposes of
this calculation, no regard is given to securities having a maturity or
expiration date at the time of acquisition of one year or less. Portfolio
turnover directly affects the amount of transaction costs that are borne by the
Fund. In addition, the sale of securities held by the Fund for not more than
one year will give rise to short-term capital gain or loss for federal income
tax purposes. The federal income tax requirement that the Fund derive less than
30% of its gross income from the sale or other disposition of stock or
securities held less than three months may limit the Fund's ability to dispose
of its securities. See "Additional Information Concerning Taxes."

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND CERTAIN INVESTMENT
PRACTICES

U.S. Government Obligations. Examples of the types of U.S. government
securities that may be held by the Fund include, in addition to U.S. Treasury
Bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Resolution Trust Corporation, Tennessee Valley Authority, U.S. Postal Service
and Washington D.C. Armory Board.

Bank Obligations. Bank obligations include negotiable certificates of
deposit, bankers' acceptances, fixed time deposits and deposit notes. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. The borrower is liable
for payment as is the bank, which unconditionally guarantees to pay the draft
at its face amount on the maturity date. Fixed time deposits are obligations of
branches of U.S. banks or foreign banks which are payable at a stated maturity
date and bear a fixed rate of interest. Although fixed time deposits do not
have a market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party. Fixed time deposits
subject to withdrawal penalties and with respect to which a Fund cannot realize
the proceeds thereon within seven days are deemed "illiquid" for the purposes
of the eighth investment limitation set forth under "Investment Objective and
Policies - Investment Limitations" below. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.

Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation. Investors should also be aware that
securities of foreign banks and foreign branches of U.S. banks may involve
investment risks in addition

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<PAGE> 111
to those relating to domestic bank obligations. Such risks include future
political and economic developments, the possible seizure or nationalization of
foreign deposits, and the possible adoption of foreign governmental
restrictions which might adversely affect the payment of principal and interest
on such obligations. In addition, foreign branches of U.S. banks and foreign
banks may be subject to less stringent reserve requirements and foreign issuers
generally are subject to different accounting, auditing, reporting and
record-keeping standards than those applicable to U.S. issuers.

Convertible Securities. As fixed income securities, convertible securities
are investments that provide for a stable stream of income with generally
higher yields than common stocks. Of course, like all fixed-income securities,
there can be no assurance of current income because the issuers of the
convertible securities may default on their obligations. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing fixed
income, offers the potential for capital appreciation through the conversion
feature, which enables the holder to benefit from increases in the market price
of the underlying common stock. There can be no assurance of capital
appreciation, however, because securities prices fluctuate. Convertible
securities generally are 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.
Because of the subordination feature, however, convertible securities typically
have lower ratings than similar non-convertible securities.

Repurchase Agreements. The repurchase price under the repurchase agreements
described in the Prospectus generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements will be held by the Company's
custodian, - 10 - LEHMAN\RETAIL\SLTGRSA2.DOC sub-custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by the Fund under the 1940 Act. The Fund will enter into repurchase
agreements only with counterparties determined to be creditworthy in accordance
with standards adopted by the Company's Board of Directors.

Reverse Repurchase Agreements. Whenever the Fund enters into reverse
repurchase agreements as described in the Prospectus, it will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained. The Fund will enter into
reverse repurchase agreements only with counterparties determined to be
creditworthy by LBGAM.

Loans of Portfolio Securities. The Fund has the ability to lend securities
from its portfolio to brokers, dealers and other financial organizations. There
is no investment restriction on the amount of securities that may be loaned.
The Fund may not lend its portfolio securities to Lehman Brothers or its
affiliates without specific authorization from the SEC. Loans of portfolio
securities by the Fund will be collateralized by cash, letters of credit or
securities which are consistent with its permitted investments, which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. From time to time, the Fund may return a
part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party, which is unaffiliated
with the Fund or Lehman Brothers, and which is acting as a "finder." With
respect to loans by the Fund of its portfolio securities, the Fund would
continue to accrue interest on loaned securities and would also earn

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<PAGE> 112
income on loans. Any cash collateral received by the Fund in connection with
such loans would be invested in securities in which the Fund is permitted to
invest.

When-Issued and Delayed Delivery Securities. As stated in the Prospectus, the
Fund may purchase securities on a "when issued or delayed delivery" basis
(i.e., for delivery beyond the normal settlement date at a stated price). When
the Fund agrees to purchase when-issued or delayed delivery securities, the
custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
separate account in order to ensure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When the Fund engages in when-issued or delayed delivery transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. The Fund does not intend to purchase
when-issued or delayed delivery securities for speculative purposes but only in
furtherance of its investment objective. The Fund reserves the right to sell
these securities before the settlement date if it is deemed advisable.

Illiquid and Restricted Securities. The Fund may not invest more than 15% of
its net assets in illiquid securities, including securities that are illiquid
by virtue of the absence of a readily available market or legal or contractual
restrictions on resale. Securities that have legal or contractual restrictions
on resale but have a readily available market are not considered illiquid for
purpose of this limitation.

The SEC has adopted Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"), which allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. The Fund's investment adviser anticipates that the market
for certain restricted securities such as institutional commercial paper and
institutional municipal securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.

LBGAM will monitor the liquidity of restricted and other illiquid
securities under the supervision of the Board of Directors. In reaching
liquidity decisions with respect to Rule 144A securities, LBGAM will consider,
among others, the following factors: (1) the unregistered nature of a Rule 144A
security; (2) the frequency of trades and quotes for a Rule 144A security; (3)
the number of dealers wishing to purchase or sell the Rule 144A security and
the number of other potential purchasers; (4) dealer undertakings to make a
market in the Rule 144A security; (5) the trading markets for the Rule 144A
security; and (6) the nature of the Rule 144A security and the nature of the
marketplace trades (e.g., the time needed to dispose of the Rule 144A security,
the method of soliciting offers and the mechanics of the transfer).

The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by nationally recognized rating
agencies for obligations that may be purchased by the Fund.

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<PAGE> 113
ADDITIONAL INFORMATION REGARDING DERIVATIVES

As described in the Prospectus under "Investment Objective and Policies - Other
Investments and Investment Practices - Hedging and Derivatives," the Fund is
authorized to use a variety of investment strategies to hedge broad or specific
market movements or, with respect to certain strategies, to seek to increase
the Fund's income or gain. A detailed discussion of Derivatives (as defined in
the Fund's Prospectus) that may be used by LBGAM on behalf of the Fund follows
below. The Fund is not obligated, however, to use any Derivatives and makes no
representation as to the availability of these techniques at this time or at
any time in the future.

The Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ("CFTC") thereunder and the federal income tax
requirements applicable to regulated investment companies which are not
operated as commodity pools.

General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Derivatives involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the
underlying security, index or other instrument at the exercise price. The
Fund's purchase of a put option on a security, for example, might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser
of the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial futures contract, index or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued
by a regulated intermediary such as the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to the
options. The discussion below uses the OCC as an example, but is also
applicable to other similar financial intermediaries.

OCC-issued and exchange-listed options, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Index options are
cash settled for the net amount, if any, by which the option is "in-the-money"
(that is, the amount by which the value of the underlying instrument exceeds,
in the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

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<PAGE> 114
The Fund's ability to close out its position as a purchaser or seller
of an OCC-issued or exchange-listed put or call option is dependent, in part,
upon the liquidity of the particular option market. Among the possible reasons
for the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the
hours during which the underlying financial instruments are traded. To the
extent that the option markets close before the markets for the underlying
financial instruments, significant price and rate movements can take place in
the underlying markets that would not be reflected in the corresponding option
markets.

OTC options are purchased from or sold to securities dealers,
financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to
exchange-listed options, which generally have standardized terms and
performance mechanics, all of the terms of an OTC option, including such terms
as method of settlement, term, exercise price, premium, guarantees and
security, are determined by negotiation of the parties. It is anticipated that
the Fund will only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.

Unless the parties provide for it, no central clearing or guarantee
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, LBGAM must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
met. The Fund will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks, or other
financial institutions that LBGAM deems to be creditworthy. In the absence of a
change in the current position of the staff of the SEC, OTC options purchased
by the Fund and the amount of the Fund's obligation pursuant to an OTC option
sold by the Fund (the cost of the sell-back plus the in-the-money amount, if
any) or the value of the assets held to cover such options will be deemed
illiquid.

If the Fund sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments held by the
Fund or will increase the Fund's income. Similarly, the sale of put options can
also provide Fund gains.

The Fund may purchase and sell call options on securities that are
traded on U.S. securities exchanges and in the OTC markets, and on securities
indices and futures contracts. All calls sold by the Fund must be "covered"
(that is, the Fund must own the securities or futures contract subject to the
call), or

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<PAGE> 115
must otherwise meet the asset segregation requirements described below for so
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund will expose
the Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the Fund to hold a security or instrument that it
might otherwise have sold.

The Fund reserves the right to purchase or sell options on instruments
and indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.

The Fund may purchase and sell put options on securities (whether or
not it holds the securities in its portfolio) and on securities indices and
futures contracts. The Fund will not sell put options if, as a result, more
than 50% of the Fund's assets would be required to be segregated to cover its
potential obligations under put options other than those with respect to
futures contracts. In selling put options, the Fund faces the risk that it may
be required to buy the underlying security at a disadvantageous price above the
market price.

General Characteristics of Futures Contracts and Options on Futures Contracts.
The Fund may trade financial futures contracts or purchase or sell put and call
options on those contracts as a hedge against anticipated market changes, and
for risk management purposes, or the Fund may seek to increase the Fund's
income or gain. Futures contracts are generally bought and sold on the
commodities exchanges on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver that position.

The Fund's use of financial futures contracts and options thereon will
in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC. Maintaining a futures
contract or selling an option on a futures contract will typically require the
Fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets ("initial margin") that initially
is from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.

The Fund will not enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and
premiums required to maintain permissible non-bona fide hedging positions in
futures contracts and options thereon would exceed 5% of the current fair
market value of the Fund's net assets; however, in the case of an option that
is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The value of all futures contracts

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<PAGE> 116
sold by the Fund (adjusted for the historical volatility relationship between
the Fund and the contracts) will not exceed the total market value of the
Fund's securities. The segregation requirements with respect to futures
contracts and options thereon are described below under "Use of Segregated and
Other Special Accounts."

Options on Securities Indices and Other Financial Indices. The Fund may
purchase and sell call and put options on securities indices and other
financial indices. In so doing, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, options on indices settle by cash settlement; that is,
an option on an index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments comprising the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.

Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, and any
combination of futures and options, instead of a single Derivative, as part of
a single or combined strategy when, in the judgment of LBGAM, it is in the best
interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by the Fund based
on LBGAM's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund management objective.

Swaps, Caps, Floors and Collars. Swap agreements can be individually
negotiated and structured to include exposure to a variety of different types
of investments or market factors. Depending on their structure, swap
agreements may increase or decrease the Fund's exposure to factors such as
security prices. Swap agreements can take many different form and are known by
a variety of names. The Fund is not limited to any particular form of swap
agreement if LBGAM determines it is consistent with the Fund's investment
objective and policies.

The Fund may enter into equity swaps, the purchase or sale of related caps,
floors and collars and other similar arrangements. The Fund will enter into
these transactions primarily to protect against any increase in the price of
securities the Fund anticipates purchasing or selling at a later date. The Fund
will use these transactions for non-speculative purposes and will not sell caps
or floors if it does not own securities or other instruments providing the
income the Fund may be obligated to pay. An equity swap is an agreement to
exchange cash flows on a notional principal amount based on changes in the
values of the reference index. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined rate or amount. A

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<PAGE> 117
collar is a combination of a cap and a floor that preserves a certain return
with a predetermined range of values.

The Fund will usually enter into swaps on a net basis, that is, the
two payments streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as these swaps,
caps, floors, collars and other similar types of instruments are entered into
for good faith hedging or other non- speculative purposes, they do not
constitute senior securities under the 1940 Act, and, thus, will not be treated
as being subject to the Fund's borrowing restrictions. The Fund will not enter
into any swap, cap, floor, collar or other similar type of transaction unless
LBGAM deems the Counterparty to be creditworthy. If a Counterparty defaults,
the Fund may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps. Swap
agreements will tend to shift the Fund's investment exposure from one type of
investment to another. Caps and floors have an effect similar to buying or
writing options. Depending on how they are used, swap agreements may increase
or decrease the overall volatility of the Fund's investments and its share
price and yield.

The most significant factor in the performance of swap agreements is
the change in the specific factors that determine the amounts of payments due
to and from the Fund. If a swap agreement calls for payments by the Fund, the
Fund must be prepared to make such payments when due. In addition, if the
Counterparty's creditworthiness declined, the value of a swap agreement would
be likely to decline, potentially resulting in losses. The Fund expects to be
able to eliminate its exposure under swap agreements either by assignment or
other disposition, or by entering into an offsetting swap agreement with the
same party or a similarly creditworthy party.

The liquidity of swap agreements will be determined by LBGAM based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are
illiquid.

The Fund will maintain cash and appropriate liquid assets (i.e., high
grade debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If the Fund enters into a swap agreement on
a net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts" below.

Risk Factors. Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to
the extent LBGAM's view as to certain market movements is incorrect, the risk
that the use of Derivatives could result in losses greater than if they had not
been used. Use of put and call options could result in losses to the Fund,
force the sale or purchase of

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<PAGE> 118
portfolio securities at inopportune times or for prices higher than (in the
case of put options) or lower than (in the case of call options) current market
values, or cause the Fund to hold a security it might otherwise sell.

The use of futures and options transactions entails certain special
risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related securities
position of the Fund could create the possibility that losses on the hedging
instrument are greater than gains in the value of the Fund's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, the Fund might not be able to close out a transaction without
incurring substantial losses. Although the Fund's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to the Fund that might result from an increase in
value of the position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium.

Losses resulting from the use of Derivatives will reduce the Fund's
net asset value, and possibly income, and the losses can be greater than if
Derivatives had not been used.

Use of Segregated and Other Special Accounts. Use of many Derivatives by the
Fund will require, among other things, that the Fund segregate cash, liquid
high grade debt obligations or other assets with its custodian, or a designated
sub-custodian, to the extent the Fund's obligations are not otherwise "covered"
through ownership of the underlying security or financial instrument. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities or
instruments required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by the Fund,
for example, will require the Fund to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option
sold by the Fund on an index will require the Fund to own portfolio securities
that correlate with the index or to segregate liquid high grade debt
obligations equal to the excess of the index value over the exercise price on a
current basis. A put option on securities written by the Fund will require the
Fund to segregate liquid high grade debt obligations equal to the exercise
price.

OTC options entered into by the Fund, including those on securities,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when the Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.

In the case of a futures contract or an option on a futures contract,
the Fund must deposit initial margin and, in some instances, daily variation
margin in addition to segregating assets sufficient to meet its

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<PAGE> 119
obligations to purchase or provide securities or currencies, or to pay the
amount owed at the expiration of an index-based futures contract. These assets
may consist of cash, cash equivalents, liquid debt or equity securities or
other acceptable assets. The Fund will accrue the net amount of the excess, if
any, of its obligations relating to swaps over its entitlements with respect to
each swap on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having
an aggregate value equal to at least the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Fund's net
obligation, if any.

Derivatives may be covered by means other than those described above
when consistent with applicable regulatory policies. The Fund may also enter
into offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Derivatives. The Fund could purchase a put option, for example, if the strike
price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if it holds a
futures contract or forward contract, the Fund could purchase a put option on
the same futures contract or forward contract with a strike price as high or
higher than the price of the contract held. Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.

INVESTMENT LIMITATIONS

The Prospectus summarizes certain investment limitations that may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares (as defined below under "Additional Information Concerning
Fund Shares"). Investment limitations numbered 1 through 7 may not be changed
without such vote of shareholders; investment limitations 8 through 12 may be
changed by a vote of the Company's Board of Directors at any time.

1. The Fund may not purchase the securities of any one
issuer if as a result more than 5% of the value of its total assets
would be invested in the securities of such issuer, except that up to
25% of the value of its total assets may be invested without regard to
this 5% limitation and provided that there is no limitation with
respect to investments in U.S. Government securities.

2. The Fund may not borrow money, except (a) from banks
or by entering into reverse repurchase agreements, in aggregate
amounts not exceeding 331/3% of the value of its total assets at the
time of such borrowing and (b) in amounts not exceeding 5% of the
value of its total assets at the time of such borrowing for temporary
or emergency purposes (including for clearance of securities
transactions or payment of redemptions or dividends). For purposes of
the foregoing investment limitation, the term "total assets" shall be
calculated after giving effect to the net proceeds of any borrowings
and reduced by any liabilities and indebtedness other than such
borrowings.

3. The Fund may not purchase any securities which would
cause 25% or more of the value of its total assets at the time of such
purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry;
provided that there is no limitation with respect to investments in
U.S. Government securities.

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<PAGE> 120

4. The Fund may not make loans, except that it may
purchase or hold debt instruments in accordance with its investment
objectives and policies, and may enter into repurchase agreements with
respect to portfolio securities.

5. The Fund may not act as an underwriter of securities,
except insofar as it may be deemed an underwriter under applicable
securities laws in selling portfolio securities.

6. The Fund may not purchase or sell real estate or real
estate limited partnerships, provided that it may purchase securities
of issuers which invest in real estate or interests therein.

7. The Fund may not purchase or sell commodities
contracts except in connection with Derivatives, or invest in oil, gas
or mineral exploration or development programs or in mineral leases.

8. The Fund may not knowingly invest more than 15% of
the value of its net assets in securities that may be illiquid because
of legal or contractual restrictions on resale or securities for which
there are no readily available market quotations.

9. The Fund may not purchase securities on margin, make
short sales of securities or maintain a short position, except that
the Fund may make short sales against the box and except in connection
with Derivatives.

10. The Fund may not write or sell puts, calls,
straddles, spreads or combinations thereof except in connection with
Derivatives.

11. The Fund may not invest in securities if as a result
the Fund would then have more than 5% of its total assets in
securities of companies (including predecessors) with less than three
years of continuous operation, except that this restriction will not
apply to U.S. government securities.

12. The Fund may not purchase securities of other
investment companies except as permitted under the 1940 Act or in
connection with a merger, consolidation, acquisition or
reorganization.

In order to permit the sale of Fund shares in certain states, the Fund
may make commitments more restrictive than the investment policies and
limitations above. Should the Fund determine that any such commitments are no
longer in its best interest, it will revoke the commitment by terminating sales
of its shares in the state involved.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Information on how to purchase and redeem the Fund's shares is included in the
Prospectus. The issuance of shares is recorded on the Fund's books, and
certificates for Fund shares are not issued unless expressly requested in
writing to the Fund's transfer agent. Certificates are not issued for
fractional shares.

Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed, other than

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<PAGE> 121
customary weekend and holiday closings, or during which trading on said
Exchange is restricted, or during which (as determined by the SEC by rule or
regulation) an emergency exists as a result of which disposal or valuation of
portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation
of the transfer of its shares upon the occurrence of any of the foregoing
conditions.) The Fund is obligated to redeem shares solely in cash up to
$250,000 or 1% of the Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period. Any redemption beyond this amount will also
be in cash unless the Board of Directors determines that conditions exist which
make payment of redemption proceeds wholly in cash unwise or undesirable. In
such a case, the Fund may make payment wholly or partly in readily marketable
securities or other property, valued in the same way as the Fund determines net
asset value. Redemption in kind is not as liquid as a cash redemption.
Shareholders who receive a redemption in kind may incur transaction costs, if
they sell such securities or property, and may receive less than the redemption
value of such securities or property upon sale, particularly where such
securities are sold prior to maturity.

EXCHANGE PRIVILEGE

Shareholders may exchange all or part of their Fund shares for shares of
certain other funds in the Lehman Brothers Group of Funds, as indicated in the
Prospectus, to the extent such shares are offered for sale in the shareholder's
state of residence. Exchanges of Fund shares for shares of the Lehman Brothers
Daily Income Fund or the Lehman Brothers Municipal Income Fund can only be made
for CDSC Shares of such funds. There currently is no charge for this service,
and exchanges are made on the basis of relative net asset value per share at
the time of exchange. Shares of the Fund exchanged for shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates, will be deemed to have been held since the
date the Fund shares being exchanged were purchased.

The exchange privilege enables shareholders of the Fund to acquire
shares in a fund with different investment objectives when they believe that a
shift between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is to be made. Prospectuses for these funds may be obtained in the
manner indicated in the Fund's Prospectus.

Upon receipt of proper instructions and all necessary supporting
documents, Fund shares submitted for exchange are redeemed at the then-current
net asset value and the proceeds immediately invested in shares of the fund
being acquired subject to any applicable CDSC. Lehman Brothers reserves the
right to reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.

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<PAGE> 122
VALUATION OF SHARES

The Prospectus discusses the time at which the net asset value of the Fund is
determined for purposes of sales and redemptions. The following is a
description of the procedures used by the Fund in valuing its assets.

Securities traded on an exchange will be valued on the basis of the
last sale price on the principal market on which such securities are traded, on
the date on which the valuation is made or, in the absence of sales in such
market, at the mean between the closing bid and asked prices. Over-the-counter
securities will be valued on the basis of the bid price at the close of
business on each day, or, if market quotations for those securities are not
readily available, at fair value, as determined in good faith by the Company's
Board of Directors. Securities which are traded both in the over-the-counter
market and on a stock exchange will be valued according to the broadest and
most representative market. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined
by the Company's Board of Directors. Amortized cost involves valuing an
instrument at its original cost to the Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. All other
securities and other assets of the Fund will be valued at fair value as
determined in good faith by the Company's Board of Directors.

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The Company's directors and executive officers, their addresses, principal
occupations during the past five years and other affiliations are as follows:

Principal Occupation During
Past 5 Years and Other
Name and Address Position with the Company Affiliations
- ---------------- ------------------------- ---------------------------

<S> <C> <C>
Kirk Hartman(1) Chairman of the Board and Managing Director, Lehman
World Financial Center Director Brothers Inc.
New York, New York 10285

</TABLE>

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<PAGE> 123

Principal Occupation During
Past 5 Years and Other
Name and Address Position with the Company Affiliations
- ---------------- ------------------------- ---------------------------

<S> <C> <C>
Burt N. Dorsett(2)(3) Director Managing Partner, Dorsett
201 East 62nd Street McCabe Capital Management,
New York, New York 10021 Inc.; Director, Research
Corporation Technologies;
formerly President,
Westinghouse Pension
Investments Corporation;
formerly Executive Vice
President and Trustee, College
Retirement Equities Fund, Inc.;
formerly Investment Officer,
University of Rochester.

Kathleen C. Holmes(2)(3) Director Managing Director, Wharton
Wharton Financial School Financial Institutions
Institutions Center Center, University of
3620 Locust Walker Pennsylvania; Senior Partner
3301 Steinberg Hall and Management Consultant,
Dietrich Hall Furash & Company.
Philadelphia, Pennsylvania 19104-6367

John N. Hatsopoulos(2)(3) Director Executive Vice President and
Thermo Electron Corp. Chief Financial Officer, Thermo
81 Wyman Street Electron Corp.
Waltham, Massachusetts 02254

Andrew Gordon President Managing Director, Lehman
World Financial Center Brothers.
New York, New York 10285

John M. Winters Vice President Senior Vice President, Lehman
World Financial Center Brothers
New York, New York 10285

Michael Kardok Treasurer and Chief Financial Vice President, The Shareholder
53 State Street Officer Services Group, Inc.
Boston, Massachusetts 02109

</TABLE>

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<PAGE> 124

<TABLE>
<CAPTION>
Principal Occupation During
Past 5 Years and Other
Name and Address Position with the Company Affiliations
- ---------------- ------------------------- ---------------------------

<S> <C> <C>
Patricia L. Bickimer Secretary Vice President and Associate
53 State Street General Counsel, The
Boston, Massachusetts 02109 Shareholder Services Group, Inc.

</TABLE>

1. Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.

No employee of Lehman Brothers, LBGAM or The Shareholders Services
Group, Inc. ("TSSG") receives any compensation from the Company for acting as
an officer or director of the Company. The Company pays each director who is
not a director, officer or employee of Lehman Brothers, LBGAM or TSSG or any of
their affiliates, a fee of $20,000 per annum plus $500 per meeting attended and
reimburses them for travel and out-of-pocket expenses.

INVESTMENT ADVISER

LBGAM serves as investment adviser to the Fund pursuant to a written advisory
agreement approved by the Company's Board of Directors, including a majority of
the directors who are not "interested persons" (as defined in the 1940 Act) of
the Company or LBGAM, on January 27, 1994. The services provided by LBGAM under
its advisory agreement and the fees paid to LBGAM are described in the
Prospectus under "Management of the Fund." LBGAM bears all expenses in
connection with the performance of its services and pays the salaries of all
officers or employees who are employed by both it and the Company. Unless
sooner terminated, the advisory agreement will continue in effect until January
27, 1996 and from year to year thereafter if such continuance is approved at
least annually by the Company's Board of Directors or by a vote of a majority
(as defined under "Additional Information Concerning Fund Shares") of the
outstanding shares of the Fund and, in either case, by a majority of the
directors who are not parties to such agreement or "interested persons" of any
party by votes cast in person at a meeting called for such purpose. The
advisory agreement is terminable by the Company or LBGAM on 60 days' written
notice, and will terminate immediately in the event of its assignment.

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<PAGE> 125
ADMINISTRATOR

As the Fund's administrator, TSSG has agreed to provide the following services:
(i) assist generally in supervising the Fund's operations, providing and
supervising the operation of an automated data processing system to process
purchase and redemption orders, providing information concerning the Fund to
its shareholders of record, handling shareholder problems, supervising the
services of employees whose principal responsibility and function is to
preserve and strengthen shareholder relations; (ii) prepare reports to the
Fund's shareholders and prepare tax returns and reports to and filings with the
SEC; (iii) compute the net asset value per share of the Fund; (iv) provide the
services of certain persons who may be elected as directors or appointed as
officers of the Company by the Board of Directors; and (v) maintain the
registration or qualification of the Fund's shares for sale under state
securities laws.

DISTRIBUTOR

Lehman Brothers acts as distributor of the Fund's shares. The Fund's shares are
sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Fund (excluding preparation and printing
expenses necessary for the continued registration of the Fund's shares) and of
preparing, printing and distributing all sales literature.

Lehman Brothers forwards investors' funds for the purchase of shares
five business days after placement of purchase orders (the "Settlement Date").
When payment is made by the investor before the Settlement Date unless
otherwise directed by the investor, the funds will be held as a free credit
balance in the investor's brokerage account, and Lehman Brothers may benefit
from the temporary use of the funds. The investor may designate another use for
the funds prior to the Settlement Date such as an investment in a money market
fund in the Lehman Brothers Group of Funds. If the investor instructs Lehman
Brothers to invest the funds in a money market fund, the amount of the
investment will be included as part of the average daily net assets of both the
Fund and the money market fund, and affiliates of Lehman Brothers which serve
the funds in an investment advisory capacity will benefit from the fact that
they are receiving fees from both such investment companies for managing these
assets computed on the basis of their average daily net assets. The Company's
Board of Directors has been advised of the benefits to Lehman Brothers
resulting from delayed settlement procedures and will take such benefits into
consideration when reviewing the advisory and distribution agreements for
continuance.

Rule 12b-1 (the "Rule") adopted by the SEC under the 1940 Act
provides, among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Company's Board of Directors has adopted a services and distribution
plan with respect to the Fund pursuant to Rule 12b-1 (the "Plan"). The Board of
Directors has determined that there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.

A quarterly report of the amounts expended with respect to the Fund
under the Plan, and the purposes for which such expenditures were incurred,
must be made to the Board of Directors for its review. In addition, the Plan
provides that it may not be amended with respect to the Fund to increase
materially the costs which may be borne for distribution pursuant to the Plan
without the approval of shareholders of the Fund, and that other material
amendments of the Plan must be approved by the Board of Directors, and by the
Directors who are neither "interested persons" (as defined in the 1940 Act) of
the Company nor have any direct or indirect financial interest in the operation
of the Plan or any related agreements, by vote cast

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<PAGE> 126
in person at a meeting called for the purpose of considering such amendments.
The Plan and any related agreements are subject to annual approval by such vote
cast in person at a meeting called for the purpose of voting on the Plan. The
Plan may be terminated with respect to the Fund at any time by vote of a
majority of the Directors who are not "interested persons" and have no direct
or indirect financial interest in the operation of the Plan or in any related
agreement or by vote of a majority of the shares of the Fund.

CUSTODIAN AND TRANSFER AGENT

Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect wholly owned
subsidiary of Mellon Bank Corporation, is located at One Boston Place, Boston,
Massachusetts 02108, and serves as the Company's custodian pursuant to a
custody agreement. Under the custody agreement, Boston Safe holds the Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges, including out-of-pocket expenses. The assets of the Company are held
under bank custodianship in compliance with the 1940 Act.

TSSG, a subsidiary of First Data Corporation, is located at 53 State
Street, Boston, Massachusetts 02019, and serves as the Company's transfer
agent. Under the transfer agency agreement, TSSG maintains the shareholder
account records for the Company, handles certain communications between
shareholders and the Company, distributes dividends and distributions payable
by the Company and produces statements with respect to account activity for the
Company and its shareholders. For these services, TSSG receives a monthly fee
computed on the basis of the number of shareholder accounts that it maintains
for the Company during the month and is reimbursed for out-of-pocket expenses.

EXPENSES

The Fund's expenses include taxes, interest, fees and salaries of the Company's
trustees and officers who are not directors, officers or employees of the
Company's service contractors, SEC fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
The Fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities. LBGAM and TSSG have agreed
that if, in any fiscal year, the expenses borne by the Fund exceed the
applicable expense limitations imposed by the securities regulations of any
state in which shares of the Fund are registered or qualified for sale to the
public, they will reimburse the Fund for any excess to the extent required by
such regulations in the same proportion that each of their fees bears to the
Fund's aggregate fees for investment advice and administrative services. Unless
otherwise required by law, such reimbursement would be accrued and paid on the
same basis that the advisory and administration fees are accrued and paid by
the Fund. To the Fund's knowledge, of the expense limitations in effect on the
date of this Statement of Additional Information, none is more restrictive than
two and one-half percent (2-1/2%) of the first $30 million of the Fund's
average annual net assets, two percent (2%) of the next $70 million of the
average annual net assets and one and one-half percent (1-1/2%) of the
remaining average annual net assets.

- 19 -

<PAGE> 127
ADDITIONAL INFORMATION CONCERNING TAXES

The following discussion is only a brief summary of certain additional
tax considerations affecting the Fund and its shareholders. No attempt is made
to present a detailed explanation of all federal, state and local tax concerns,
and the discussion set forth here and in the Prospectus is not intended as a
substitute for careful tax planning. Investors are urged to consult their tax
advisers with specific questions relating to federal, state or local taxes.

IN GENERAL

The Fund intends to qualify as a regulated investment company (a
"RIC") under Subchapter M of the Code and to continue to so qualify.
Qualification as a RIC requires, among other things, that the Fund: (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans and 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 stocks or securities; (b) derive
less than 30% of its gross income in each taxable year from the sale or other
disposition of any of the following held for less than three months: (i)
stocks or securities, (ii) options, futures, or forward contracts, or (iii)
foreign currencies (or foreign currency options, futures or forward contracts)
that are not directly related to its principal business of investing in stock
or securities (or options and futures with respect to stocks or securities)
(the "30% limitation"); and (c) diversify its holdings so that, at the end of
each quarter of each taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash, cash items, U.S. government securities,
securities of other RICs and other securities with such other securities
limited, in respect of any issuer, to an amount not greater than 5% of the
value of the Fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in
the securities (other than U.S. government securities or the securities of
other RICs) of any one issuer.

Investors should consider the tax implications of buying shares just
prior to a distribution. Although the price of shares purchased at the time
may reflect the amount of the forthcoming distribution, those purchasing just
prior to a distribution will receive a distribution which will nevertheless be
taxable to them.

Gain or loss, if any, on the sale or other disposition of shares of
the Fund will generally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. If a shareholder sells or
otherwise disposes of a share of the Fund before holding it for more than six
months, any loss on the sale or other disposition of such share shall be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such share, or shall be disallowed
to the extent of any exempt-interest dividend. Currently, the maximum federal
income tax rate imposed on individuals with respect to net realized long-term
capital gains is limited to 28%, whereas the maximum federal income tax rate
imposed on individuals with respect to net realized short-term capital gains
(which are taxed at the same rates as ordinary income) is 39.6%.

A 4% non-deductible excise tax is imposed on RICs that fail currently
to distribute an amount equal to specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over
capital losses). The Fund intends to make sufficient distributions or deemed
distributions

- 20 -

<PAGE> 128
of its ordinary taxable income and any capital gain net income prior to the end
of each calendar year to avoid liability for this excise tax.

If for any taxable year the Fund does not qualify for tax treatment as
a RIC, all of the Fund's taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to Fund shareholders.
In such event, dividend distributions to shareholders would be taxable as
ordinary income to the extent of the Fund's earnings and profits, and would be
eligible for the dividends received deduction in the case of corporate
shareholders.

The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or 31% of gross proceeds realized
upon sale paid to its shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to backup
withholding by the Internal Revenue Service for failure properly to include on
their return payments of taxable interest or dividends, or who have failed to
certify to the Fund that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."

The Fund's net long-term capital gains will be distributed at least
annually. The Fund will generally have no tax liability with respect to such
gains, and the distributions, whether paid in cash or reinvested in additional
shares, will be taxable to the Fund's shareholders as long-term capital gains,
regardless of how long a shareholder has held the Fund's shares. Such
distributions will be designated as a capital gain dividend in a written notice
mailed by the Fund to its shareholders not later than 60 days after the close
of the Fund's taxable year.

Investment company taxable income earned by the Fund will be
distributed to its shareholders. In general, the Fund's investment company
taxable income will be its taxable income (for example, any short-term capital
gains) subject to certain adjustments and excluding the excess of any net
long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. The Fund will be taxed on any undistributed
investment company taxable income of the Fund. To the extent such income is
distributed by the Fund, it will be taxable to the Fund's shareholders as
ordinary income, whether paid in cash or reinvested in additional shares.

PERFORMANCE DATA

From time to time, the Fund may quote total return in advertisements or in
reports and other communications to shareholders and compare its total return
to that of other funds or accounts with similar objectives and to relevant
indices.

AVERAGE ANNUAL TOTAL RETURN

The Fund's "average annual total return" figures, as described in the
Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:

- 21 -

<PAGE> 129
<TABLE>
<CAPTION>
P(1 + T) = ERV
<S> <C> <C>
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 investment made at the
beginning of a 1-, 5-, or 0- period at the end of the 1-, 5-, or 10-year period (or
fractional portion thereof), assuming reinvestment of 11 dividends and
distributions.
</TABLE>

The Fund's total return figures calculated in accordance with the
above formula will assume that the maximum applicable CDSC has been deducted
from the hypothetical $1,000 initial investment.

AGGREGATE TOTAL RETURN

The Fund's "aggregate total return" figures, as described in the Prospectus,
represent the cumulative change in the value of an investment in Fund shares
for the specified period and are computed by the following formula:

<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN = ERV-P
-----
P
<S> <C>
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made at the
beginning of a 1-, 5-, or 10- year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.
</TABLE>

The Fund's performance will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and operating
expenses. Consequently, any given performance quotation should not be
considered representative of the performance of Fund shares for any specified
period in the future. Because performance will vary, it may not provide a basis
for comparing an investment in Fund shares with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other mutual funds should give
consideration to the nature, quality and maturity of the respective investment
companies' portfolio securities and market conditions.

ADDITIONAL INFORMATION CONCERNING FUND SHARES

As used in this Statement of Additional Information and the Prospectus, a
"majority of the outstanding shares" of the Fund means the lesser of (1) 67% of
the Fund's shares represented at a meeting at which the holders of more than
50% of the outstanding shares of the Fund are present in person or by proxy, or
(2) more than 50% of the outstanding shares of the Fund.

- 22 -

<PAGE> 130
directors. To the extent required by law, the Company will assist in
shareholder communication in such matters.

Each share of the Fund is entitled to such dividends and distributions
out of the assets belonging to the Fund as are declared in the discretion of
the Company's Board of Directors. In determining the Fund's net asset value,
assets belonging to the Fund are credited with a proportionate share of any
general assets of the Company not belonging to a particular fund of the Company
and are charged with the direct liabilities in respect of the Fund and with a
share of the general liabilities of the Company which are normally allocated in
proportion to the relative net asset values of the respective funds of the
Company at the time of allocation.

In the event of the liquidation or dissolution of the Company, shares
of the Fund are entitled to receive the assets attributable to the Fund that
are available for distribution, and a proportionate distribution, based upon
the relative net assets of the Fund, of any general assets not attributable to
a fund of the Company, that are available for distribution. Shareholders are
not entitled to any preemptive rights.

Subject to the provisions of the Company's Charter, determinations by
the Board of Directors as to the direct and allocable liabilities and the
allocable portion of any general assets of the Company, with respect to the
Fund are conclusive.

COUNSEL

Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017-3954, serves as
counsel to the Company.

AUDITORS

The statement of assets and liabilities of the Funds dated July 31, 1994 which
is incorporated by reference in this Statement of Additional Information has
been audited by Ernst & Young LLP, independent auditors, whose report thereon
appears elsewhere herein, and has been included herein in reliance upon the
report of said firm as independent auditors. Ernst & Young LLP has offices at
200 Clarendon Street, Boston, Massachusetts 02116-5072.

FINANCIAL STATEMENTS

The Company's Annual Report for the fiscal period ended July 31, 1994, which
contains audited financial statements on the Fund for the fiscal period ended
July 31, 1994, is incorporated into this Statement of Additional Information by
reference in its entirety. The Fund's unaudited financial statements for the
period from August 1, 1994 to September 30, 1994 are attached hereto.

- 23 -

<PAGE> 131
APPENDIX A
DESCRIPTION OF RATINGS

A description of the rating policies of Moody's and S&P with respect to bonds
and commercial paper appears below.

MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS

Aaa -- Bonds which are rated "Aaa" are judged to be of the best
quality and carry the smallest degree of investment risk. 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 of greater amplitude 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
qualities 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 which are 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 which are rated "B" generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of time may be
small.

Caa -- Bonds which are 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.

Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in high degree. Such issues are often in default or have other
marked shortcomings.

C -- Bonds which are 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.

A-1

<PAGE> 132
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. 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 -- This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to repay principal
and pay interest.

AA -- Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.

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

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

BB-B-CCC-CC-C -- Bonds rated "BB", "B", "CCC", "CC" and "C" are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligations. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.

CI -- Bonds rated "CI" are income bonds on which no interest is being
paid.

D -- Bonds rated "D" are in default. The "D" 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 is also used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

The ratings set forth above may be modified by the addition of a plus
or minus to show relative standing within the major rating categories.

MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS

PRIME-1 -- Issuers (or related supporting institutions) rated
"Prime-1" have a superior ability for repayment of senior short-term debt
obligations. "Prime-1" repayment ability will often be evidenced by many of 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

A-2

<PAGE> 133
generation, and well- established access to a range of financial markets and
assured sources of alternate liquidity.

PRIME-2 -- Issuers (or related supporting institutions) rated
"Prime-2" have a strong ability for repayment of senior short-term debt
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
alternative liquidity is maintained.

PRIME-3 -- Issuers (or related supporting institutions) rated
"Prime-3" have an acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market compositions 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.

NOT PRIME -- Issuers rated "Not Prime" do not fall within any of the
Prime rating categories.

STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:

A-1 -- This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation.

A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".

A-3 -- Issues carrying this designation have adequate capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.

B -- Issues rated "B" are regarded as having only speculative capacity
for timely payment.

C -- This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.

D -- Debt rated "D" is 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.

A-3

Financial Statements

LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (UNAUDITED)
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 82.9%
COMPUTER & COMPUTER SERVICES - 12.5%
10,000 American Management Systems Inc.** $ 235,000
18,000 BISYS Group, Inc.** 382,500
15,000 Caere Corporation 140,625
10,000 Ceridian Corporation** 246,250
5,000 Computer Sciences Corporation** 217,500
17,000 EMC Corporation** 342,125
10,000 IMRS Inc.** 375,000
10,000 Informix Corporation** 277,500
5,000 Intel Corporation 307,500
15,000 Orbital Sciences Corporation** 247,500
7,000 Parametric Technology** 232,750
10,000 Policy Management Systems Corporation** 398,750
10,000 Sun Microsystems Inc.** 293,750
10,000 Unisys Corporation** 107,500
----------
3,804,250
----------
HEALTHCARE - 9.8%
5,000 Columbia/HCA Healthcare Corporation 217,500
10,000 Community Health Systems, Inc.** 260,000
10,000 Drypers Corporation 120,000
10,000 Genzyme Corporation ** 342,500
12,000 Homedco Group Inc.** 420,000
10,000 Manor Care, Inc. 266,250
15,000 Multicare Companies, Inc.** 300,937
10,000 National Medical Enterprises Inc.** 171,250
10,000 Quantum Health Resources Inc.** 421,875
8,000 Scherer (R.P.) Corporation** 333,000
5,000 Target Therapeutics Inc.** 146,250
----------
2,999,562
----------
CONSUMER SERVICES - 5.7%
5,000 Albertson's, Inc. 145,625
5,000 Capital Cities/ABC Inc. 410,000
7,000 CUC International, Inc.** 231,000
5,000 Dell Webb Corporation 76,875
20,000 DIMAC Corporation** 245,000
10,000 Loewen Group Inc. 242,500
10,000 Showboat, Inc. 136,250
5,000 SPS Transaction Services Inc.** 260,000
----------
1,747,250
----------
ELECTRIC - 5.0%
25,000 Dallas Semiconductor Corporation** 387,500
20,000 General Instrument Corporation** 570,000
1,800 Kent Electronics Corporation** 63,900
8,000 Lam Research Corporation** 322,000
5,000 Varian Associates, Inc. 182,500
----------
1,525,900
----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-1
<PAGE> 135
<TABLE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (UNAUDITED)
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - (CONTINUED)
TELECOMMUNICATIONS - 4.8%
10,000 A Plus Communications Inc.** $ 130,625
20,000 Centennial Cellular Corporation, Class A 345,000
10,000 Paging Network Inc.** 288,750
10,000 Rogers Cantel Mobil Communications, Class B** 290,000
5,000 Southwestern Bell Corporation 212,500
5,000 Sprint Corporation 190,625
----------
1,457,500
----------
RETAIL - 4.5%
15,000 Heilig-Meyers Company 390,000
20,000 Home Shopping Network, Inc.** 215,000
10,000 Lillian Vernon Corporation 185,000
12,000 Sports & Recreation Inc.** 312,000
10,700 Stop & Shop Companies** 268,838
----------
1,370,838
----------
MANUFACTURING - 4.3%
10,000 Fusion Systems Corporation** 324,375
20,000 Group Technologies Corporation** 180,000
5,000 Scott Paper Company 305,625
15,000 Union Switch & Signal Corporation** 262,500
10,000 Watts Industries Inc., Class A 242,500
----------
1,315,000
----------
ENTERTAINMENT - 3.7%
10,000 Argosy Gaming Company** 175,000
25,000 GTECH Holding Corporation** 503,125
10,000 Mirage Resort Inc.** 215,000
10,000 Players International Inc.** 242,500
----------
1,135,625
----------
INSURANCE - 3.6%
8,000 CMAC Investment Corporation 211,000
10,000 MBIA Inc. 596,250
10,000 MGIC Investment Corporation 301,250
----------
1,108,500
----------
BROADCASTING - 3.0%
20,000 Emmis Broadcasting Corporation, Class A** 325,000
10,000 Infinity Broadcasting Corporation, Class A** 305,000
15,000 Turner Broadcasting Systems Inc., Class A 294,375
----------
924,375
----------
MEDICAL & DENTAL EQUIPMENT - 2.9%
7,500 Charter Medical Corporation** 207,187
10,000 IDEXX Laboratories Inc.** 295,000
15,000 Orthofix International, Inc.** 172,500
5,000 SciMed Life Systems Inc.** 218,750
----------
893,437
----------
FINANCIAL SERVICES - 2.9%
10,000 Equifax Inc. 296,250
10,000 Roosevelt Financial Group Inc. 166,875
20,000 SEI Corporation 430,000
----------
893,125
----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-2
<PAGE> 136

<TABLE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (UNAUDITED)
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - (CONTINUED)
BANKING - 2.9%
10,000 Ahmanson (H. F.) & Company $ 208,750
10,000 Bank of Boston Corporation 266,250
5,000 First Interstate Bancorp 405,625
---------
880,625
---------
CABLE & TELEVISION - 2.6%
10,000 TCA Cable Television, Inc. 243,750
10,000 United International Holdings Inc., Class A** 151,875
10,000 Viacom Inc., Class B, Non-voting** 397,500
---------
793,125
---------
PHARMACEUTICALS - 2.3%
30,000 Perrigo Company** 405,000
10,000 Teva Pharmaceuticals Industries, ADR 283,750
---------
688,750
---------
BUILDING & EQUIPMENT - 1.6%
10,000 Clayton Homes Inc.** 190,000
13,000 Ply Gem Industries, Inc. 300,625
---------
490,625
---------
PUBLISHING - 1.6%
5,000 Houghton Mifflin Company 206,250
20,000 Westcott Communications, Inc.** 273,750
---------
480,000
---------
AUTOMOTIVE PARTS & ACCESSORIES - 1.5%
5,000 Eaton Corporation 237,500
12,000 Lear Seating Corporation** 220,500
---------
458,000
---------
ADMINISTRATIVE SERVICES - 1.3%
10,000 Paychex, Inc. 377,500
---------
CHEMICALS - 1.1%
5,000 Borden Chemicals/Plastics Ltd. 123,750
10,000 IVAX Corporation 196,250
---------
320,000
---------
PAPER PRODUCTS - 1.0%
10,000 Times Mirror Company 307,500
---------
TRANSPORTATION - 0.9%
15,000 Celadon Group Inc.** 277,500
---------
METALS - 0.8%
10,000 WCI Steel, Inc.** 121,250
5,000 Wolverine Tube Inc.** 128,750
---------
250,000
---------
INDUSTRIAL - 0.8%
5,000 Thermo Electron Corporation** 229,375
---------
MINING - NON-METALS - 0.7%
5,000 Cleveland-Cliffs 193,750
---------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-3
<PAGE> 137
<TABLE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (UNAUDITED)
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - (CONTINUED)
BASIC INDUSTRIES - 0.6%
10,000 Pall Corporation $ 172,500
-----------
OIL & GAS - 0.3%
5,000 Petroleum Geo-Services, ADR** 96,875
-----------
PACKAGING - 0.2%
2,500 AptarGroup Inc. 67,187
-----------

TOTAL COMMON STOCKS (Cost $24,049,159) 25,258,674
-----------

TOTAL COMMON STOCKS AND PUT OPTION PURCHASED
(Cost $24,141,909) 25,281,174
-----------
FACE
VALUE
- ----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 22.3% (Cost $6,804,000)
$6,804,000 Agreement with Chase Manhattan Corporation, 5.150% dated
09/30/1994 to be repurchased at $6,806,920 on 10/03/1994
collateralized by $7,695,000 U.S. Government Securities with
various maturities and coupon rates (Value $6,946,470) 6,804,000
-----------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $30,945,909*) 105.3 % 32,085,174

NUMBER OF
CONTRACTS
- ----------------------------------------------------------------------------------------------------------------------------
PUT OPTION WRITTEN (0.0)% (PREMIUM RECEIVED $34,749)
50 Nasdaq 100 Index Put Option, December 1994, at $320.00 (0.0) (5,938)
-----------
OTHER ASSETS AND LIABILITIES (Net) (5.3) (1,599,247)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS 100.0 % $30,479,989
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
** Non income producing securities.

ABBREVIATION:
ADR - American Depositary Receipt
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-4
<PAGE> 138

<TABLE>

LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1994 (UNAUDITED)

<S> <C> <C>
ASSETS:
Investments, at value (Cost $30,945,909) (Note 1)
See accompanying schedule:
Securities......................................................................... $25,281,174
Repurchase Agreements.............................................................. 6,804,000 $32,085,174
Cash.................................................................................. ----------- 300
Receivable for investment securities sold............................................. 575,000
Unamortized organization costs (Note 6)............................................... 117,042
Receivable for Fund shares sold....................................................... 25,812
Dividends and interest receivable..................................................... 8,258
Other assets.......................................................................... 2,000
-----------
TOTAL ASSETS.......................................................................... 32,813,586

LIABILITIES:
Payable for investment securities purchased........................................... 2,230,228
Distribution fee payable (Note 3)..................................................... 18,775
Organization costs payable............................................................ 16,671
Accrued Directors' fees and expenses (Note 2)......................................... 9,167
Service fee payable (Note 3).......................................................... 6,258
Option written, at value (Premium received $34,749) (Note 1)
See accompanying schedule.......................................................... 5,938
Custodian fees payable (Note 2)....................................................... 5,400
Investment advisory fee payable (Note 2).............................................. 3,821
Transfer agent fees payable (Note 2).................................................. 1,150
Administration fee payable (Note 2)................................................... 1,019
Accrued expenses and other payables................................................... 35,170
-----------
TOTAL LIABILITIES..................................................................... 2,333,597
-----------
NET ASSETS................................................................................. $30,479,989
===========

NET ASSETS CONSIST OF:
Undistributed net investmentincome......................................................... $ 42,712
Accumulated net realized loss on securities sold...................................... (8,570)
Unrealized appreciation of securities................................................. 1,168,076
Par value............................................................................. 2,966
Paid-in capital in excess of par value................................................ 29,274,805
-----------
TOTAL NET ASSETS...................................................................... $30,479,989
===========
NET ASSET VALUE and offering price per share +
($30,479,989 / 2,966,398 shares outstanding) $ 10.27
===========
<FN>
___________________
+ Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-5
<PAGE> 139

<TABLE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1994 (UNAUDITED)

<S> <C> <C>
INVESTMENT INCOME:
Interest.............................................................................. $ 82,944
Dividends............................................................................. 26,713
----------
TOTAL INVESTMENT INCOME.................................................................... 109,657

EXPENSES:
Investment advisory fee (Note 2)...................................................... $ 47,808
Distribution fee (Note 3)............................................................. 36,368
Registration and filing fees.......................................................... 14,190
Administration fee (Note 2)........................................................... 12,749
Service fee (Note 3).................................................................. 12,122
Legal and audit fees.................................................................. 6,363
Amortization of organization costs (Note 6)........................................... 4,225
Directors' fees and expenses (Note 2)................................................. 3,667
Custodian fees (Note 2)............................................................... 3,000
Transfer agent fees (Note 2).......................................................... 2,336
Other................................................................................. 3,454
Fees waived by investment adviser and administrator
(Note 2)........................................................................... (41,225)
---------
TOTAL EXPENSES........................................................................ 105,057
----------
NET INVESTMENT INCOME...................................................................... 4,600
----------

REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(Notes 1 and 4):
Net realized gain on securities sold during the period................................ 211,384
----------
Net change in unrealized appreciation of:
Securities......................................................................... 1,283,914
Written options.................................................................... 13,437
----------
Net unrealized appreciation of investments during
the period......................................................................... 1,297,351
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............................................ 1,508,735
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................................................................... $1,513,335
==========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-6
<PAGE> 140

<TABLE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS

<CAPTION>
Period
Ended
09/30/1994
(unaudited)
-----------
<S> <C>
Net investment income...................................................................... $ 4,600
Net realized gain/(loss) on securities and written options
during the period....................................................................... 211,384
Net unrealized appreciation/(depreciation) of securities and
written options during the period..................................................... 1,297,351
-----------
Net increase/(decrease) in net assets resulting from operations............................ 1,513,335
Net increase in net assets from Fund share
transactions (Note 5)................................................................. 2,625,460
-----------
Net increase in net assets................................................................. 4,138,795
NET ASSETS:
Beginning of period........................................................................ 26,341,194
-----------
End of period (including undistributed net investment
income of $42,712 and $38,112, respectively).......................................... $30,479,989
===========
<FN>
____________________
* The Fund commenced operations on May 20, 1994.
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-7
<PAGE> 141

Lehman Brothers Funds, Inc.
Selected Growth Stock Portfolio
NOTES TO SEPTEMBER 30, 1994 FINANCIAL STATEMENTS (UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES

Lehman Brothers Funds, Inc. (the "Company") was incorporated under the
laws of the State of Maryland on May 5, 1993. It is an open-end management
investment company, which currently offers three funds. Information presented in
these financial statements pertains only to the Lehman Brothers Selected Growth
Stock Portfolio ("Selected Growth Stock Portfolio") (the "Fund"). The following
is a summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements.

Portfolio valuation: Portfolio securities held by the Fund which are
traded on a recognized stock exchange are valued at the last sale price on the
securities exchange on which such securities are primarily traded or at the last
sale price on the national securities market or in the absence of sales in such
market, at the mean between the closing bid and asked prices. Securities traded
only on over-the-counter markets are valued on the basis of the closing
over-the-counter bid prices or if no sale occurred on such day at the mean of
the current bid and ask prices. Certain securities may be valued by one or more
principal market makers. Restricted securities, securities for which market
quotations are not readily available, and other assets are valued at fair value
under the supervision of the Board of Directors. Short-term investments that
mature in 60 days or less are valued at amortized cost.

Repurchase agreements: The Fund may engage in repurchase agreement
transactions. The Fund values repurchase agreements at cost and accrues
interest into interest receivable. Under the terms of a typical repurchase
agreement, the Fund takes possession of an underlying debt obligation subject to
an obligation of the seller to repurchase, and the Fund to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. There is potential loss to the Fund in the
event of default by the seller, including the risk of adverse market action or
delay in connection with the disposition of the underlying obligations. The
Fund reviews the creditworthiness of those banks and dealers with which the Fund
enters into repurchase agreements to evaluate potential risks.

Option contracts: The Fund may engage in option contracts. Upon the
purchase of a put option or a call option by the Fund, the premium paid is
recorded as an investment, the value of which is marked-to-market daily. When a
purchased option expires, the Fund will realize a loss in the amount of the cost
of the option. When the Fund enters into a closing sale transaction, the Fund
will realize a gain or loss depending on whether the sales proceeds from the
closing sale transaction are greater or less than the cost of the option. When
the Fund exercises a put option, it will realize a gain or loss from the sale of
the underlying security and the proceeds from such sale will be decreased by the
premium originally paid. When the Fund exercises a call option, the cost of the
security which the Fund purchases upon exercise will be increased by the premium
originally paid.

When a Fund writes a call option or a put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a
closing purchase transaction, the Fund realizes a gain (or loss if the cost of
the closing purchase transaction exceeds the premium received when the option
was sold) without regard to any unrealized gain or loss on the

F-8
<PAGE> 142
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
NOTES TO SEPTEMBER 30, 1994 FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)

underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by
the premium originally received. When a put option is exercised, the amount of
the premium originally received will reduce the cost of the security which the
Fund purchased upon exercise.

The risk associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is the Fund may forego the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised.

Securities transactions and investment income: Securities transactions
are recorded as of the trade date. Interest income is recorded on the accrual
basis. Dividend income is recorded on the ex- dividend date. Realized gains
and losses on investments sold are recorded on the basis of identified cost.

Federal income taxes: The Fund intends to qualify as a regulated
investment company by complying with the requirements of the Internal Revenue
Code of 1986, as amended and applicable to regulated investment companies and by
distributing substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.

Dividends and distributions to shareholders: It is the policy of the
Fund to declare and pay dividends from net investment income annually. Capital
gains, unless offset by any available capital loss carryforward, are distributed
to shareholders annually after the close of the fiscal year in which earned. In
order to avoid the application of a 4% non-deductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make
additional distributions of any undistributed ordinary income or capital gains
before each December 31, and expects to make any other distributions as are
necessary to avoid the application of this tax.

2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS

Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as the
Fund's investment adviser pursuant to an investment advisory agreement. LBGAM is
a wholly owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). Under
the investment advisory agreement, the Fund pays a monthly fee at an annual rate
of 0.75% of the value of the Fund's average daily net assets. LBGAM may
voluntarily waive fees. For the period ended September 30, 1994, LBGAM
voluntarily waived fees of $32,546.

The Shareholder Services Group, Inc. ("TSSG"), a wholly owned subsidiary
of First Data Corporation, serves as the Fund's administrator pursuant to an
administration agreement. Under the administration agreement the Fund pays a
monthly fee at the annual rate of 0.20% of the value of its average daily net
assets. TSSG may voluntarily waive fees. For the period ended September 30,
1994, TSSG voluntarily waived fees of $8,679.

F-9
<PAGE> 143
Lehman Brothers Funds, Inc.
Selected Growth Stock Portfolio
NOTES TO SEPTEMBER 30, 1994 FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)

For the period ended September 30, 1994, the Fund incurred total
brokerage commissions of $29,948, of which none was paid to Lehman Brothers Inc.
("Lehman Brothers").

A contingent deferred sales charge ("CDSC") may be imposed upon the
redemption of Fund Shares within two years after the date of purchase. The
amount of the CDSC will depend on the number of years since the shareholder made
the purchase payment from which the amount is being redeemed. During the period
ended September 30, 1994, Lehman Brothers received $3,498 in CDSC Fees on the
redemption of Fund Shares.

No employee of Lehman Brothers, LBGAM or TSSG receives any compensation
from the Company for serving as an officer or Director of the Company. The
Company pays each Director who is not a director, an officer or employee of
Lehman Brothers, LBGAM or TSSG or their affiliates a fee of $20,000 per annum,
plus $500 per meeting attended, and reimburses each of them for travel and
out-of-pocket expenses.

Boston Safe Deposit and Trust Company, an indirect wholly owned
subsidiary of Mellon Bank Corporation, serves as the Fund's custodian. TSSG
serves as the Fund's transfer agent.

3. SERVICE AGREEMENTS

Lehman Brothers acts as the distributor of Fund shares.

Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the
Company has adopted a services and distribution plan (The "Plan") with respect
to the Fund. Under the Plan, the Fund has agreed to pay Lehman Brothers a
service fee, accrued daily and paid monthly, at an annual rate of 0.25% of the
value of the Fund's average daily net assets, and a distribution fee, accrued
daily and paid monthly, at an annual rate of 0.75% of the value of the Fund's
average daily net assets. The service fee is used by Lehman Brothers to pay
Investment Representatives or Introducing Brokers for servicing shareholder
accounts. The distribution fee is paid to Lehman Brothers for advertising,
marketing and distributing Fund shares. For the period ended September 30,
1994, the Fund incurred distribution fees and service fees of $36,368 and
$12,122, respectively.

4. PURCHASE AND SALES OF SECURITIES

Cost of purchases and proceeds from sales of securities, excluding
short-term investments, aggregated $18,783,824 and $5,375,203, respectively, for
the period ended September 30, 1994. At September 30, 1994, aggregate gross
unrealized appreciation for all securities in which there is an excess of value
over tax cost was $1,591,599 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value was $452,334. Net
unrealized appreciation was $1,139,265 at September 30, 1994.

F-10
<PAGE> 144
Lehman Brothers Funds, Inc.
Selected Growth Stock Portfolio
NOTES TO SEPTEMBER 30, 1994 FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)

<TABLE>
Written option activity for the Fund for the period ended September 30,
1994 was as follows:

<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
<S> <C> <C>
Options outstanding at July 31, 1994........ 50 $34,749
-- -------
Options outstanding at September 30, 1994 .. 50 $34,749
== =======
</TABLE>

<TABLE>
5. SHARES OF CAPITAL STOCK

At September 30, 1994, the Board of Directors have authority to issue
10,000,000,000 shares of capital stock ($0.001 par value) for the Lehman
Brothers Funds, Inc. Changes in common stock outstanding were as follows:

<CAPTION>
Period Ended Period Ended
09/30/94 07/31/94***
Shares Amount Shares Amount
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Sold .................. 291,722 $ 2,949,169 2,712,257 $26,711,937
Dividend Reinvestment.. - - - -
Redeemed............... (31,736) (323,709) (5,845) (57,611)
------- ----------- --------- -----------
Net increase........... 259,986 $ 2,625,460 2,706,412 $26,654,326
======= =========== ========= ===========
________________
<FN>
*** The Fund commenced operations on May 20, 1994.
</TABLE>

6. ORGANIZATION COSTS

The Fund bears all costs in connection with its organization including
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations. All such costs are being
amortized on the straight-line method over a period of five years from the
commencement of operations. In the event that any of the initial shares of the
Fund are redeemed during such amortization period, the Fund will be reimbursed
for any unamortized organization costs in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.

F-11
<PAGE> 145

LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN MEXICAN GROWTH AND INCOME PORTFOLIO

Incorporated by reference to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form N-1A, filed on January
14, 1994, and not affected by this filing.

<PAGE> 146
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN LATIN AMERICA DOLLAR INCOME PORTFOLIO

Incorporated by reference to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form N-1A, filed on January
14, 1994, and not affected by this filing.

<PAGE> 147
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS INTERNATIONAL BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 148
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS GLOBAL EMERGING MARKETS EQUITY FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 149
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS GLOBAL EMERGING MARKETS BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 150
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS LARGE CAPITALIZATION U.S. EQUITY FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 151
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS INTERNATIONAL EQUITY FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 152
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS MUNICIPAL BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 153
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS NEW YORK MUNICIPAL BOND FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 154
LEHMAN BROTHERS FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION

LEHMAN BROTHERS HIGH-GRADE FIXED INCOME FUND

Incorporated by reference to Post-Effective Amendment No. 3 to the Company's
Registration Statement on Form N-1A, filed on September
8, 1994, and not affected by this filing.

<PAGE> 155
PART C. OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(a) Financial Statements:

Included in Part A

Financial Highlights

Included in Part B

Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Incorporated by reference to the Company's Annual Report
dated July 31, 1994.

Included in Part C

Consent and Opinion of Independent Auditors is filed herewith.

(b) Exhibits:

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C> <C>
1(a) -- Registrant's Amended Articles of Incorporation and Certificate of Correction of
Amended Articles of Incorporation are incorporated by reference to Exhibit 1(a) to
Post-Effective Amendment No. 2, filed January 14, 1994 ("Post-Effective Amendment No.
2") to the Registrant's Registration Statement on Form N-1A, filed May 6, 1993,
Registration Nos. 33-62312 and 811-7706 (the "Registration Statement").

1(b) -- Articles Supplementary to Registrant's Articles of Incorporation dated March 15, 1994
is incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 3, filed
September 8, 1994 ("Post-Effective Amendment No. 3").

1(c) -- Articles Supplementary to Registrant's Articles of Incorporation, dated July 27,
1994, is incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 3.

1(d) -- Form of Articles Supplementary to Registrant's Articles of Incorporation with
respect to Lehman Brothers International Bond Fund, Lehman Brothers Global Emerging
Markets Equity Fund, Lehman Brothers Global Emerging Markets Bond Fund, Lehman
Brothers Large Capitalization U.S. Equity Fund, Lehman Brothers International Equity
Fund, Lehman Brothers Municipal Bond Fund, Lehman Brothers New York Municipal Bond
Fund and Lehman Brothers High-Grade Fixed Income Fund is incorporated by reference to
Exhibit 1(d) to Post-Effective Amendment No. 3.

</TABLE>
<PAGE> 156
<TABLE>
<S> <C> <C>
2 -- Registrant's By-Laws are incorporated by reference to Exhibit 2 to
Pre-Effective Amendment No. 1, filed July 22, 1993 ("Pre-Effective Amendment No. 1")
to the Registration Statement.

3 -- Not Applicable.

4 -- Form of Stock Certificate for shares of Registrant's Capital Stock is incorporated
by reference to Exhibit 4 to Pre-Effective Amendment No. 1.

5(a) -- Form of Investment Advisory Agreements between Registrant and Lehman Brothers Global
Asset Management Inc.("LBGAM Inc.") relating to Lehman Brothers Daily Income Fund and
Lehman Brothers Municipal Income Fund are incorporated by reference to Exhibit 5 to
Pre-Effective Amendment No. 1.

5(b) -- Form of Investment Advisory Agreement between Registrant and LBGAM Inc. relating to
Lehman Selected Growth Stock Portfolio is incorporated by reference to Exhibit 5(b)
to Post-Effective Amendment No. 2.

5(c) -- Form of Investment Advisory Agreements between Registrant and Lehman Brothers Global
Asset Management Limited ("LBGAM Ltd.") relating to Lehman Mexican Growth and Income
Portfolio and Lehman Latin America Dollar Income Portfolio is incorporated by
reference to Exhibit 5(c) to Post-Effective Amendment No 2.

5(d) -- Form of Research Service Agreements between Lehman Brothers Inc. and LBGAM Ltd. is
incorporated by reference to Exhibit 10 to Post-Effective Amendment No. 2.

5(e) -- Form of Investment Advisory Agreements between Registrant and LBGAM Ltd. relating to
Lehman Brothers International Bond Fund, Lehman Brothers Global Emerging Markets
Equity Fund, Lehman Brothers Global Emerging Markets Bond Fund, Lehman Brothers Large
Capitalization U.S. Equity Fund and Lehman Brothers International Equity Fund are
incorporated by reference to Exhibit 5(e) to Post-Effective Amendment No. 3.

5(f) -- Form of Investment Advisory Agreements between Registrant and LBGAM Inc. relating to
Lehman Brothers Municipal Bond Fund, Lehman Brothers New York Municipal Bond Fund and
Lehman Brothers High-Grade Fixed Income Fund are incorporated by reference to Exhibit
5(f) to Post-Effective Amendment No. 3.

6 -- Form of Distribution Agreement between Registrant and Lehman Brothers Inc. is
incorporated by reference to Exhibit 6 to Pre-Effective Amendment No. 1.

</TABLE>

<PAGE> 157
<TABLE>
<S> <C> <C>
7 -- Not Applicable.

8(a) -- Form of Custodian Agreement between Registrant and Boston Safe Deposit and Trust
Company is incorporated by reference to Exhibit 8(a) to Pre-Effective Amendment No.
1.

8(b) -- Form of Administration Agreement between Registrant and The Boston Company Advisors,
Inc. is incorporated by reference to Exhibit 8(b) to Pre-Effective Amendment No. 1.

9(a) -- Form of Transfer Agency Agreement between Registrant and The Shareholder Services
Group, Inc. is incorporated by reference to Exhibit 9 to Pre-Effective Amendment No.
1.

9(b) -- Form of Amendment to the Transfer Agency Agreement between Registrant and The
Shareholder Services Group, Inc. is incorporated by reference to Exhibit 9(b) to
Post-Effective Amendment No. 3.

10 -- Opinion and Consent of Piper & Marbury is incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 3.

11 -- Consent of independent auditors is filed herewith.

12 -- Not Applicable.

13(a) -- Form of Share Purchase Agreement between Registrant and Lehman Brothers Inc. relating
to Lehman Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund is
incorporated by reference to Exhibit 13 to Pre-Effective Amendment No. 1.

13(b) -- Form of Share Purchase Agreement between Registrant and Lehman Brothers Inc. relating
to the addition of Selected Growth Stock Portfolio, Lehman Latin America Dollar
Income Portfolio and Lehman Mexican Growth and Income Portfolio is incorporated by
reference to Exhibit 13(b) to Post-Effective Amendment No. 2.

13(c) -- Form of Share Purchase Agreement between Registrant and Lehman Brothers Inc. relating
to Global Clearing Shares, dated July 21, 1994, is incorporated by reference to
Exhibit 13(c) to Post-Effective Amendment No. 3.

</TABLE>

<PAGE> 158

<TABLE>
<S> <C> <C>
13(d) -- Form of Share Purchase Agreement between Registrant and Lehman Brothers Inc. relating
to Lehman Brothers International Bond Fund, Lehman Brothers Global Emerging Markets
Equity Fund, Lehman Brothers Global Emerging Markets Bond Fund, Lehman Brothers Large
Capitalization U.S. Equity Fund, Lehman Brothers International Equity Fund, Lehman
Brothers Municipal Bond Fund, Lehman Brothers New York Municipal Bond Fund and Lehman
Brothers High-Grade Fixed Income Fund is incorporated by reference to Exhibit 13(d)
to Post-Effective Amendment No. 3.

14 -- Not Applicable.

15(a) -- Form of Plan of Distribution relating to Lehman Brothers Daily Income Fund and Lehman
Brothers Municipal Income Fund is incorporated by reference to Exhibit 15 to
Pre-Effective Amendment No. 1.

15(b) -- Form of Amended and Restated Services and Distribution Plan is incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 3.

15(c) -- Form of Amended and Restated Distribution Plan (the "Restated Plan") dated January
27, 1994 relating to Lehman Brothers Daily Income Fund and Lehman Brothers Municipal
Income Fund is incorporated by reference to Exhibit 15(c) to Post-Effective Amendment
No. 3.

15(d) -- Amendment to the Restated Plan dated July 21, 1994 is incorporated by reference to
Exhibit 15(d) to Post-Effective Amendment No. 3.

15(e) -- Form of Shareholder Servicing Agreement between Registrant and Service Organizations
relating to the Select Shares of Lehman Brothers International Bond Fund, Lehman
Brothers Global Emerging Markets Equity Fund, Lehman Brothers Global Emerging Markets
Bond Fund, Lehman Brothers Large Capitalization U.S. Equity Fund, Lehman Brothers
International Equity Fund, Lehman Brothers Municipal Bond Fund, Lehman Brothers New
York Municipal Bond Fund and Lehman Brothers High-Grade Fixed Income Fund is
incorporated by reference to Exhibit 15(e) to Post-Effective Amendment No. 3.

16 -- Not Applicable.

17 -- Not Applicable.

18 -- Powers of Attorney of Mr. Dorsett, Mr. Hatsopoulos and Ms. Holmes dated November
2, 1994 are incorporated by reference to Exhibit 18 to Post-Effective Amendment No.
4.

</TABLE>

<PAGE> 159
27 -- Financial Data Schedules for the Company's financial
statements dated July 31, 1994 are filed herewith.
.

Item 25. Persons Controlled by or under Common Control with Registrant
None.

Item 26. Number of Holders of Securities

Title of Class
--------------
Common Stock, par value
$.001 per share

<TABLE>
<CAPTION>
Holders as of November 9, 1994
------------------------------
<S> <C>
FUND
----
Lehman Brothers Daily Income Fund 629,725,408.86
(Class A) --------------
Lehman Brothers Municipal Income Fund 209,403,104.85
(Class B) --------------
Lehman Brothers Selected Growth Stock Portfolio 31,212,938.69
(Class C) --------------
</TABLE>

Item 27. Indemnification.

Reference is made to Articles VII and VIII of Registrant's Amended
Articles of Incorporation filed as Exhibit 1(a) to Post- Effective Amendment
No. 2 to the Registration Statement, Article V of Registrant's By-Laws filed as
Exhibit 2 to Pre-Effective Amendment No. 1, and paragraph 4 of the Distribution
Agreement filed as Exhibit 6 to Pre-Effective Amendment No. 1.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities of Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands 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.

Item 28. Business and Other Connections of Investment Adviser.

Lehman Brothers Global Asset Management Inc. ("LBGAM Inc."), which
serves as investment adviser to Lehman Brothers Daily Income Fund, Lehman
Brothers Municipal Income Fund and Lehman Selected Growth Stock Portfolio, and
will serve as investment adviser to Lehman Brothers Municipal Bond Fund, Lehman
Brothers New York Municipal Bond Fund and Lehman Brothers High-Grade Fixed
Income Fund, is a wholly owned subsidiary of Lehman Brothers Holdings Inc.
("Holdings"). LBGAM Inc. is an investment adviser registered under the
Investment Advisers Act of 1940 (the "Advisers Act") and serves as investment
counsel for individuals with substantial capital, executors, trustees and
institutions. It also serves as investment adviser or sub-investment adviser
to several investment companies.
<PAGE> 160
The list required by this Item 28 of officers and directors of LBGAM
Inc., together with information as to any other business profession, vocation
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by LBGAM Inc. pursuant to the Advisers Act (SEC File No.
801-42006).

Lehman Brothers Global Asset Management Limited ("LBGAM Ltd."), which
will serve as investment adviser to Lehman Mexican Growth and Income Portfolio,
Lehman Latin America Dollar Income Portfolio, Lehman Brothers International
Bond Fund, Lehman Brothers Global Emerging Markets Equity Fund, Lehman Brothers
Global Emerging Markets Bond Fund, Lehman Brothers Large Capitalization U.S.
Equity Fund, and Lehman Brothers International Equity Fund, is an affiliate of
Lehman Brothers and is an indirect, wholly owned subsidiary of Holdings. LBGAM
Ltd., is an investment adviser registered under the Advisers Act and serves as
investment adviser or sub-investment adviser to several U.S. registered and
offshore investment funds.

The list required by this Item 28 of officers and directors of LBGAM
Ltd., together with information as to any other business profession, vocation
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by LBGAM Ltd. pursuant to the Advisers Act (SEC File No.
801-21068).

Item 29. Principal Underwriters.

(a) In addition to acting as distributor for the shares of the
Registrant's funds, Lehman Brothers Inc.("Lehman Brothers") acts as distributor
for Lehman Brothers Institutional Funds Group Trust, The USA High Yield Fund
N.V., The Latin American Bond Fund N.V., Mexican Short-Term Investment
Portfolio N.V., Garzarelli Sector Analysis Portfolio N.V., The Mexican
Appreciation Fund N.V., The Mexico Premium Income Portfolio N.V., ECU
Fixed-Income Fund N.V., European Equity Investments N.V., Pacific Equity
Investments N.V., Global Bond Investments N.V., U.S. Money Market Investments
N.V., U.S. Appreciation Fund N.V., U.S. Government Securities Investments N.V.,
The Asian Dragon Portfolio N.V., Offshore Diversified Strategic Income Fund
N.V., Lehman Brothers Series I Mortgage-Related Securities Portfolio N.V., TBC
Enhanced Tactical Asset Allocation Portfolio N.V., U.S. Tactical Asset
Allocation Portfolio N.V., Short-Term World Income Portfolio (Cayman), The
Global Advisors Portfolio N.V., The Global Advisors Portfolio II N.V., Short
Duration U.S. Government Fund N.V., The Global Natural Resources Fund N.V. and
various series of unit investment trusts.

(b) Lehman Brothers is a wholly-owned subsidiary of Holdings. The
information required by this Item 29 with respect to each director, officer and
partner of Lehman Brothers is incorporated by reference to Schedule A of Form
BD filed by Lehman Brothers pursuant to the Securities Exchange Act of 1934
(SEC File No. 8-12324).

Item 30. Location of Accounts and Records.

(1) Lehman Brothers Funds, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109

(2) Lehman Brothers Global Asset Management Inc.
3 World Financial Center
New York, New York 10285

<PAGE> 161
(3) Lehman Brothers Global Asset Management Limited
Two Broadgate
London EC2M 7HA
England

(4) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108

(5) The Shareholder Services Group, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109

Item 31. Management Services.

Not Applicable

Item 32. Undertakings.

The undersigned Registrant hereby undertakes to file a
post-effective amendment, using financial statements which need not be
certified, within four to six months from the date the Registrant commences
selling shares of each of Lehman Mexican Growth and Income Portfolio, Lehman
Latin America Dollar Income Portfolio, Lehman Brothers International Bond Fund,
Lehman Brothers Global Emerging Markets Equity Fund, Lehman Brothers Global
Emerging Markets Bond Fund, Lehman Brothers Large Capitalization U.S. Equity
Fund, Lehman Brothers International Equity Fund, Lehman Brothers Municipal Bond
Fund, Lehman Brothers New York Municipal Bond Fund and Lehman Brothers
High-Grade Fixed Income Fund.

<PAGE> 162
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that
it meets all of the requirements for effectivemess of this Post-Effective
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended, and 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 and State of New
York, on November 21, 1994.

LEHMAN BROTHERS FUNDS, INC.
Registrant

By: /s/ Andrew D. Gordon
---------------------------
Andrew D. Gordon, 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.

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kirk Hartman Chairman of the Board and Director November 21 ,1994
- -----------------------
Kirk Hartman

/s/ Michael Kardok Treasurer and Chief Financial Officer November 21, 1994
- ----------------------- (principal financial and accounting officer)
Michael Kardok

* Director November 21, 1994
- -----------------------
Burt N. Dorsett

* Director November 21, 1994
- -----------------------
John Hatsopoulos

* Director November 21, 1994
- -----------------------
Kathleen C. Holmes

* /s/ Andrew Gordon
- -----------------------
Attorney-in-Fact
</TABLE>
<PAGE> 163
EXHIBIT No. DESCRIPTION OF EXHIBIT
- ----------- ----------------------

11 Consent of independent auditors dated November 22,
1994.

27 Financial Data Schedules

<PAGE> 1
EXHIBIT 11

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the references made to our firm under the captions "Financial
Highlights" in each Prospectus and "Auditors" in each Statement of Additional
Information and to the inclusion in this Post-Effective Amendment No. 5 to
Registration Statement Number 33- 62312 on Form N-1A of our report dated August
31, 1994, on the financial statements and financial highlights of Lehman
Brothers Funds, Inc. (comprising, respectively, the Lehman Brothers Daily
Income Fund, the Lehman Brothers Municipal Income Fund and the Lehman Selected
Growth Stock Portfolio).

ERNST & YOUNG LLP

Boston, Massachusetts
November 21, 1994
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LEHMAN BROTHERS FUNDS, INC. FOR THE YEAR ENDED JULY
31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> LEH BROS FNDS, INC., DLY INCOME FND-SELECT SHR

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 809,436,244
<INVESTMENTS-AT-VALUE> 809,436,244
<RECEIVABLES> 32,248,390
<ASSETS-OTHER> 389,216
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 842,073,850
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,518,919
<TOTAL-LIABILITIES> 23,518,919
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 818,477,726
<SHARES-COMMON-STOCK> 818,538,361
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 60,635
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16,570
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 818,554,931
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,779,283
<OTHER-INCOME> 0
<EXPENSES-NET> 4,837,306
<NET-INVESTMENT-INCOME> 21,941,977
<REALIZED-GAINS-CURRENT> 16,570
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 21,958,547
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (21,941,977)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTION-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,591,256,544
<NUMBER-OF-SHARES-REDEEMED> (3,792,217,038)
<SHARES-REINVESTED> 19,498,755
<NET-CHANGE-IN-ASSETS> 818,554,931
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,185,627
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,892,136
<AVERAGE-NET-ASSETS> 730,404,506
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 809,436,244
<INVESTMENTS-AT-VALUE> 809,436,244
<RECEIVABLES> 32,248,390
<ASSETS-OTHER> 389,216
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 842,073,850
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,518,919
<TOTAL-LIABILITIES> 23,518,919
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 818,477,726
<SHARES-COMMON-STOCK> 818,538,361
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 60,635
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16,570
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 818,554,931
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,779,283
<OTHER-INCOME> 0
<EXPENSES-NET> 4,837,306
<NET-INVESTMENT-INCOME> 21,941,977
<REALIZED-GAINS-CURRENT> 16,570
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 21,958,547
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTION-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 100
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 818,554,931
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,185,627
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,892,136
<AVERAGE-NET-ASSETS> 730,404,506
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LEHMAN BROTHERS FUNDS, INC. FOR THE YEAR ENDED JULY
31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> LEH BROS FNDS, INC., MUNI INC. FUND, SELECT SHR

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 262,996,410
<INVESTMENTS-AT-VALUE> 262,996,410
<RECEIVABLES> 6,118,420
<ASSETS-OTHER> 173,528
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 269,288,358
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,853,343
<TOTAL-LIABILITIES> 4,853,343
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 264,424,228
<SHARES-COMMON-STOCK> 264,447,342
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 23,114
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,237)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 264,435,015
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,046,443
<OTHER-INCOME> 0
<EXPENSES-NET> 1,438,151
<NET-INVESTMENT-INCOME> 4,608,292
<REALIZED-GAINS-CURRENT> (12,327)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,595,965
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,608,279)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTION-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,214,682,908
<NUMBER-OF-SHARES-REDEEMED> (954,395,614)
<SHARES-REINVESTED> 4,150,160
<NET-CHANGE-IN-ASSETS> 264,435,015
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 670,015
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,994,070
<AVERAGE-NET-ASSETS> 233,955,050
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LEHMAN BROTHERS FUNDS, INC. FOR THE YEAR ENDED JULY
31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> LEH BROS FNDS, INC., MUNI INC. FUND, CDSC SHRS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 262,996,410
<INVESTMENTS-AT-VALUE> 262,996,410
<RECEIVABLES> 6,118,420
<ASSETS-OTHER> 173,528
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 269,288,358
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,853,343
<TOTAL-LIABILITIES> 4,853,343
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 264,424,228
<SHARES-COMMON-STOCK> 264,447,342
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 23,114
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,327)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 264,435,015
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,046,443
<OTHER-INCOME> 0
<EXPENSES-NET> 1,438,151
<NET-INVESTMENT-INCOME> 4,608,292
<REALIZED-GAINS-CURRENT> (12,327)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,595,965
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTION-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,888
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 670,015
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,994,070
<AVERAGE-NET-ASSETS> 233,955,050
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.00)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LEHMAN BROTHERS FUNDS, INC. FOR THE YEAR ENDED JULY
31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> LEH BROS FNDS, INC., SELECTED GR STOCK FUND

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 28,387,571
<INVESTMENTS-AT-VALUE> 28,242,922
<RECEIVABLES> 351,923
<ASSETS-OTHER> 221,838
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,816,683
<PAYABLE-FOR-SECURITIES> 2,292,450
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 183,039
<TOTAL-LIABILITIES> 2,475,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,652,311
<SHARES-COMMON-STOCK> 2,706,412
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 38,112
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (219,954)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (129,275)
<NET-ASSETS> 26,341,194
<DIVIDEND-INCOME> 2,455
<INTEREST-INCOME> 102,880
<OTHER-INCOME> 0
<EXPENSES-NET> 69,238
<NET-INVESTMENT-INCOME> 36,097
<REALIZED-GAINS-CURRENT> (219,954)
<APPREC-INCREASE-CURRENT> (129,275)
<NET-CHANGE-FROM-OPS> (313,132)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,712,257
<NUMBER-OF-SHARES-REDEEMED> (5,845)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 26,341,194
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25,460
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 115,979
<AVERAGE-NET-ASSETS> 16,744,232
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> (0.28)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.73
<EXPENSE-RATIO> 2.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>